There are plenty of once-Goliaths that crashed and burned because of poor business expense management. Just look at WeWork! At one point they were primed for market domination and a $47 billion dollar valuation. Then, their S-1 hit the internet and the walls began to crumble. It took investors and analysts minutes to see that the company’s losses far surpassed its revenue—for every dollar it made, the company was spending two.
In the span of six short weeks, a giant had fallen.
The lesson we can draw from this is that what’s equally important to top line growth is the costs required to achieve it. Market shocks can come from anywhere (we’re looking at you, COVID-19) and having a strong expense management culture can help you not just survive, but thrive.
Want to know how to track business expenses and control costs? Here's what we'll cover in this article:
- Why is it important to track and control expenses?
- Common types of business expenses
- Challenges of tracking and managing expenses
- How to track business expenses
- How to reduce business costs
Let's hit the books.
Why is it important to track and control expenses?
Companies who don’t track and control expenses are unable to adequately account for their financial past. Much like history, losing your grip on the past relinquishes control of your company’s future trajectory.
Monitoring your expenses throughout the month keeps your business finances in line in several different ways, including:
Gain an accurate view of company performance
When it comes time to look at monthly P&L, it’s important that you’re keeping track of both the big items like contractor expenses or marketing ad budget at the same time as small line items like one-off client lunches. You need a comprehensive view that fully accounts for the entirety of your spend so you can see what you’re doing right or wrong and adjust based on business needs.
Reveal spending issues
If you’re unaware of where your money is going each month, you will not be able to modify bad financial behavior that negatively impacts your company’s profitability. Daily and monthly expense tracking allows you to find trends or outlying costs.
To get a clear picture of your finances, it’s important that you are catching little costs that add up and deciding whether larger expenses are justifiable. This works on both a macro level (looking at the business as a whole) as well as a micro level (empowering team managers to keep tabs on their team’s budget, performance, and spend habits).
Help you stick to your budget
Once you’ve built a budget, the hard part is actually adhering to it. Expense tracking is one of the most important ways you ensure that your spending habits are in alignment with your established plan. At the end of each month, you can review the expenses and compare your spend to projected spend. If you went over, see where you can make cuts. If you were under, look for places to allocate more money.
Prepare for tax season
If you want to obey the law and avoid audits (as well as make sure you get all the proper tax deductions), it’s crucial that you’re prepared for tax season. The IRS requires that you keep the receipt for any business expense that is greater than $75. Ideally, your tracking system should be able to log receipts on your behalf so you can easily see what’s deductible when it’s time to fill out your tax returns.
What’s the one key takeaway? Tracking your expenses isn’t just good business, it’s essential.
It helps your entire company become more disciplined and organized. On top of that, it paints a clear picture, allowing you to prioritize expenses and accurately measure progress.
Common types of business expenses
No matter the size of the business, improving the bottom line is often as simple as reducing operating expenses. Attempting to raise prices may turn off customers. Attempting to reduce your capital expenditures may take significant time and negotiation.
However, operating expenses—expenses a company incurs by keeping the business operational—rarely have a direct impact on price or quality. So, by tracking and controlling operational costs, you can improve your financials and cash flow without impacting the appeal of your product or service to customers.
But what are operating expenses that need to be accounted for? The most important include:
Office related expenses
- Rent
- Utilities
- Telephone & Internet
- Office equipment
- Professional Service fees: Accounting, Legal, Other Contractors
- Insurance
Cost of goods sold
- Direct materials
- Hosting expenses to deliver the software
- Costs for third-party software related to the delivered product
- Personnel costs for implementation (consulting, data migration, training)
- Personnel costs for customer support team
Sales and marketing-related expenses
- Advertising
- Travel & Entertainment
- Sales materials
- Software and tooling
- Direct mailing
Compensation-related expenses
- Compensation
- Payroll tax expenses
- Sales commissions
- Employee Benefits, including health insurance and 401k or pension plans
Challenges of tracking and managing expenses
Generally, the smaller and less complex a company is, the easier it is to monitor and control the company’s finances, including direct expenses and indirect costs. Factors like scope and market position can impact the overall difficulty of detailed financial recordkeeping, as can the nitty-gritty details of your business model.
That said, every business faces significant hurdles when it comes to tracking expenses, including:
The sheer scale of it all
The operational expenses listed above are just some of the expenses you need to consider and manage on a daily, monthly, and yearly basis—some of which you’d want to amortize or depreciate over time. Managing tail spend, in particular, can be difficult to track, since it typically makes up 80% of transactions but just 20% of costs. The sheer quantity of it all can make tracking and categorizing a nightmare.
Human error
When processes are dependent on humans, there will inevitably be mistakes. Manual processes are harder to optimize, since these errors will always be present to some degree (which is why many businesses seek to automate these processes). According to CFO Innovation, human error is the number one problem with tax and accounting mistakes.
Approval delays
Manual processes tend to cause several delays, and even digital processes can suffer from this same issue. As a financial monitoring and approval task passes along to the next step of the accountability chain, an expense report might go overlooked or be forgotten, delaying the process of approval or reimbursement as a result.
Expense fraud
If you rely on manual expense management and tracking, it becomes difficult to check and confirm every expense for accuracy. This exposes your operation to fraud, specifically expense report fraud, which according to Accounting Today, "Accounts for 21 percent of fraud in small businesses (those with less than 100 employees), and 11 percent in large businesses (those with 100 or more employees)." The difference is likely due to the fact that small business owners are more likely to use manual expense management than larger businesses, but it’s something that businesses of all time must be cognizant of.
Check out our guide on small business expense management for more on this topic.
Time delay
Since expense audits are usually limited until the end-of-the-month report, the information you have to use may be out of date and useless by the time all of the expenses are laid out. And in a competitive business environment, you need to be able to monitor your spend as it happens and adjust accordingly.
Tracking expenses and controlling company costs can be a long, drawn out, and unreliable process—but it doesn’t have to be.
How to track business expenses
These days, far too many businesses rely on antiquated accounting methods that set them up for failure. Even the most complex Excel models are manual in nature and become inadequate for keeping track of your operational expenses, especially as your business scales. Manual bookkeeping processes such as this are time and labor intensive—and who’s to say if they are accurate or up-to-date.
If you haven't made the switch already, it's time to ditch the old ways and embrace the new. It's time to move away from Excel-based tracking. Put simply, there's a better option for staying atop your company's finances.
And what is that?
Real-time expense management and accounting via Ramp. It's a finance automation platform that comes with a host of built-in features, enabling you to:
1. Monitor spend at a macro and micro level
Ideally, you need to have both a macro and micro vantage point of your spend. Companies need the ability to see the top-line view of the entire company and the option to zoom in on a single user or expense. Doing so makes it easier to project your spend by employee, merchant, or department.
2. Use instant reconciliation & receipt matching
Expense reports take time and are prone to errors and fraud. Instant reconciliation is a must-have, especially if it’s able to automatically collect, match, and categorize paper receipts in real-time.
3. Integrate spend management & accounting software
You very likely already use an accounting software such as QuickBooks, Freshbooks, or Xero. The best spend management platforms are able to seamlessly pair with other financial management tools, allowing you to close your books in but a few clicks.
4. Automatically categorize expenses
It becomes exponentially easier to manage expenses and reconcile your monthly spend if all expenses are automatically categorized and then stored. You need to be able to create customizable rules and smart category mapping.
5. Give employees a corporate card
One of the easiest ways to stay atop of your expenses is to tie all of them to a central bank account and a corporate card. The best solution would have an automated spend management platform built in.
How to reduce business costs
As noted above, the process of tracking business expenses involves more than just compiling a list of all expenditures. You need optimized datasets that prime all of your recorded information for trend analysis and other research into what your expenses mean.
Spend control is a complex process. It involves not just recording and analyzing data, but then acting on the insights provided and making strategic decisions that maximize impact to your bottom line.
Many strategies for financial management can put that data to use, and the specific methods you implement depend on your business purpose, needs, and means.
That said, a general approach towards cost reduction may look like:
1. Get a clear and transparent view of your spend
Both the historical view of expenses and real-time view help paint a 360-degree profile of your business. Without a clear view of previous and current spend practices, it’s nearly impossible to analyze where there’s potential waste vs. opportunity to optimize spend management. You need to be able to ensure that spending data is properly tagged within the proper:
- Category
- Department
- Account
- Vendor
Delineating between these categories makes it easier to slice and forecast your spending data.
2. Look at your highest spend bucket items
That could be in payroll, key vendors or suppliers, or even office rent. Perform a spend analysis and see what benchmarks look like. If necessary, you may need to renegotiate your contracts moving forward.
3. Make sure you’re getting the best price
Financially savvy companies seek out the best deals. Pricing must be opaque and deals negotiable. Be sure that you’re on the right plan, that you’re using all of your licenses, leveraging discounts and credits, and getting the best deal with your custom plan.
4. Keep an eye on recurring expenses
Even things like software as a service (SaaS) can become a cost-creep where you sign up for a lower tier and forget to change the pricing tier. Or, your company is rapidly growing and different teams start employing different tools that could be solved by one that’s centralized.
5. Culture matters
It’s critical that you instill a financial culture of responsibility from the top down. It’s every employee's job to ensure that the company is spending its money wisely. Even small purchase decisions can add up. Success comes when all of your teams are doing their best to optimize spending.
Although every company is in its own unique situation, the more visibility you have on your expenses, the better off you’ll be.
Track expenses and strengthen your financial performance with Ramp
At Ramp, we know that tracking and managing business expenses can be a difficult process. That’s why we offer a corporate card that helps you control what your employees spend on. Ramp allows you to issue corporate cards that automatically control how much, how often and where they can be used. SaaS cards, Travel cards, lunch cards, gas cards—you name it, your cards enforce it.
Since we’re a charge card, we don’t operate on an interest model.We aren’t powering your purchases and hoping to make money on interest accrued over time. Your balance is due at the end of the billing period, so there’s no regular interest compounding, ever. We don’t burden you with unnecessary spending in the form of dues for registration, nor on a monthly or yearly basis. We also never charge you foreign transaction fees.
Our robust financial management and cost reduction services are completely free.
Sign up today to see how easy tracking and controlling your expenses can be, in under 15 minutes.
