What is Expense Management?
Expense management is a term that means different things to different internal stakeholders. Some people conflate expense management and spend management. Spend management refers to making sure that overall spend is managed according to the budget and best practices.
Expense management is related to spend management, in that it refers to the processes and tools a business uses to authorize payment for employee-initiated expenses. Travel, business lunches, and other types of indirect procurement require an expense management approach that minimizes waste and optimizes resources.
As more companies focus on reducing tail spend, expense management will gain importance as a way to reduce off-book spending and improve spend management. Here are some of the key practices of expense management and ways to introduce this strategy in your business.
How to practice expense management
Historically, companies used expense reports — paper forms — to file and manage employee expenses. These forms typically record the following information:
- Date and time of the expenditure
- Purpose of the expenditure
- Employee to be reimbursed or paid
- Manager to approve the reimbursement or payment
- Sub-totals of different categories
- Grand total
- Amounts advanced (in cases of reimbursement)
These paper forms offer an old-fashioned, outdated way to manage expenses. Today, with many companies working globally in distributed teams, it’s simply not feasible to route paper forms for approval. Likewise, this system often leads to delays, errors, and difficulty maintaining compliance.
Today’s expense management relies on spend management software to automate workflows and digitize records. Indirect spend — spending on goods and services purchased that are incidental to the product or service a company is offering — can be managed directly through a procurement platform. Fairmarkit’s platform, for instance, digitizes and automates the procurement process for indirect spend, while simultaneously providing a platform for better supplier management for direct spend.
Benefits of expense management
Companies that modernize their expense management by integrating indirect spend into a procurement platform open new opportunities for reducing tail spend.
Expense management technology enables better security by digitally managing the expense approval process. Expense management systems ensure that expense reports are submitted to validated employees and approval is obtained, reducing the risk of fraud.
Likewise, expense management solutions reduce errors that can occur through manual paper approvals. Expense management software creates a paper trail for bookkeeping purposes, and enables better financial controls. Expense management in general helps companies avoid unnecessary spending and going over budget by providing a real-time snapshot of what’s been spent against each department’s budget.
And, expense management makes internal processes more efficient. Expense management systems that are easy to use help employees get back time in their day. The software makes it simple to submit expense reports, share receipts, and route forms for approval. This encourages employees to spend responsibly and adds transparency across the organization.
Expense management vs cost management
It’s worth noting that expense management is a little different than other costs that arise during the course of business. Expenses are recurring costs that have no asset associated with them. Travel, conference fees, and business meeting expenses all fall under expense management.
Costs are usually one-off: the cost of a new piece of equipment, an acquisition, or a piece of real estate. These costs don’t generally fall under expense management, since there’s little you can do to cut down on the spending associated with managing these expenses regularly.
To look for areas in which you can apply expense management software, look for internal sources of spending usually carried out by individual employees. Create an expense policy that dictates how, when, and to whom each person submits their expense report. Offer training on using spend management software to create a clearing house for all employee expenses. With this process better understood and centralized, you can create a workflow that’s automated, productive, and easy for employees to use.
Expense management is both the role of the employee and the role of the finance and accounting teams. Employees need to be aware of the guardrails around managing expenses; including how to spend compliantly, which expenses are reimbursable (and which ones are not), and how to initiate the approvals process. Finance and accounting need to be cognizant of the company’s cash flow, of which expense management plays a huge role. In short, expense management is everybody’s business.
To learn more about expense management, check out our blog, The Source.