{"id":8211,"date":"2019-04-30T17:32:28","date_gmt":"2019-04-30T15:32:28","guid":{"rendered":"https:\/\/sourcing-force.com\/?p=8211"},"modified":"2022-10-23T23:12:33","modified_gmt":"2022-10-23T21:12:33","slug":"why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line","status":"publish","type":"post","link":"https:\/\/sourcing-force.com\/en\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\/","title":{"rendered":"Why Analysis of Indirect Spend Is Important to Your Margin &#038; Bottom Line?"},"content":{"rendered":"<p>[et_pb_section fb_built=&#8221;1&#8243; _builder_version=&#8221;4.16&#8243; global_colors_info=&#8221;{}&#8221;][et_pb_row _builder_version=&#8221;4.16&#8243; background_size=&#8221;initial&#8221; background_position=&#8221;top_left&#8221; background_repeat=&#8221;repeat&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.16&#8243; custom_padding=&#8221;|||&#8221; global_colors_info=&#8221;{}&#8221; custom_padding__hover=&#8221;|||&#8221;][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p><span style=\"font-size: 14pt; font-family: helvetica, arial, sans-serif;\"><img decoding=\"async\" class=\"aligncenter size-full wp-image-8536\" src=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/Spend-analysis-and-bottom-line-3.png\" alt=\"\" width=\"935\" height=\"412\" srcset=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/Spend-analysis-and-bottom-line-3.png 935w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/Spend-analysis-and-bottom-line-3-300x132.png 300w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/Spend-analysis-and-bottom-line-3-768x338.png 768w\" sizes=\"(max-width: 935px) 100vw, 935px\" \/><\/span><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p><span style=\"font-size: 18pt;\">Indirect spend typically shows up as &#8220;operating costs&#8221; or SG&amp;A (Selling, General and Administrative) costs, while direct spend refers to costs of goods and services that are directly incorporated into a product being manufactured or COGS (Cost of Goods Sold).<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-size: 14pt;\">Procurement teams have traditionally focused on reducing the direct spend, but it is becoming more and more critical for companies to optimize their indirect spend, especially in the current economic downturn. It may significantly affect the bottom line and profit margin.<\/span><\/p>\n<p><span style=\"font-size: 14pt;\">Investors care more about Profit Margin\/Operating margin than Gross Margin. Gross Margin only counts in COGS. It represents the proportion of each dollar of revenue that the company\u00a0retains after direct spend. Profit Margin\u00a0measures efficiency and profitability. It gives analysts an idea of how much\u00a0a company makes on each dollar of sales. The formula for calculating Profit Margin is:\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<blockquote>\n<p><span style=\"font-size: 14pt;\"><strong>Profit Margin (%) = Net Income\/Revenue = (Revenue \u2013 COGS \u2013 SG&amp;A)\/Revenue<\/strong><\/span><\/p>\n<\/blockquote>\n<p>&nbsp;<\/p>\n<p><span style=\"font-size: 14pt;\">Profit Margin serves as a good performance indicator against the past performance and similar companies\u2019. The higher the ratio the better. Better managing and reducing SG&amp;A definitely helps boosting the ratio up.<\/span><\/p>\n<p><span style=\"font-size: 14pt;\">Now let\u2019s take another look at it from an economics perspective, the Break-Even Point<em>.\u00a0 <\/em><\/span><\/p>\n<p><span style=\"font-size: 14pt;\"><em><strong>In economics &amp; business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has \u201cbroken even\u201d. \u2013\u00a0<\/strong><\/em><strong>Wikipedia<em>.<\/em><\/strong>\u00a0<\/span><\/p>\n<p><span style=\"font-size: 14pt;\">The Total Costs here are composed of two types of costs: Fixed Costs, which have to be paid by a company, independent of the level of goods or services produced, such as office rents, salaries, and some marketing costs; Variable Costs, which vary with production output volume and can be easily associated to a particular unit of product\/service. Please see the graph for explanation.<\/span><span style=\"font-family: helvetica, arial, sans-serif;\"><a href=\"https:\/\/sourcing-force.com\/en\/source-to-pay-suite\/\"><\/a><\/span><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p><span style=\"font-size: 14pt;\"><img decoding=\"async\" class=\"aligncenter size-full wp-image-8216\" src=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/Break-even-point-1.png\" alt=\"\" width=\"540\" height=\"418\" srcset=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/Break-even-point-1.png 540w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/Break-even-point-1-300x232.png 300w\" sizes=\"(max-width: 540px) 100vw, 540px\" \/><\/span><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p><span style=\"font-size: 14pt;\">You can identify the Sales as well as the Total Costs, both increase with the unit number. The y-intersect represents the Fixed Costs, and the slope of the same line represents the Unit Variable Costs, as Total Costs = Fixed Costs + Variable Costs = Fixed Costs + Unit*Unit Variable Costs. The Break-Even Point is where the two lines meet. Only beyond BEP can a company make profit selling products\/services.<\/span><\/p>\n<p><span style=\"font-size: 14pt;\">How to reach the BEP with having to sell fewer units, or to make a bigger\/faster profit? <\/span><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p><span style=\"font-size: 14pt;\"><strong>There are three solutions:<\/strong><\/span><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<ul>\n<li><span style=\"font-size: 14pt;\">Lower the y-intersect\/Fixed Costs thus the Total Costs line will shift down;<br \/><\/span><\/li>\n<li><span style=\"font-size: 14pt;\">Decrease the Unit Variable Costs\/slope of Total Costs line thus the line will become flatter;<\/span><\/li>\n<li><span style=\"font-size: 14pt;\">Increase Sales Price\/the slop of Sales line thus the line will become stiffer.<\/span>\u00a0<\/li>\n<\/ul>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p>\u00a0<span style=\"font-size: 14pt;\"><img decoding=\"async\" class=\"aligncenter wp-image-8052 size-large\" title=\"e procurement sourcing force\" src=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/White-papers-1-2-1024x311.png\" alt=\"\" width=\"1024\" height=\"311\" srcset=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/White-papers-1-2-1024x311.png 1024w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/White-papers-1-2-300x91.png 300w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/White-papers-1-2-768x234.png 768w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/White-papers-1-2-1080x328.png 1080w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/White-papers-1-2.png 1210w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/span><\/p>\n<p>&nbsp;<\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<ul><\/ul>\n<p><span style=\"font-size: 14pt;\">Any solution will cause the BEP to shift towards left, which means fewer units to be sold before making profit, and decreased loss area and increased profit area as well.<\/span><\/p>\n<p>&nbsp;<\/p>\n<blockquote>\n<p><span style=\"font-size: 14pt;\"><strong>So why are we talking about this? It is because a large part of Fixed Costs\/y-intersect is composed of indirect spend. <\/strong><\/span><\/p>\n<\/blockquote>\n<p><span style=\"font-size: 14pt;\"><br \/>People usually ignore the indirect spend but it plays an important role in making profit! And profit is the key because even if a company is making revenue it only loses money before hitting the BEP. That\u2019s why they call net profit the bottom line, not sales or revenue, and also why Profit Margin matters more than Gross Margin.<\/span><\/p>\n<p><span style=\"font-size: 14pt;\">Then why not increase the bottom line by reducing costs as much as we can? Especially now we know the analysis and management of indirect spend is way more important than it seemed!<\/span><span style=\"font-family: helvetica, arial, sans-serif;\"><a href=\"https:\/\/sourcing-force.com\/en\/source-to-pay-suite\/\"><\/a><\/span><\/p>\n<p>&nbsp;<\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.17.6&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<ul><\/ul>\n<p>&nbsp;<\/p>\n<hr \/>\n<p><span style=\"color: #808080; font-family: helvetica, arial, sans-serif; font-size: 15pt;\"><a style=\"color: #808080;\" href=\"https:\/\/sourcing-force.com\/en\/procure-to-pay-automation\/\"><strong>See how Sourcing Force helps businesses automate their procurement processes<\/strong><\/a><\/span><\/p>\n<p>&nbsp;<\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.18.0&#8243; hover_enabled=&#8221;0&#8243; global_colors_info=&#8221;{}&#8221; sticky_enabled=&#8221;0&#8243;]<\/p>\n<ul><\/ul>\n<p><span style=\"font-family: helvetica, arial, sans-serif;\"><a href=\"https:\/\/sourcing-force.com\/en\/sourcing-software\/\"><img decoding=\"async\" class=\"aligncenter size-large wp-image-8003\" src=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/e-procurement-suite-1024x186.png\" alt=\"\" width=\"1024\" height=\"186\" srcset=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/e-procurement-suite-1024x186.png 1024w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/e-procurement-suite-300x55.png 300w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/e-procurement-suite-768x140.png 768w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/e-procurement-suite-1080x196.png 1080w, https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/e-procurement-suite.png 1210w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/span><\/p>\n<p>&nbsp;[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Indirect spend typically shows up as &#8220;operating costs&#8221; or SG&amp;A (Selling, General and Administrative) costs, while direct spend refers to costs of goods and services that are directly incorporated into a product being manufactured or COGS (Cost of Goods Sold). &nbsp; Procurement teams have traditionally focused on reducing the direct spend, but it is becoming [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":8536,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[36],"tags":[],"class_list":["post-8211","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-spend-analytics"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Why Analysis of Indirect Spend Is Important to Your Margin &amp; Bottom Line? -<\/title>\n<meta name=\"description\" content=\"At Sourcing Force, we always help our clients with their analysis of indirect spend. Indirect spend typically shows up as &quot;operating costs&quot; or SG&amp;A (Selling, General and Administrative) costs, while direct spend refers to costs of goods and services that are directly incorporated into a product being manufactured or COGS (Cost of Goods Sold).\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/sourcing-force.com\/en\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why Analysis of Indirect Spend Is Important to Your Margin &amp; Bottom Line? -\" \/>\n<meta property=\"og:description\" content=\"At Sourcing Force, we always help our clients with their analysis of indirect spend. Indirect spend typically shows up as &quot;operating costs&quot; or SG&amp;A (Selling, General and Administrative) costs, while direct spend refers to costs of goods and services that are directly incorporated into a product being manufactured or COGS (Cost of Goods Sold).\" \/>\n<meta property=\"og:url\" content=\"https:\/\/sourcing-force.com\/en\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\/\" \/>\n<meta property=\"og:site_name\" content=\"Sourcing Force\" \/>\n<meta property=\"article:published_time\" content=\"2019-04-30T15:32:28+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-10-23T21:12:33+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/sourcing-force.com\/wp-content\/uploads\/2019\/04\/Spend-analysis-and-bottom-line-3.png\" \/>\n\t<meta property=\"og:image:width\" content=\"935\" \/>\n\t<meta property=\"og:image:height\" content=\"412\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Olivier Audino\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@SourcingForce\" \/>\n<meta name=\"twitter:site\" content=\"@SourcingForce\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Olivier Audino\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"4 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/en\\\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/en\\\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\\\/\"},\"author\":{\"name\":\"Olivier Audino\",\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/#\\\/schema\\\/person\\\/481e000db1e02e01e9dc0913e2430fbd\"},\"headline\":\"Why Analysis of Indirect Spend Is Important to Your Margin &#038; Bottom Line?\",\"datePublished\":\"2019-04-30T15:32:28+00:00\",\"dateModified\":\"2022-10-23T21:12:33+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/en\\\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\\\/\"},\"wordCount\":780,\"image\":{\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/en\\\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/sourcing-force.com\\\/wp-content\\\/uploads\\\/2019\\\/04\\\/Spend-analysis-and-bottom-line-3.png\",\"articleSection\":[\"Spend analytics\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/en\\\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\\\/\",\"url\":\"https:\\\/\\\/sourcing-force.com\\\/en\\\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\\\/\",\"name\":\"Why Analysis of Indirect Spend Is Important to Your Margin & Bottom Line? -\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/en\\\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\\\/#primaryimage\"},\"image\":{\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/en\\\/why-analysis-of-indirect-spend-is-important-to-your-margin-bottom-line\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/sourcing-force.com\\\/wp-content\\\/uploads\\\/2019\\\/04\\\/Spend-analysis-and-bottom-line-3.png\",\"datePublished\":\"2019-04-30T15:32:28+00:00\",\"dateModified\":\"2022-10-23T21:12:33+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/sourcing-force.com\\\/#\\\/schema\\\/person\\\/481e000db1e02e01e9dc0913e2430fbd\"},\"description\":\"At Sourcing Force, we always help our clients with their analysis of indirect spend. 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