What is expense management?

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Businesses encounter a wide variety of employee expenses during their operations, from office supply purchases and rent to client dinners and travel.

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For that reason, it's essential to have an expense policy and procedure in place so your company’s finance team can properly control, process, and reimburse employee spending. An all-in-one expense management solution can serve as a centralized hub for all of this—but we’re getting ahead of ourselves.

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In this article, we’ll cover all things expense management, outline the various types of expenses and expense claims a company is likely to encounter, and explain how spend management software can help automate the process. 

Why is expense management important?

Expense management is key for controlling company spending and maintaining cash flow. Here's why it’s so important:

Financial control and accuracy

Keeping track of expenses gives you real-time visibility into where your money is going, helping you identify cost savings and make informed decisions. This level of insight is essential for budgeting, financial forecasting, and strategic planning.

Compliance and fraud prevention

Accurate records ensure you’re staying compliant with tax authorities and other regulatory bodies. Plus, it helps you catch and prevent instances of expense fraud.

Employee morale and productivity

A streamlined expense management process speeds up the expense approval workflow ensures your employees are reimbursed quickly and accurately, improving trust and goodwill. This helps boost morale and productivity since employees can focus on their work without worrying about when they’ll get reimbursed.

What are the steps in the expense management process?

Expense management is a multistep process with different actors:

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1. An employee makes a business purchase: First, an employee might charge work-related business travel expenses, supplies, or client entertainment on their credit card
2. The employee produces an expense report: They'd then report their spending and provide necessary information like the date, location, price, and receipt for their expense
3. The report undergoes review: The employee’s manager must review the expense report to make sure it qualifies as a business cost and falls within company policies, and that the employee provided the required details and documentation
4. The expense is approved and processed: After confirming the accuracy of the information, the manager would then forward the expense claim to the finance team for approval and processing
5. The employee is reimbursed: The finance team then approves and categorizes the expense under the proper business expense label, and the employee is reimbursed for the claimed amount, if necessary

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All these steps should be documented for easy reference in an internal or external audit, or to generate up-to-date financial reports and set future budgets

Types of expense management

There are different types of expense management systems, including:

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• Manual expense management: Traditional expense management involves manually tracking and managing expenditures via manual data entry using spreadsheets or paper forms
• Automated expense management: This system uses expense management software to automate the process (the best solutions offer real-time visibility into your spending patterns)
• Mobile expense management: This enables employees to capture receipts, submit expense reports, and track business expenses on the go using a mobile app
• Cloud-based expense management: Cloud-based expense management systems store expense data securely in the cloud, allowing easy access from anywhere with an internet connection
• Integrated expense management: Integrated expense management systems integrate with other accounting systems such as accounting software, ERP platforms, HR systems, and travel management tools

What types of expenses go into expense management?

The three types of business expenses in accounting are fixed, variable, and periodic. Fixed expenses like rent and full-time employee salaries remain the same over a particular period of time and don't change based on your business's level of production or sales.

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In contrast, variable expenses do change relative to your company's output. For example, factory utility bills might increase as your company manufactures more product. The money spent on raw materials or hourly wages would also increase.

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Finally, periodic expenses are incurred at less regular intervals of time. Because they can vary in terms of timing and cost, they aren't fixed costs. Examples include vehicle maintenance and holiday gift-giving.

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You might also categorize business expenses into operating and non-operating. While operating expenses refer to costs incurred during regular business activities (e.g., employee salaries and administrative expenses), non-operating expenses involve costs that fall outside core operations, like legal fees stemming from a lawsuit.

Examples of common business expenses

The IRS defines business expenses as “ordinary and necessary” costs required to run your business. Ordinary costs are common expenses for your business or industry, and necessary costs are required to operate your business, regardless of whether they’re indispensable.

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Some examples of business expenses include:

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• Employee salaries and benefits
• Workspace rent or mortgage payments
• Insurance premiums
• Office supplies
• Utility bills
• Professional fees to lawyers or accountants
• Raw materials for production
• Equipment maintenance
• Marketing and advertising
• Shipping
• Interest on loans
• Travel accommodations and transportation
• Conferences and workshops
• Software

What is expense management software?

Expense management software is a type of program that streamlines the employee reimbursement process. This software can automate expense reporting, track and categorize expenses, facilitate reimbursements, and integrate with payroll and accounting software. It also helps catch policy violations or fraud by flagging suspicious transactions.

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Here are some of the key features of a modern expense management platform:

Automatic expense tracking

Expense management software lets employees quickly and easily submit expenses using their phones. They can take photos of paper receipts and type out memos with any required information, so there's no need to keep track of different pieces of paper.

Quick expense report approvals

Once an employee has submitted this information, their managers can review and approve expenses in real time on their own mobile devices, making expense reimbursements quicker.

Integration with accounting software

Integration with accounting software for bookkeeping or tax filing is another helpful feature of automated expense management systems. This functionality makes it easier to pull all financial data together in one place.

Automatic expense categorization

Expense management software can automate the process of organizing expenses into categories like payroll and salary costs, office equipment, professional fees, and business travel. This makes it easy to identify deductible costs for tax filing, compile an expense report for specific spending categories, and locate the receipts for business write-offs in the event of an audit.

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What are the benefits of efficient expense management?

An effective expense management process provides a host of benefits that allow businesses to grow and thrive.

Time savings

Manual systems are time-consuming. By speeding up the expense reporting and approval process, efficient expense management can free up time for other work that actively serves the aims of the business.

Financial rewards

By freeing up employees to spend their time doing work that helps grow the business, efficient expense management systems can also boost a company's overall financial productivity and earnings.

Reduced errors

Inefficient expense management is prone to errors. As a result, it's necessary to review every step for potential mistakes and rectify any issues that arise. If you don't catch an error early enough in the process, however, it can lead to major discrepancies and issues down the road. Accuracy is key.

Guaranteed compliance

Better systems help businesses remain in compliance with the rules of the IRS and other regulatory bodies as they manage their finances. This approach also allows companies to keep accurate and easily accessible records available for audits, improving overall financial decision-making.

Increased morale

Inefficient expense management can be tedious and frustrating, so better systems create a more positive and enjoyable employee experience and boost company morale.

Accurate budgeting

Reliable and accurate financial records allow your business to better track spending and allocate the right amount of funding to different departments as you set and review your budget.

Lower environmental footprint

Removing the need for physical documentation cuts down on paper usage and reduces your company's environmental footprint.

Streamline your expense management with Ramp

Ramp's expense management software offers a solution to the pitfalls of inefficient manual processes. Our digital system—paired with our corporate cards—allows employees to easily submit expense reports, document receipts, gain manager approval, and receive reimbursements quickly.

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Ramp integrates seamlessly with major accounting, tax filing, banking, and security software to allow for easy financial management and collaboration. Companies that use Ramp can look forward to fewer errors, less time spent on tedious accounting tasks, greater financial productivity, and overall employee satisfaction.