What is Expense Management?
Expense management refers to the process of setting up policies for employees travel and entertainment expenses, setting up processes for reimbursing employees and then having greater visibility to control travel and entertainment expenses for the whole company.
Why Expense Management is important?
T&E (Travel and entertainment) expenses is often a big line item after labor and benefits expenses. A JP Morgan study puts the expenses as high as 12% of the annual sales number. On average, your Travel and Entertainment expenses could be around 10% of your revenue.
Now if you are a small company, this might not be enticing, but let’s look at some potential cases with certain revenue ranges
As you see above, if you are in the $50M annual revenue range, even at 2 %, the expenses are around $1M.
When it comes to reducing cost and increasing EBITDA (Earnings before interest, tax, depreciation, and amortization), these expenses could be a good target if you understand the major categories of spend and have a cost reduction strategy around it.
No matter what the total spend on expenses, Expense management is also important from a fraud prevention perspective. If you don’t have corporate cards, the chance of fraud increase because of fraudulent receipts.
Challenges with managing T&E spend
So if Expense management is important, why are companies not effectively managing expenses?
There are a couple of reasons for that
1. Lack of a comprehensive policy
The most common reason is a lack of comprehensive T&E policy. If the T&E policy is nonexistent or not detailed enough, then that could be a cause of ambiguity for employees on what is reimbursable and what is nonreimbursable.
This is a problem which can be fixed easily, and having a policy is one of the many best practices for T&E expense policy. Also, having a T&E policy helps you gather better data which in turn increase visibility into Spend.
We have already covered this in Components of the T&E policy but here is a brief overview of what you should cover in a very basic expense policy.
a) What are the different expense categories and what information you need to capture when employees submit their expenses? For example, Air travel, business meals, entertainment etc.
b) When your employees should submit receipts. For example, any expense greater than $25 needs a receipt. It is good practice to maintain receipts for all expenses or as required by your auditors.
c) If you issue corporate credits to your employees then you should clearly identify scenarios where the card should and shouldn’t be used. Also, some companies mandate the use of corporate cards because that helps to gather better and consistent data for further analysis of the spend.
d) A clear definition of what expenses are reimbursable and what are not reimbursable. There is no set standard for what is considered reimbursable and what is not. It completely depends upon on your company culture and what perks you offer to your employees. For example, if you have remote employees, you might reimburse them for furnishing their home office or regular office supplies.
In other cases, you might allow expenses like childcare and personal grooming but in other companies, this might be a non-reimbursable spend,
How to identify which spend is reimbursable or not? Look at your past expense reports and that would be a good start.
e) For air travel, there should be guidelines for economy vs business class travel. Few things which should be covered in the policy
• How to select the least logical fare for any sector.
• What is the cap for hotels in different cities
2. Limited visibility into Travel and entertainment expenses
The second challenge companies face with expense management is a lack of detailed spend visibility.
The lack of visibility is because of a lack of automation. Most of the companies still use spreadsheets to submit and approve expenses.
Though Excel might be efficient, it is hard to consolidate data for reporting perspective and when you need information to make decisions on cost-cutting, that information is not readily available.
As per a survey by research firm Paystream (now called Levvell) advisors, most of the companies are still using manual processes.
Let’s look at the results of the survey
On an average 26% of companies under $100M in revenue have a very manual process for expense management. Receipts are sent directly to the A/P department for processing.
Though this might be Ok from an expense submission standpoint, it is highly inefficient when it comes to consolidating the data to get better spend visibility.
No wonder companies mention Increasing visibility as their top priority for implementing expense management tools
As you can see above, 61% of the companies mention increased spend visibility as the top benefit for implement TEM technologies.
The second benefit after increased visibility is, of course, quicker reimbursement for employees. This is especially important if you don’t have a corporate card program and you are asking your employees to use their personal card for travel and other entertainment expenses.
3. Pre-authorization of expenses
The other challenge companies have with travel and entertainment expense management is pre-authorization of spend. Let’s discuss this in more details.
If you have a purchasing system, then you already have a pre-authorization process for Spend. The requisition goes through proper authorization before the order is sent to the supplier.
So if you wanted to control Spend, you have an opportunity to control cost by rejecting the requisition for purchase.
That is not the case with expenses and it is dependent on the manager to judge whether we should have spent this money or not.
Travel and hotels are the biggest expenses for companies followed by meals for business.
So there are a couple of ways companies can control cost through pre-authorization
a) Implement a travel approval policy
The intent of the policy should be that any travel above a certain threshold should be approved at a certain level in the organization. Be careful about group travel, for example, conferences. It is not uncommon to see people from different departments go to the same industry event. You could reduce cost in these cases by authorizing only limited people for travel.
The employees who are then traveling can debrief the rest of the team with learnings from the event. Don’t agree with our assessment?
Let’s take an example, assume there is an industry event where 3 people from each department are planning to attend.
Let’s say total 10 people went to the event. On an average, it would cost $1200/person (Flight+Hotel+meals).
Total event cost is $12,000. Let’s say you had pre-authorization of spend, and only 3 people went. That is a savings of $8,400 (1200*7). Control 5 such events in a year and you can save $42,000.
b) Implement authorization for major expenses
Travel is not the only thing which is booked using credit cards or on person card by employees. There could be events, other parties which are happening in your company. It could be events sponsored by the company.
Have a pre-authorization of expenses, so that you have an opportunity to control cost before it happens.
We believe so much in pre-authorization that we have built a pre-authorization process right in our expense reporting tool. You have the option to have the expenses approved before your employees go about Spend money.
The other benefit of the pre-authorization of expenses is that the review process becomes simple. You can just have the expenses reviewed and if the expense is tied to a pre-authorization request, then you don’t need any further approvals.
Finance can review expense reports faster and that increase the efficiency of the whole process.
Fraud is another challenge for CFO’s to deal with. You might say that we don’t have this issue.
That might be true but when was the last time, you audited your expenses?
Fraud is a by-product of poor expense management or manual expense management process.
As per research published by ACE (Association of Certified Fraud Examiners), expense reimbursement fraud is seen in 14% of the cases they analyzed.
As you can see in the above chart, the median loss is $40,000 due to the expense reimbursement frauds.
So in 14% of the cases, an employee files a reimbursement request for a fictitious or inflated business expenses
Do you still think you don’t have this challenge?
9 strategies for Expense Management – Reduce T&E expenses
We talked about problems with expense management, now in this section, we will give you give you strategies which you can use today to reduce the expenses.
1. Negotiate better rates
This is no brainer suggestion that you should look at reducing the cost for travel and expense, but where do you start and how much you can save?
Below is an analysis done by Accenture to identify how much companies can save by strategically negotiating rates combined with small policy changes.
The lowest is in the hotels – 4% cost savings and the highest is in the travel management company. The one obvious thing you point out that the companies which are covered in this survey have more than $1B in spend.
Not all companies have such high Spend but you can still achieve these savings by carefully analyzing the spend.
Let’s look at the two to three categories where you can easily save 4-5% on your travel expenses
Savings on Hotel Rates
The approach most people take with hotel negotiations is to negotiate a nationwide discount program with big hotel chains like Marriott. In theory that makes sense, but you need a large volume of Spend to be in a position to negotiate rates with these hotel chains.
Most of the times, they won’t even entertain you if your volume is low.
There are other cheaper alternatives like Airbnb but that comes as the added cost of risk to the company which needs to be underwritten by another corporate insurance policy.
Instead, we suggest that you look at the top 5 cities where your employees are traveling and that start negotiating the rates for each city.
Here is how it works
1. Get the travel data for the last 12 months, you can get this from your travel booking tool.
If you don’t have a travel booking tool, you can get that from your expense reporting tool.
If you don’t even have that, have someone go through manual receipts for the last 2-3 months and identify top cities.
2. Identify the top hotels where you have maximum nights.
3. Call that specific hotel location – Yes, you read that right – Don’t call the hotel chain because they won’t be interested, assuming you have a low volume of nights.
4. Then ensure that your employees use that code while booking the hotel.
Savings on Airfare
For airfare, there are certain airlines who might offer you discounted rates, especially if they are just introducing a new flight from your city. For example, Southwest introduce discounts whenever they launch in a new city.
Otherwise, you need to have a volume of at least $1M to get any sort of discounts from airlines.
If you don’t have such large volume for travel, don’t worry just register for corporate miles and you can still save money. We have covered this in detail in the later sections.
Savings on Car rental
This used to be an area where companies used to put a lot of focus on negotiating cost but with the growth in ride-sharing companies like Uber and Lyft, the volume of car rentals is low.
Having said that, check your car rental expenses and see if there is any substantial volume and then use that to negotiate a better deal with car rental companies.
We didn’t cover meals because we are going to discuss that in the next section.
2. Increase visibility and accountability
Increasing visibility is the first step towards decreasing the cost of the overall T&E expenses. Of course, more visibility drives better accountability.
Paystream analyzed this issue in one of their annual surveys. As you can see in the graph above, 19% of the companies consider lack of spend visibility as an issue and that is the main motivator for them to invest in a travel expense management tool.
And approx 26% of the companies in the <$100M annual revenue range report this is an issue.
We have cover benefits of automation in the subsequent sections but let’s first focus on the benefits of increased spend visibility.
By increasing visibility into spend, you can understand not only the top merchants with whom are spending money but also the purpose of those expenses. Here are a few suggestions on visibility into expenses.
• Drive accountability by opening up the expense report to all department owners. Every department owner should be able to see the total department spend, top employees by spend and top merchants by spend. It is not uncommon for budget owners to say that they didn’t realize they are spending that much.
• If you are not comfortable with opening up expense reports to everyone, then at least show them comparison on how much they are spending as compared to other departments.
• When showing comparison focus on the categories. For example – a sales department might have Airfare as their top expense but the marketing department might have business meals as their top expense.
The goal is to increase transparency so that everyone can the ask question – Is this expense really required?
Use this introspection to avoid unwanted expenses in the future.
3. Link cost to the outcome especially for sales
It is important to reduce travel and entertainment cost, but have you tried to link the expenses to the outcome it is driving?
Let us explain
Each department has certain Key outcomes they are trying to achieve. For the department to achieve those outcomes they leverage resources and expenses being one of them. Let take an example – Sales department
Sales main goal to get revenue and help companies meet the corporate revenue goal. For achieving those goals, they hire salespeople and they travel to meet prospects and so on.
So essentially their main goal is revenue, so you can measure the outcome by measuring the expenses as compared to revenue goal.
So for example, the expense for the sales team is $500,000 and they contributed $10M in revenue, then the expense per $ sales revenue is $0.05 or in other words, for every dollar in revenue, you are spending $0.05.
The reason for measuring this is important is that now you can assess the impact of expenses on revenue. In other words, the outcome.
Second, you can take this data to the Sales rep level and see the individual effectiveness,
For example Rep 1 generates $1m in revenue and spend $100,000 in expense while Rep 2 spends the same amount but only generates $200,000 in revenue.
Now before you say, it is not that simple. We would say, yes we agree – this is not perfect but you can start asking these questions if you have expenses linked to the business outcome.
When trying to link expenses to the outcome, don’t focus on all departments. Just take top X departments which contributes to 80% of the spend and then try to link expenses with outcomes.
4. Implement an Expense Management Software
Processing expense reports manually is challenging and time-consuming.
Still, 34% of small and mid-market companies report that they process expenses manually. Whether that is through spreadsheets or a combination of spreadsheets and manual processing.
Implementing an expense management tool is a low hanging fruit when it comes to cost reduction. The tools are generally inexpensive and easy to implement.
The same survey reveals that the average cost for processing an expense report manually is $26.63 and the cost of processing the same expense report fully automation is $6.85
That is a saving of $19.78 per expense report or in other words a 75% reduction in expense report processing cost.
So for example, you process 1,000 expense reports every year, so as per this analysis, you can save up to $19,780 every year by automating the expense report submission process.
Even if you paid $5000 annually for an expense management system, it is still ~300% return on investment (ROI).
That decreased cost is manifested in the form of increased productivity of your AP team. So instead of spending time on creating expense reports in the system, they can focus more on ensuring that reports are correct and employees are only getting reimbursed for what is allowed as per corporate spend policy
The other benefit of implementing an expense management tool is that you can automate a lot of data capturing including the chart of accounts to which the expense should be coded. For example, In ProcureDesk Expense management tool, the expenses are automatically linked to the accounting based on the category of the line item.
5. Implement a pre-authorization mechanism for expenses
The biggest issue with expenses is that no matter how efficient you are in processing it, the Spend has already happened.
We recommend implementing a pre-authorization control for all major purchases going through your purchasing system.
We argue that the same should be done for your expenses. Not every expense but any expense above a threshold. Let’s say that threshold is $500, it could be anything based on your spend patterns.
But the idea here is to afford the opportunity to decision-makers to review the spend before it happens. That way they can decide whether the spend is really necessary or the spend can be avoided.
Now travel falls in a separate bucket and we cover that in the next section.
Expense pre-authorization example
Let’s say that your marketing department wants to do an event, let’s say it is a new product launch party. They probably have to purchase supplies for the event and they might use their personal card or corporate credit card to purchase these supplies.
They go ahead and spend the money and now after they submit the expenses, the stakeholder knows how much was the total cost and finance is trying to understand that if this was even an approved expense.
Now consider this scenario
The person in charge of purchase goes to the expense management system and submits a request for an expense. They request approval for a certain amount and based on the amount, the expense is routed for approval to budget owners and finance.
If the expense is approved, the person in charge can go ahead and purchase whatever is required for the event and submits the expenses.
The expenses are linked to the pre-authorization request, so finance knows that it was a pre-approved expense. They check for receipts and the expense is approved.
Which scenario is easier?
The reason we gave this example is that a lot of people assume that adding more controls to the expense process will slow down things for employees. That might be true in case of manual controls and approvals.
However with the help of technology, you can automate this process, and in fact, make it simpler for your employees to have the expenses pre-approved.
6. Reduce travel cost in business through trip approvals and advance booking
We kept travel separate because this is generally implemented in your travel management tool.
If you don’t have a travel management tool, then this can go through the expense pre-approval process we defined above.
If you do have a travel tool, then the pre-approvals can be managed within that tool.
The idea is simple – have pre-authorization of travel so that you can avoid any unwanted travel.
For example – Often for big industry conferences, many employees from different departments travel for the same conference. With pre-authorization of travel, you can ensure that only required employees are going and the rest of the employees can be debriefed when the employees come back from the conference.
There are two ways you can implement pre-authorization of travel approvals
a) Approve everything
In this case, you are approving all the travel request before the travel is booked. It makes perfect sense because it helps you to control the spend.
The challenge with this approach is two fold
One, Approvals requires time and depending upon the amount of travel, this could be a full-time job.
Second, most of the travel approvals are time sensitive, usually 24 hours. So the person approving the travel request needs to be cognizant of that so that employees can get the fare they are requesting.
Unless you are a very small company, we don’t recommend this.
b) Approve exceptions only
The other approach is to only approve exceptions. That means travel booking doesn’t need any pre-approval unless it is an exception.
How do you define an exception?
You can define caps for airfare and hotels and any travel above the threshold should be considered an exception and needs to be approved. We have covered the concept of caps in more detail in the later section.
7. Sign up for award miles for airlines
This might be the simplest technique for reducing your travel cost. Every major airline has a corporate award program. At least that is true for major airlines in the United States.
The way it works is that you keep accumulating points every time your employee’s book travel. You can then use those points to book travel for your employees. These points are in addition to what your employees earn from travel.
This way you are not incurring an additional cost but you are using existing points to book new travel.
Some airlines do have minimum requirements for you to be eligible to enroll in such a program, so please read the fine print.
How much you can save through corporate reward programs?
It, of course, depends on the travel in a year but over a period of time, you can start accumulating points.
For example, you can redeem a Delta airlines travel certificate for anywhere in the US for 80,000 miles in economy. Let’s assume that each ticket generally cost $500. if your company accumulates 1 Million miles in a year, that is around 12 tickets. This adds up to $6,000.
Now you might say it is not a lot of money but that is free money, and you don’t have to make any big change for that, just register and then keep accumulating points. If nothing else, you can use these cost savings to invest in expense management and reporting tool.
The trick is to redeem these points for expensive tickets so if you do land up accumulating a lot of points then you might want a dedicated person to manage this so that these points are not misused.
Here are the links for major corporate miles programs
To make sure you get these points, you have to book either on the direct website of the different providers or add the codes in your travel booking tool.
8. Reduce/Control air travel and hotels costs by introducing thresholds.
Air travel and lodging are the two main expenses of your overall T&E travel budget. The next would be meals and entertainment.
As per a survey by JP Morgan, companies spend anywhere between 24% to 38% on air travel. This number could vary of course based on the size of the company.
For example mid-market companies the number is 24%. That means if you are spending $1M in total expenses, $240,000 would on air travel. So what are the opportunities to reduce air travel cost?
Introduce the least logical fare for air travel
Put simply it is the lowest airfare available for a selected time window. For example +/- 2 hours window from the selected time.
Users are encouraged to pick the lowest logical fare to reduce the cost.
The next step is to introduce a threshold or cap beyond which an approval is required before the travel can be booked. The idea of the cap is to give enough flexibility on the flight choices without a need for approval. Some companies go by % and some companies go by a fixed amount.
So let’s take an example. Let say an employee is planning to travel from New York to San Francisco. Based on the parameters they entered the cost of the flight starts at $500. So the least logical fare, in this case, is $500.
How do you define the threshold?
The ideal way to do this to look at historical data and identify the most traveled sectors.
Take the top 2-3 sectors and try to book travel 2 weeks in advance and see what is the least logical fare, then take the top 4-5 options for flexibility and see what is the maximum cost of the ticket.
So for example, the least logical fare is $500 and to offer flexibility employees can pick from other 5 flights and let’s say the max cost of the ticket is $600.
So in this case, the threshold is $100 over the least logical fare or 20% over the least logical fare.
Again there is no standard benchmark for this, you can do a quick analysis of your past travel history and determine the thresholds
Caps for Lodging / Hotels
The next step is to define caps for hotels cost or per night cost for hotels. Any hotel booked about the cap must go through an approval process and should be treated as an exception.
This can be achieved in one of the two ways or a mix of the following two approaches
Define your own cap for hotel
The best way to define a cap is to analyze your historical data and see what you have paid overtime for different cities. This could be overwhelming if your employees travel all across the world.
In that case, prioritize the top 5- 10 cities which contribute to the maximum spend and then identify the average rate paid for that city. That becomes your new cap.
Now if you are thinking that that might not work for times when you have a price surge due to events in that town, you are correct. However, since you are taking the average cost over 12 months then hopefully that should give you a good idea of what has been paid over a period of time.
The other way to look at the cap is what is your preferred rate in a given city. In case you have negotiated a rate with the preferred hotel then use that as a cap for per night.
Use a standard benchmark for hotels cap
The other alternative is to use standard benchmarks. In cases where you don’t have purchase history then rely on the benchmarks.
BTN publish a yearly benchmark on per diems which includes hotels too.
Here is a snapshot of the top 10 cities from the 2018 benchmark
You can read the complete 2018 hotels benchmark here
For example, New York is at $392.95 per night and Honolulu is at $239.32.
If you want to further understand how these average rates are calculated, you can read the detailed US hotel cost breakdown report
So for example, New York average rate per night is $392.95 but that includes $62.48 in taxes. Per night rate varies from $288.50 to $335.91 based on the type of the hotel.
9. Reward frugal employees
Cost reduction is not always about spending less but spending wisely. You would always have employees who treat company money as their own money and would spend the money wisely. They would spend the money as if it is their own money.
On the other side, there are employees who just don’t care about how they spend and how much they spend until it is approved by the manager.
To reduce cost in the long term, you need to establish a cost-conscious culture.
The best way to build a cost-conscious culture is to ensure that everyone knows where they stand as compared to other employees in the company or department.
Now if you want to have radical transparency, let everyone have access to each other expenses. That way, you can see the Hawthorne effect first hand.
If you are not that bold, start with showing where an employee stands as compared to others in their department and the whole company. Any good expense reporting tool can help you achieve that.
You should not just stop at this, but reward employees who are spending frugally.
Publicly recognize these employees with monetary rewards to drive the right behavior.
For example, you can issue gift cards to frugal employees.
You could do a “Frugal Employee of the Month” award which goes the most frugal employee.
We don’t think that the amount of the gift card matters that much but the act of recognizing the right behavior matters the most.
You could do this in multiple ways – you could have a “Frugal Employee of the month” in each department or each company.
Now how do you identify frugality?
There are a couple of ways to do that, you can identify employees who picked the least logical fare the most.
The other way to look at it is to identify employees who have booked the lowest cost hotels in a specific city.
A word of caution here, We are assuming that your travel tool is set up in a way that the unsafe hotels are already removed from the listing and you are only showing the hotels which are safe and decent. For example, 3-4 stars and above.
It doesn’t have to be complicated if you can’t do anything else just reward the random acts of frugalness. That would go a long way in establishing a cost-conscious culture.
So there you have it, 9 key strategies for reducing your expenses.