As a business owner, managing your business expenses can be the difference between success and bankruptcy. Even the most inspired, talented business endeavors can fall short if they cannot navigate the basics of cost management. This guide will introduce you to important business expense concepts, show you different ways to track your expenses effectively, and make sure you choose the right cost management solution for your business.
What is expense management?
Expense management is the system your company uses to process, pay, and track business expenses. This system can be as informal as a collection of spreadsheets, or as streamlined as an all-inclusive software system. No matter what industry you’re in, it’s important to have an expense management solution that works for your organization’s needs.
Different people in your organization have different needs from business expense management. Finance teams are looking for accurate records and solutions that help everyone stay on budget. Individual employees need a system that’s easy to use when submitting expenses in order to reimburse them quickly.
Anyone invested in the success of your business will benefit from systems that create cost savings and lower financial risks.
What are business expenses?
Business expenses are the everyday costs of operating a business, which includes employee-incurred expenses, such as plane tickets, and operating costs, such as the water bill of your home office. Your expenses are paid for with business capital, and can have an impact on your overall profitability.
Business expenses include:
- Payroll for staff
- Insurance
- Fees for attorneys, licensing, accounting, etc.
- Rent, mortgage, building maintenance
- Marketing, research & advertising (including for social channels like Facebook)
- Office supplies
- Utilities
- Property taxes on real estate
- Vehicle expenses
- Travel expenses
- Cost of Goods Sold (COGS) = anything necessary to create, sell or distribute your goods or service, such as materials, labor, packaging, etc.
Keeping track of business expenses
Why is it critical to track business expenses? Careful tracking allows you to:
- Stick to your budgets, catch abnormal spend, and cut down on unnecessary expenses
- Predict your business’ cash flow
- Claim the largest possible tax deductions
- Grow your business
Upgrading the way you manage your business expenses can improve the profit margins for your business. There are critical steps to effectively tracking expenses that provide long-term benefits:
- Open at least one dedicated business bank account for all business transactions.
- Choose your method of accounting—it could be a whole finance team or even just high-powered accounting software.
- Categorize each business expense carefully to see if they are tax deductible.
- Streamline expense reports—these can be paper, electronic, or a combination of the two.
- Connect your bank to expense management software to save time and effort.
- Track purchases and reimbursements that don’t go through your bank, including all receipts and invoices.
- Record expenses daily, then reconcile accounts at the end of the month.
Types of expense management
There are a few different categories of corporate expense management, and it’s important to weigh your options even if you’ve been using the same system for many years.
Spreadsheets
Whether it’s Microsoft Excel or Google Sheets, many companies use spreadsheets to track expenses. While this system is free and familiar to many, they are labor intensive, prone to user error, and confusing to employees who are unfamiliar with spreadsheets.
Paper tracking
Tracking expenses on paper can be tempting for those who want to keep physical receipts or those who aren’t used to newer, more efficient methods. Very small businesses might take this approach at first, but ultimately it leads to lack of organization and increased errors.
Expense tracking software
The right software is secure, easy to use for all employees, and tracks expenses in real time. If you do your research, you’ll be able to find a system that can be implemented quickly and easily, while saving you a lot of headaches in the short and long term.
Traditional expense tracking vs. automated expense management
Traditional doesn’t always mean better, so be sure to choose the method that best fits your needs.
Traditional expense tracking includes three of the methods described above: paper tracking, spreadsheets, and software tracking. While these can all get the job done, they don’t give you a real time view of your business expenses, and they can be difficult to manage. They often lead to incorrect expense reports if your employees make even small mistakes.
Automated expense management uses cost management software to make sure user error is never a factor, so all expenses are quickly and easily tracked and categorized. With the right automated option, you won’t have to worry about accidentally going over budget.
Benefits of expense management software
If you want automated expense management that gives you greater insight into your spending, you want expense management software. When you choose the right business expense software, the benefits include:
- A tool that is easy for every employee to use
- Less room for user error
- Real-time tracking and visibility of expenses
- Greater visibility of spending in every department
Less time spent on the expense report process
What does the expense management process look like?
Expense management doesn’t have to mean micromanaging expenses for different departments. Instead, it can offer customized spending options that empower employees to make smarter business decisions with their budgets.
The process starts with employees reporting their expenses. From there, the expense is approved or validated by someone else, often managers. If needed, the reimbursement process will give money back to the employees who spent their personal funds.
The finance department will conduct expense audits at regular intervals, and keep records of expenses and receipts for as long as necessary for tax purposes.
Challenges in T&E management
When discussing expense management, T&E refers to “travel and expense,” or sometimes “travel and entertainment.” This describes employee expenses such as air travel, hotel stays, car rentals, meals, and other costs often associated with business trips.
T&E can provide several challenges for businesses, especially if the policies around these costs are really just loose guidelines. Having a clear, defined T&E policy, with specific budgets, can help create clarity and minimize expenses.
Another challenge with employee expenses is visibility. If your employees can’t see how much is left in their travel budget, they won’t know whether to order a steak or a sandwich for the last meal of their trip. A system that tracks expenses in real time will help them stay on track.
User error can create problems as well. The simpler and easier it is to track expenses, the better off your company will be. Look for expense management solutions that automate tracking so minimal information needs to be entered manually.
Choosing an expense management platform
Prepare: Discuss and define
Define your current organizational challenges to create a ranked list that the expense management platform should solve or simplify. Then list the top three to five biggest challenges your organization faces when it comes to managing expense reports
Once you’ve narrowed it down, meet with your team, departments, and managers. Ask them the same question to determine:
- Do their responses match your prioritized list?
- Did they find it difficult to limit their response to three to five challenges?
- What new challenges did you uncover in their responses?
- Are certain employee roles impacted more than others? Why?
Consider the following deep-dive questions:
- Have you factored the size of your business into your needs?
- How many people in your organization file expense reports?
- How do employees currently submit spend requests and expenses?
- Do your employees travel for business frequently? Does this include international travel?
Demo: Compare and evaluate
You have outlined your highest priorities, allowing you to start comparing various spend solutions, and how they address your organization’s top concerns. Most companies offer free demos, providing insight into their system’s capabilities and user interface.
Decide: Select and adopt
Now that you’ve completed the research stage, it’s time to choose a budgeting and business management system and move forward to implementation. You have outlined your priorities, taking timing and functionality into consideration, empowering you to choose the best fit for your organization’s unique needs. You should have everything you need to make the right choice.
Is it time to update your company’s expense management system?
Depending on the expense management system you choose, you could have a number of challenges to overcome. Typically, organizations choose to change and update their procedures and implement an expense management solution as their business grows or for one of the following reasons:
- Spend control: Increasing visibility to reduce expense costs and losses through policy enforcement
- Improved efficiency: Eliminate the paper trail and data re-entry
- Reporting: Simplify KPIs by generating spend and expense management reports, tracking who spends and why
- Compliance: Enforce organizational policies and guidelines through simplified user adoption and approval flows
