Every business has expenses.
In the beginning, when there are fewer people involved, expenses can be centralized and paid out of one account. That changes as businesses scale as the need may arise for employees to have and maintain their own expense accounts. That requires an expense policy, an approval process, and a mechanism for reimbursements.
But managing all that manually can pose some challenges. In this article, we’ll go over some of the ways to overcome those challenges.
What is an expense account?
An expense account is not a separate bank account. It’s a ledger used to keep track of costs that fall into business expense categories. Accountants generally set them up as t-accounts that are part of the general ledger, giving them the ability to allocate those expenses when they prepare financial reports. They’re also useful for tax filings, as many business expenses are deductible.
When the company pays expenses directly, the expense account is credited, and a cash account is credited. When employees pay expenses and later submit for reimbursement, the expense account is set up as an accounts payable account on the liability side of the general ledger. The expense account is debited, and cash is credited when the reimbursement is processed.
This process might get confusing for business managers because debits and credits work differently on the asset and liability sides of the general ledger. Investing in small business accounting software can eliminate some of that confusion and expense management tools make it even simpler.
4 types of expenses that need to be accounted for
Accurately classifying expenses is important for several reasons.
Your company needs small business tax deductions that can only be claimed with clear expense categorization. The finance team is tasked with putting together an accurate balance sheet. Ownership wants to make sure there’s no wasteful spending. These are all factors that go into expense management and budgeting.
1. Essential expenses
We’re all familiar with essential expenses in our personal lives. That list looks different for the business. Certain expenses are obvious, like rent, utilities, and taxes. Other additions to the “essential” list include, professional fees, office supplies, licensing fees, salaries, and insurance premiums. These all need to get paid for you to stay in business.
2. Discretionary expenses
A discretionary expense, unlike an essential expense, is a cost that you have a choice about taking on. Examples of this are marketing expenses, public relations, events, video production, freelancers, and collateral (business cards, posters, flyers). You could also put that expensive brew you have for the coffee maker in this category. These are all wants, not needs.
3. Operating expenses
Most of your essential expenses will be in the operating expense category. An operating expense (OPEX) is a cost that your company incurs as a result of its normal business activities. Examples of this include rent, equipment, inventory, payroll, insurance, and R&D. Marketing expenses could also fall in this category, but they are not essential.
4. Non-operating expenses
Anything that doesn’t classify as an operating expense is a non-operating expense. Interest payments on debt, inventory write-offs, and legal settlements fall in this category. Investment losses are non-operating expenses also. There are others that may not be as obvious. Expense management software and a handy set of expense guidelines can help with this.
5 expense account challenges for small businesses
Managing expenses gets more complicated as companies grow. Expansion, marketing, adding new employees, and supporting the infrastructure required for all that can create some challenges for small business owners. Some of those may not be as visible as others. We’ve highlighted a few of the more troubling issues in the sections below.
1. Travel and expense (T&E) procedures and costs
Without strict policies and vigilant attention to detail, T&E can become an issue for ownership, employees, and accountants. T&E reimbursement is one of the key areas of concern for SMBs. Reimbursable spending on travel needs to be clearly defined in policy. The reimbursement process should be automated, but even that can be a problem if there are no spend controls.
2. Manual entry errors
Modern aggregation technology can track expenses and eliminate manual entry errors. That doesn’t work if employees are using their own credit cards for expenses and then submitting for reimbursement. That’s the type of scenario where errors occur because everyone involved is doing a manual entry, from the employee to the bookkeeper to the accounting department.
3. Receipt discrepancies
Let’s say you find a discrepancy in a manual entry, or you want to challenge an expense on a reimbursement report. Without receipt automation, there may not be a good way to prove or disprove the transaction happened. Paper receipts without digital copies are an inefficient way to keep records.
4. Maverick spending without screening vendors
Procurement departments can become their own little kingdoms inside a company when they don’t follow a set of procurement rules. One example of this is called maverick spend. It’s when the procurement team spends more than they’re authorized to and doesn’t properly vet or pre-screen vendors. This is more than an expense issue—it can affect all levels of operations.
5. The hidden cost of zombie spend
How many subscriptions and membership fees do you pay for every month? Chances are you’re not using them all. Most of them are so small you barely notice them. Imagine that number multiplied by the number of employees or departments you have at your company. That’s known as zombie spend. It’s an expensive problem that’s difficult to get rid of.
Simplify & automate expense account management with Ramp
A broken expense management system requires more than just one simple fix. Many small businesses find that they need to completely restructure the way they handle expense accounting, employee spending, and reimbursements. Ramp can help you with all that. Our platform is designed to handle the following functions:
Creating a set of rules that govern expenses is the first step in cleaning up any issues that you’re having. What classifies as a legitimate business expense? Are there spending limits in certain categories? Is procurement policy clearly laid out? You can use Ramp to create and archive an expense policy for everyone to follow.
Corporate charge cards
One of the biggest headaches in expense management is reimbursing employees who use their personal credit card for expenses. Reimbursement reports need to be filed on time and employees don’t do a great job keeping receipts. Giving them a corporate charge card solves both problems.
Using a Ramp charge card and our convenient mobile app gives employees the tools they need to charge expenses and upload a digital copy of the receipt. Archiving and categorization are automatic, making your accountant’s job much easier when they need to create financial reports or file taxes.
Imagine being able to limit where your employees can spend money on behalf of your company. Ramp’s spend controls allow you to set limits, designate specific vendors they can shop at, and eliminate waste. We also provide a real-time dashboard so you can see expenses as they happen, not weeks after the fact.
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