Table of Contents
- What Is Expense Management?
- Common Examples of Travel & Expenses (T&E)
- Importance of Expense Management
- Expense Management Process
- What is Expense Management Ratio?
- Expense Management Software vs. Traditional
- Benefits of Expense Management Software
- How to Choose Expense Management Software for Your Business
Your finance team may find opportunities to automate and streamline business processes and workflows for expense management.
We provide an expense management definition and explain how to choose expense management software that automates employee expense reimbursement processes and reduces business operating costs through expense policies compliance, fraud elimination, and better spend management.
What Is Expense Management?
Expense management is a system of business processes ranging from establishing company policies, having employees submit electronic receipts, issuing corporate credit cards to employees for routine purchases, generating exceptions reports, routing expense payment requests to approvers, controlling expenditures, and making payments to reimburse employees for approved expenses.
Expense management is a system to control, track, and process employee expense reimbursements and employee-related corporate credit card transactions. Specialized online and mobile app expense management software integrates with accounting software and ERP systems.
Common Examples of Travel & Expenses (T&E)
Corporate travel and business expenses include:
- Car rentals
- Taxis or driving services like Lyft and Uber
- Hotel, motel, and other lodging expenses like Airbnb
- Business meals while conducting business travel, entertainment, or employee motivation
- Corporate auto expenses (excluding commuting)
- Routine office supply purchases (tail spend not going through procurement)
- Professional license expenses
- Continuing education expenses
- Tuition expense reimbursement (following company policy)
- Employee networking expenses
Importance of Expense Management
Expense management is important because it lets a company automate and establish controls over employee spending through company policies compliance, checking for duplicate and fraudulent payments, obtaining approvals, implementing budgetary controls, and tracking employee spending by category.
Importantly, employee expense reports and credit card transactions are checked for authorized business purposes (rather than personal spending) and adherence to spending limits to reduce improper or lavish spending in a business with an adequate expense management system.
Tail spend management software, which is a subset of expense management software, can reduce costs of processing employee spending on low-cost items by sourcing and purchasing items outside the procurement department.
Expense Management Process
The expense management process electronically captures invoices, matches documents, screens, reviews, approves, tracks, and reimburses employee expenses. The business may use a corporate credit card issued to an employee to pay for and capture some employee expenses.
What is Expense Management Ratio?
For a business, rather than a mutual fund, the expense management ratio can be defined in two ways:
- Managing the overall percentage of operating expenses incurred in a business
- Managing purchases through the procurement department vs. tail spend.
Expense Management Ratio for Operating Expenses
According to Jerry Auel, Vice President AgDirect Credit, which is part of FarmCredit:
“The normal operating expense ratio range is typically between 60% to 80%, and the lower it is, the better. Below 70%, you’re doing a really good job of controlling expenses”.
Although the operating expense ratio applies to overall company expenses, managing employee-related expenses well can contribute to keeping the operating expense ratio below 70%. Expense control makes the company attractive to lenders, reduces borrowing rates, and helps it achieve its KPI performance goals.
Expense Management Ratio for Tail Spend
To lower overall purchasing and procurement costs, a business may strictly manage only 80% of business expenses through the procurement department. For the 20% of lower-cost items routinely ordered, it’s more cost-effective to treat these expenses as tail spend or maverick spend ordered and purchased outside the procurement department by employees.
Expense Management Software vs. Traditional
Expense management software is designed specifically for managing employee expenses. It’s more specialized than traditional accounting software and ERP systems. Some ERP companies offer expense management software to handle functionality beyond the core ERP system. Expense management software integrates with traditional accounting and ERP systems.
Within the expense management software category, some expense management software is designed specifically to provide tail spend management through system spending controls and using thousands of pre-approved vendors in their network for routine purchases like office supplies.
Benefits of Expense Management Software
Using an automated expense management system instead of manual processes, employees will feel less sting by submitting digital expense reports through software that reduces delayed reimbursements.
Mobile app or SaaS online expense management software captures employees’ receipts in real-time sing photos, OCR scanning of paper receipts, or e-receipts, making the expense report submission process much easier and quicker when on the go for business travel, entertainment, or making small routine purchases.
Your accounts payable team won’t lose its collective breath chasing down paper expense reports that get lost in the system, manually matching receipts, and recalculating totals.
Employees submit receipts for automated data entry, and an automated system does the heavy lifting throughout the expense management process. Therefore, business labor costs will decline, or AP roles will shift to more meaningful work.
Policy compliance can be quickly and easily screened, using expense management software rules that reflect company policies. Non-compliance with expense policies will kick out exceptions and reduce improper reimbursements.
Expense management software functionality incorporates system checks for duplicate payments and fraudulent employee expense reimbursement requests.
The approval process is smoother, with automated routing to designated approvers.
How to Choose Expense Management Software for Your Business
When you begin the software selection and evaluation process for expense management software, start by looking at review sites to compile a list of expense management companies to consider. List your most important business needs and match those needs with the functionality of expense management software offered by different vendors.
Examples of expense management solutions software are SAP Concur, TripActions, and Expensify.
Be sure that the vendors you’re considering are financially stable and offer adequate customer support.
If your company is a small business, perhaps you just need expense management software for small businesses. You’ll need more extensive functionality with higher pricing that your budget can handle for a mid-sized or larger company.
Besides getting CFO approval, involve employees who often travel for business, incurring employee travel expense in the decision. A system’s ability to handle travel and other expense reporting well is essential. Is the software easy and convenient to use, with a friendly user interface? Is a mobile app good for submitting receipts and expenses? Does the software include needed features?
If an end-user doesn’t like the system, you’ll experience delays with expense report data capture. Accounting won’t reflect expense accruals promptly, making business financial statements a less valuable source of information.
If expense management software includes travel-booking features, are there controls over the spending to prevent overspending and assure company policy compliance to achieve good travel management?
Can the business credit cards (sometimes called P-cards or purchasing cards) issued to employees and card transaction processing link to the expense management software? Will the company’s approved corporate card vendor provide a transactions data feed and help you manage spending controls by employee and expense category?
The best expense management software may be different for your business than it is for other companies. Make a customized decision about an expense management tool providing automation that fits your specific business needs and enables expense management best practices.
And consider using more than one type of expense management software if you need to manage tail spend or have other needs not covered by the primary expense management system your company selects.