What is expense management?

As the old saying goes, you have to spend money to make money, which is why every business has expenses. While they vary from company to company, business expenses include office supply purchases, client dinners and travel, employee perks, and operations costs.

The key to success is managing your expenses properly. Proper expense management involves budgeting for, processing, and managing your business's relevant costs. A proper expense policy and procedure allows you to spend your money wisely, comply with tax regulations, and reimburse your team when they spend money on the company’s behalf.

In this article, we explain the expense management process and why it’s important, the types of systems that might work for you, and how a spend management software solution can become your central hub for all things expenses.

Why is expense management important?

Expense management is key for controlling company spending and maintaining cash flow. Here are four 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. This helps 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 compliant with tax authorities and other regulatory bodies. Plus, it helps you catch and prevent instances of expense fraud.

3. Audit protection and preparation

Likewise, should the IRS or another tax authority request an audit, effective expense management ensures you have all the appropriate backup information to make the process go as smoothly as possible.

4. Employee morale and productivity

A streamlined expense management process speeds up the expense approval workflow, ensuring your employees receive reimbursements quickly and accurately. That helps boost morale and productivity since employees can focus on their work without worrying about when they’ll get reimbursed.

Who is involved with expense management?

While the act of actually making purchases to create expenses usually falls to individual employees, the management process usually involves these key players:

• Managers or expense approvers
• Accounting for recordkeeping
• Finance for budgeting
• HR who sees that policies are communicated

What are the steps in the expense management process?

Expense management is a multi-step process with different players:

1. An employee makes a business purchase: First, an employee charges work-related travel expenses, supplies, or client entertainment on their credit card
2. The employee produces an expense report: They next 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 forwards the expense claim to the finance or accounting department for approval and processing
5. The employee is reimbursed: The finance team approves and categorizes the expense under the proper business expense label, and, if necessary, the employee is reimbursed for the claimed amount

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:

• 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 is expense management software?

Expense management software streamlines the employee reimbursement process. With this software, you 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.

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 simply 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

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

Automatic expense categorization

Expense management software automates 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.

What are the benefits of efficient expense management?

An effective and efficient expense management process provides many benefits that help businesses 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 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, every step must be reviewed for potential mistakes and any issues fixed. Failure to catch an error early enough in the process can lead to major issues down the road. Accuracy is key.
• Guaranteed compliance: Better systems help businesses comply 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.

Ramp integrates seamlessly with major accounting, tax filing, banking, and security software, enabling easy financial management and collaboration. Companies that use Ramp can expect fewer errors, less time spent on tedious accounting tasks, greater financial productivity, and improved employee satisfaction.