Spend analysis is the process of creating an unchallenged and transparent truth of the entire company spending. Transparency is crucial to organizations that strive for overall improvements. The very same organizations measure their success by EBITDA instead of Gross Profit.
EBITDA, which stands for earnings before interest, tax, depreciation and amortization, covers costs that are often hidden for most companies (commonly depreciation and amortization specifically). Ask yourself, what is the direct and indirect spend in legal, software, or marketing companies? When working with EBITDA over Gross Profit, it provides that transparency – but it’s not necessarily easier to work with, which creates discouragement. However, there are methods where it is possible to measure the positive impact on EBITDA.
Direct and Indirect Spend
Direct spend connects to the spending of the goods that are an integral part of the production process. For example, plastic granules are a critical part of plastics production. Even though production passed a long way from the manufacture, direct cost usually connects to it.
On the other hand, indirect spend connects to goods and services not contributing to the final product. These are office supplies, team building or marketing budgets, staff expenses, IT, and utility bills.
However, if the company product is a service or intellectual work, what would be a direct spend? Following the saying that “software developers turn coffee into code,” would coffee be a direct spend for an IT company? Furthermore, is the quality of coffee or its quantity more important? Do coffee break surroundings impact this production?
Regardless of perception, it is essential to know that both direct and indirect spend lead to improvements. In both cases, thorough spend analysis will present opportunities to improve these hidden costs on the EBITDA.
Three Ways to Improve EBITDA by Spend Analysis
Spend analysis is the first step to improve EBITDA, and the proper usage of the results is the second. As a result, companies can cut costs, tackle new opportunities, and improve brand awareness.
If properly conducted, Spend Analysis will present many opportunities to cut costs and enhance profits. Keeping in mind that the price of goods can change, Spend Analytics can guide the direction that will maintain the status quo.
Unlike before, globalization impacts the way organizations normally behave. Now, the supplier base could be affected by events in other countries, such as Brexit. However, geopolitical risks could turn into opportunities if analytically addressed.
Even though cost reduction has the most effect on direct spend, it is beyond exploiting a lower price opportunity. Companies should maintain standards and develop the ability to “see the whole picture” while looking after developing better supplier relationships. A helping hand in times of crisis could lead to opportunities on the fluctuating market.
Brand Awareness Through Supplier Relationships
Healthy supplier relationships hide many positive effects. For example, building a long-term collaboration means that the supplier will work to make it fruitful.
As times of crisis can destroy both businesses, transparency is essential. Imagine the leverage that the company gets when helping its long-term supplier.
On the other hand, suppliers have the interest to help their buyers to survive. Here lies an opportunity to improve your EBITDA since relationships improve brand awareness. In this scenario, suppliers are the ones bringing new customers.
More than for direct costs, this is the case for indirect spend. It is because of indirect spend suppliers are collaborating with companies from many industries. Therefore, the network of contacts can bring new customers to the company.
Seizing the Market Opportunities
Reducing costs and brand awareness combined can lead to the third way to improve your EBITDA. Enhancing the difference between production and selling price is a solid foundation for the new market’s expansion.
Of course, the difference itself is enough to improve EBITDA. Similar to using resources in production, the trade marketing sector can use this difference as a discount. It is because markets with high price elasticity are the fertile ground for discounted offers. Sometimes, the customer was unreachable by the previous price.
Expanding your sales in most cases means production expansion. In this case, the economy of scale leads to more efficient production. Another effect of the economy of scale is the better contract with suppliers since the quantity, in most cases, defines rebate.
Spend Analysis Software Makes a Difference
As the times have changed, it is crucial to understand that some indirect costs can catalyze business improvement. Seemingly, companies are not aware of the “make or break moments” of modern times. As a result, almost 50% of Fortune 500 companies evaporate from a list in a decade.
However, the focus on cutting direct costs is only a first step. The proper approach is the combination of both direct spend and indirect spend reduction. Moreover, the strategic plan is determining which ones to hold as the doors to the market opportunities open and close.
Sounds complicated? Well, Spend Analysis is the first step enabling these ways to improve your EBITDA. As tracking these changes is almost impossible in Excel sheets, the proper software facilitates this process.
ProcurePort’s Spend Analysis Platform gathers disparate data in creating the truth of both direct and indirect spend, working as a profit enhancer. Contact a solutions specialist for a free demo to work through your new spend analysis software.