What is expense management?

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Nearly every business encounters a variety of employee expenses, from office supply purchases 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 finance team can properly control, process, and reimburse employee spending. An all-in-one expense management solution can serve as a central hub for all of this—but we’re getting ahead of ourselves.

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In this article, we’ll explain the expense management process, outline the various types of expense claims a company is likely to encounter, share some expense management best practices, and explain how spend management software can help.

Why is expense management important?

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

1. Financial control and accuracy

Tracking business 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.

2. 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.

3. Employee morale and productivity

A streamlined expense management process speeds up the expense approval workflow, ensuring your employees are reimbursed quickly and accurately. 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 multi-step process with different players:

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1. An employee makes a business purchase: First, an employee might charge work-related 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 reviews the expense report to make sure it qualifies as a business cost, falls within company policies, and has all the required details and documentation attached
4. The expense is approved and processed: After confirming policy compliance, the manager would then forward the expense claim to the finance or accounting department 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, if necessary, the employee is reimbursed for the claimed amount

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

Types of expense management systems

There are different types of expense management systems, including:

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• Manual expense management: Traditional expense management involves manual data entry and managing expenditures using digital spreadsheets or paper forms
• Automated expense management: This system uses expense management software to automate the process. The best solutions can offer real-time visibility into your spending patterns.
• Mobile expense management: This enables employees to scan 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 platforms sync with your other accounting systems, including accounting software, ERP platforms, HR systems, and travel management tools

What types of expenses go into expense management?

The three main 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 on an irregular but predictable basis. Because they can vary in terms of timing and cost, they aren't the same as 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 while doing 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
• 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 streamlines the employee reimbursement process. This software can automate expense reporting, enforce your expense management policy, track and categorize expenses, and facilitate reimbursements. 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. The best software offers mobile apps with OCR-powered receipt scanning so employees just have to take a photo of their paper receipt and fill in any required information.

Quick expense report approvals

Once an employee submits their expense report, their managers can review and approve expenses in real time on their own mobile devices, making expense reimbursements quicker.

Integration with accounting software

Integrations with accounting software for bookkeeping or tax filing are 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 tax-deductible expenses, 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 number of benefits that help businesses grow and thrive:

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• 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 helps improve profitability.
• Financial rewards: By freeing up employees to spend more time doing work that grows 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 fix any issues. If you don't catch an error early enough in the process, however, it can lead to major issues down the road. Accuracy is key.
• Guaranteed compliance: Better systems help businesses remain compliant with industry and tax regulations 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 employee experience
• Accurate budgeting: Reliable and accurate financial records allow your business to track spending and allocate budgets more effectively. Expense management also helps your team identify opportunities for cost savings. For example, you can negotiate lower prices with existing vendors or add more vendors who will compete on price.
• Smaller environmental footprint: Eliminating the need for physical documentation cuts down on paper usage and reduces your company's environmental footprint

Streamline your expense management process with Ramp

Ramp's expense management software offers a solution to the pitfalls of inefficient manual processes. Paired with our industry-leading corporate cards, our expense management system automatically enforces spending limits, speeds up the expense reporting process, and helps employees get reimbursed faster.

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Ramp integrates seamlessly with major accounting, tax filing, banking, and security software, enabling 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 improved employee satisfaction.