Written by Marijn Overvest | Reviewed by Sjoerd Goedhart
Fact Checked by Ruud Emonds | Our editorial policy
Spend Forecasting — What You Should Know?

As taught in the Spend Analysis Course / ★★★★★ 4.9 rating
Key take-aways
- Spend forecasting blends historical and current spending data. It employs qualitative and quantitative methods to guide future spending decisions.
- It involves tracking key metrics such as departmental expenses, total workforce, expenditure as a percentage of revenue, and financial efficiency indicators.
- Spend forecasting is pivotal for venture-backed companies aiming at rapid growth.
Spend forecasting allows businesses to gain a much deeper insight that they can use to optimize their supply chain. However, what is it?
In this article, we are going to discuss what spend forecasting is. We are going to explain the importance of spend forecasting and its components. Additionally, we are going to show you the elements you need to consider in spend forecasting and how you can use it to reduce your costs in your business.
Once you are done reading this article, you will have a deeper understanding of spend forecasting that will allow you to make more informed decisions that will enhance your supply chain.
I created a free, downloadable spend analysis template. This includes an editable Excel template and a PowerPoint presentation to help you with your spend forecasting. I even created a video where I’ll explain how you can use this template.
Spend Forecasting: What is it?
Spend forecasting is a process that blends past and present spending data using qualitative and quantitative methods. It helps companies understand how they should spend money in the future. This way, it gives a complete picture that helps companies make more strategic buying decisions, cut future expenses, and make more value.
In spend forecasting, you’ll be tracking several vital metrics related to your company’s overall expenses:
- Departmental Expenses: You’ll analyze how much each department within your organization spends.
- Total Workforce: You’ll need to keep an eye on your overall headcount, monitoring the number of employees.
- Expenditure as a Percentage of Revenue: You’ll calculate the proportion of expenses concerning your company’s total revenue.
- Financial Efficiency Metrics: Specifically, you should focus on key indicators like Customer Acquisition Cost (CAC) and the LTV: CAC ratio. These metrics will provide insights into the cost-effectiveness of acquiring new customers.
For companies involved in physical product manufacturing, the spending priorities usually revolve around machinery procurement and efficient supply chain management. In contrast, for SaaS (Software as a Service) businesses, the emphasis should be on human resources and the necessary resources required for the operations.
The Importance of Spend Forecasting
For venture capital-backed companies aiming for rapid growth, spend forecasting plays a pivotal role in establishing benchmarks for your growth journey. It’s not about predicting every single detail that will appear on your financial statements but rather comprehending the financial impact as your company expands.
In this scenario, headcount planning is closely intertwined with spend forecasting because your workforce constitutes the bulk of your expenditures, and it dictates the pace of your growth.
If your goal is to maximize revenue growth, you should try planning investments in your sales. Thus, you will need to recruit and train sales representatives for your company. These expenses are assessed as a percentage of revenue, considering how much new revenue is generated for every dollar spent on sales and marketing.
Additionally, you’ll monitor the sales representative onboarding process to forecast future headcount and spending to sustain the company’s growth momentum.
Furthermore, enhancing spend forecasting and obtaining forward-looking insights involves conducting market research. You can study the financial performance of publicly traded companies that have achieved similar growth rates and benchmarks.
By applying their growth patterns to your forecasting models, you can gain insights into what it would take to achieve progress in your company. Thus, it can help you optimize your procurement, manage budgets, and identify more cost-saving opportunities that align your spending with your company goals.
Components of Spend Forecasting
The following are the components of spend forecasting:
1. Cost Forecasting
In today’s global market, businesses are flooded with data. Analyzing forecasts from various sources, such as market pricing, commodity trends, energy costs, and labor trends, helps you spot rising and falling costs.
Deep cost forecasting, done at the category level, helps develop cost models, guiding optimal sourcing decisions.
2. Demand Planning
Understanding the demand for raw materials and services is vital for making smart sourcing decisions. By researching market and industry data, you can predict the level of demand and how prices may change over time.
Additionally, demand planning can help you identify items that are likely to increase in price or scarcity, allowing you to save money and optimize your supply chain.
3. Invoice Analysis
Invoices can introduce inefficiencies and errors. Automation tools can help streamline invoice processing, but they can also be used for spend forecasting. Sudden increases in invoices from new suppliers may indicate a need for new materials or partnerships.
Unexpected purchasing behavior can lead to opportunities for integrating new categories into your supply chain and business plans.
4. Currency Forecasting
Exchange rates can significantly impact procurement plans. If your contracts are in a foreign currency, currency fluctuations can affect your costs.
Adding economic and currency trend analysis to your spend forecasting makes cost predictions more accurate and adaptable, allowing for real-time adjustments in sourcing decisions.
Elements to Consider in Spend Forecasting
These elements play an important role that can heavily affect your spend forecasting:
1. Spend Patterns
Spending patterns can change over time. Thus, identifying spend increases in specific categories can present opportunities. Adjusting order frequency or quantity based on changing needs or supply uncertainties can be advantageous for your company.
Unusual or unexpected purchases, especially those without purchase orders (POs), can highlight areas for rationalization or opportunities for new strategic supplier partnerships. Integrating new commodities into your sourcing processes and category management practices enhances visibility and forecast accuracy.
2. Currency Fluctuations
When dealing with imports, monitoring currency choices and exchange rate fluctuations is crucial for determining payment terms, prices, and quality.
Analyzing currency trends and exchange rate forecasts enables fact-based sourcing decisions. Real-time information allows adjustments during supply chain disruptions.
3. Cost Drivers
Understanding what factors drive the cost of a product is crucial. Typically, it’s raw materials, energy, or labor.
By monitoring raw material indices and energy prices, you can project potential price fluctuations. To enhance savings forecasting, it’s essential to estimate how price movements in each key cost element may impact future costs.
4. Market Trends
Historical data can provide insights, but market research and indexes are essential for predicting price movements. Analyzing global demand for raw materials and finished products, such as shipping containers, helps identify potential future price increases.
By looking closely into commodity pricing trends and forecasts, you can create revised cost models at the commodity level. Thus, it will help you decide whether to buy in bulk for economies of scale when prices are favorable.
Reducing Costs Through Spend Forecasting
Spend forecasting helps with short-term spending, not just to save money, but to make sure the business is putting money into projects and things that help reach its big goals. In the long run, forecasting spending can make the company’s financial management better. Here are some ways that you can do to reduce costs through spend forecasting:
1. Find spending patterns
If the finance team knows when company trips and events happen, they can use that information to make better predictions about future spending. It also helps departments to stay within their budgets or change the budget if they need to spend more.
2. Hire the right number and the right people
The company has to decide when hiring in different departments is best. The finance team can think about costs like depreciation and amortization based on how many employees there are.
Hiring costs money at first. But knowing when to hire so new employees are ready to work when they’re needed helps the company take advantage of chances to make more money, even when a business’s performance fluctuates during the year.
3. Check spending by the vendor or software
When you split up how each department spends money, it helps them take charge of how they spend. They can see who they’re paying, what software they’re using, and who’s doing work for them. With this information, they can decide if they want to switch to cheaper software or cancel software they don’t need.
Conclusion
Spend forecasting is a powerful tool for businesses to manage their finances effectively, both in the short term and the long term. It goes beyond saving money, and helping organizations invest wisely in projects aligned with their goals. It empowers departments to take ownership of their spending, identify cost-saving opportunities, and adapt to changing financial needs.
By evaluating spending by vendors, software, and contractors, understanding spending patterns, and optimizing how you hire people for revenue growth, businesses can make informed decisions to capitalize on opportunities and navigate challenges effectively.
Furthermore, spend forecasting is not just about managing money. It is also about strategically using resources to drive the company toward its objectives while building a stronger financial foundation.
Frequentlyasked questions
What is spend forecasting?
Spend forecasting is a process that blends past and present spending data using qualitative and quantitative methods.
Why is spend forecasting important?
Spend forecasting can provide insights into what it would take to make progress within your company. This, in turn, can help you optimize your procurement, manage budgets effectively, and identify more cost-saving opportunities that align your spending with your company’s goals.
How does spend forecasting adapt to changes in spending patterns?
Spend forecasting can adapt to changing spending patterns by providing insights into when and where spending increases or decreases. This information helps departments adjust budgets, optimize procurement, and make strategic financial decisions.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
