Expense management is an unavoidable obligation for finance teams. But perhaps it’s often not attributed the level of importance it deserves. A significant improvement in the way this activity is completed can lead to unexpected gains for the wider business.
In this article, we discuss what expense management is, why it’s so important, and how to build an effective expense management process. We also highlight the repercussions of poor expense management, as well as the benefits gained from automating this task.
What is expense management?
An expense, in business terms, is typically a cost incurred by an employee whilst representing the company. They will sometimes use a business card, or possibly their own money (in which case they’ll need to be reimbursed).
They may need to attend a conference which requires an overnight stay, or perhaps they need to drive across the country to speak to a prospective client. In these scenarios, the cost of travel and accommodation will need to be paid for by the company. Any equipment or stationery purchased by an office manager will also fall into this bracket.
Expense management is any strategy used for monitoring/controlling these types of spend. This can involve the recording of expense data, any measures implemented to help reduce expense costs, or any methods used to assess the legitimacy of expense claims. The approach used for expense management will vary from company to company, with some utilising paper records and physical receipts, while others use spreadsheets or dedicated software.
What is the importance of expense management?
Expenses have a big role to play in a company’s overall financial picture. If these costs aren’t incorporated into the wider accounting data, there will be an inaccurate portrayal of financial health. So, expenses need to be logged thoroughly, and must be visible to the entire finance team.
Failure to do this properly could lead to overspending, which would ultimately damage the business’s bottom line. By having a well-defined strategy for expense management, it creates consistency throughout the business, helps to reduce instances of fraudulent/incompetent behaviour, and provides a pool of data that can be analysed to improve performance.
What is the expense management process?
Create a policy
When devising an expense management strategy, the first thing to do is determine an intricate policy that covers as much as possible. This helps to reduce uncertainty and provides clearly defined guidance when dealing with a claim.
The policy should highlight exactly what constitutes an expense, and what doesn’t. It should also state what the upper limit is for each type of expense. Business cards could also be limited to a certain amount of spend each month. These measures help to prevent the company being financially exploited by employees.
Once the rules have been set, the relevant employees should be tasked with upholding this policy and completing related tasks. This creates accountability and keeps the whole process moving.
There should be at least one individual that governs all expense management activity and serves as a central point of contact. There should also be individuals tasked with looking after each stage of the cycle, such as submissions, approvals, reimbursements, etc.
Have a submission method
When a worker needs to submit an expense claim, it should be simple for them to do this. They should know exactly what steps to take, and ideally it shouldn’t be long-winded. Both submitters and approvers should use the same system, a company-wide method that is easily accessible.
Some businesses will tell employees to go to a designated person with their physical receipts whenever they need to make a claim. Others will perhaps use a digital platform where images of receipts can be uploaded and submitted that way. Whatever the method is, new starters should be made aware of it as soon as they join.
The next stage is to approve these expense claims, so long as they are valid. The policy should be used to dictate decisions around the validity of these submissions. The appropriate person should either approve or deny these, thus progressing the claim onto the next stage.
After this, assuming the expense has been approved, the claimant should then be reimbursed as quickly as feasibly possible. The employee in charge of reimbursements should ensure the correct amount is transferred into the relevant bank account provided.
Log data accordingly
As soon as the expense has been reimbursed, this data should be logged in the appropriate place. The transaction can then be referred to in the future, in the event of a dispute (or if it needs to be called upon for an audit). This spend should also be considered when the finance team are conducting their calculations around financial performance, as expenses are an important and relevant component of this.
Review the process
Like any process, the tactics used for expense management should be reviewed and refined at regular intervals. This helps to avoid the strategy becoming outdated/non-compliant, and ensures constant improvements are being made. The existing method should be scrutinised using performance data, so that informed tweaks can be made. Reviews help to highlight any gaps in the operation too, such as a key individual that has perhaps left the company (but hasn’t been replaced).
What are the consequences of poor expense management?
Reduced employee satisfaction
An inadequate expense management system is usually bad for all involved. Those making expense claims will be dissatisfied if they’re unable to get their money back in a timely fashion. Those processing the claims will also have a poor experience if they can’t complete the task efficiently (and if it eats up a lot of their time). If employee satisfaction is low, it will be tough to retain your best talent going forward.
A lack of a centralised or well-defined system can lead to an unstructured environment, which will also generate confusion among employees. This results in a lack of cohesion between those involved in expense management and reduces visibility around what has been completed.
When expense claims are processed manually, there will unfortunately (and inevitably) be instances of human error. Time and money must be spent rectifying these mistakes and submitting repeated claims. A lack of framework/policy also leads to an increase in fraudulent behaviour and occurrences of non-compliance. This also leads to higher costs due to excessive claims and legislative fines.
Compromised financial data
If expense data isn’t monitored effectively (or is neglected completely) then a crucial resource is lost. For example, when paper receipts are used, there’s a much higher risk that this information will be damaged or misplaced. Also, if the data isn’t incorporated into the wider finances, there’s then an incomplete picture of the business’s overall financial health. And it’s this picture which guides key strategic decisions. So, if it’s inaccurate, the company may ultimately make unwise choices around the likes of investment.
When expenses are processed manually it becomes quite a drawn-out operation (in comparison to what’s possible). Therefore, on any given day, productivity will be impacted. In this scenario the finance team will likely have to consolidate data from a range of sources (which is also time-consuming). And the policy must be cross-referenced manually with every single claim.
What are the benefits of an automated expense management system?
Automation and increased efficiency go hand in hand. If dedicated software for expense management is used, automation becomes a real possibility, as there’s an interconnectedness between much of the processes. This allows for claims to flow smoothly from one stage to the next (with less need for human intervention). It also improves the quality of work due to greater visibility and fewer mistakes. Tasks are completed quicker, which means goals can be more easily achieved. And the finance team’s capacity is increased, so they can focus on more complex and creative endeavours.
Lower reliance on physical documents
The use of software and other digital methods reduces the need for paper documents. This is better for the environment, which is beneficial from a moral perspective (as well as a reputational one). It also makes financial data more secure and less exposed to theft, damage, or sabotage.
Many software solutions are customisable, allowing companies to embed their unique policies within them. These systems are effective at spotting instances of duplicated and non-compliant claims. These submissions can instantly be rejected which saves a lot of time. Financial software is often built with legislation in mind, so that businesses can avoid unwanted fines. Providers will often update their systems as soon as a legislative change occurs. This can be implanted right away with cloud-based systems.
When all expense-related activity is recorded in a single system, there’s only one version of the truth, which helps to reduce conflict that might arise from contrasting opinions. Employees are easily held accountable for their respective roles and ambiguity is reduced thanks to this visibility. Managers also have more clarity around bottlenecks. This kind of cohesion helps with improving communication and keeping colleagues synchronised.
Many software solutions have some form of reporting capability. This is another time-saving mechanism for finance teams, as they don’t have to spend hours compiling information by hand. With fewer mistakes, the data relating to expenses will be of a higher quality. And if a cloud-based system is used, this data should always be current too (as expenses can be submitted remotely). These reports should highlight key metrics, such as the individuals and types of cost that generate the most expense claims. These stats could provide insights that lead to better performance.
Which expense management software to use
At Advanced, we provide an expense management system called WebExpenses. It enables increased efficiency for businesses by automating many of the tasks relating to expense management. WebExpenses streamlines these activities by eliminating the need for endless manual data entry. It also serves to provide better visibility around spending.
This expense management solution helps to facilitate organisational growth, and has functionality around invoice processing, payment services, corporate travel, and full auditing. Perhaps its most powerful characteristic is that it seamlessly integrates with Advanced Financials, our cloud-based accounting software.
Advanced Financials empowers finance teams with its functions around accounts payable/receivable, sales invoicing, credit management, bank reconciliation and purchasing management. This financial management solution also contains useful dashboards and over 1,000 customisable reports.
By having an automatic link between expenses and the wider financial function, there’s a reduced need for data reconciliation, and a far more complete picture of the company’s financial standing. There’s more peace of mind around the accuracy of reports too. This leads to greater confidence with the key strategic decisions that are being made around budgeting, investment opportunities, and more.
Are you looking to enhance your expense management strategy, and would you like to gain the advantages that come with automating this process? If so, be sure to read more about our cloud-based accounting solution and expense management software.