Travel and Expense
What Are Business Expense Categories and How Can You Improve Them?
It’s a simple fact: the better we take care of our bodies, exercise, eat right, and get enough sleep, the more likely we are to maintain good health. In many ways, the same is true for financial management. The healthier the financial processes, the better the oversight, the stronger the compliance, and the fewer inefficiencies that weigh the organization down.
While there are many best practices and tips that we recommend for increasing your financial health, refining and optimizing your business expense categories and policies is a great place to start.
What are Business Expense Categories?
Business expense categories – also known as expense types – are categorized buckets of employee spending used by companies to track and manage outgoing spend. A robust list of expense types allows companies to increase oversight into employee spend and help establish guard rails that ensure compliance. For example, if an employee travels to Boston for a client meeting, they could submit expenses for Airfare, Car Rental, Meals, etc.
Some other commonly used expense types include:
- Office supplies
- Professional services
- Meals & entertainment
As the Environment Changes, So Should Your Expense Types
Aligning expense types with the way employees travel and spend can be tricky, and there isn’t always a perfect solution. As businesses grow, more expense types are added to financial systems for employees to choose from. Or, on the reverse, to simplify a growing list, companies might create one category to encompass multiple expense types. Take Penn State University as an example: With the help from Huron Consulting, Penn State University was able to reduce the number of expense types from 1,000 to 200 — and map these to the general ledger — without negatively impacting transparency into spend.
“With the help from Huron Consulting, Penn State University was able to reduce the number of expense types from 1,000 to 200 — and map these to the general ledger — without negatively impacting transparency into spend.”
While what works for each individual company will look very different, it’s important to strike a balance between having enough detail to know exactly where business dollars are being spent, and not overwhelming employees with too many expense types to choose from. And companies should continue to periodically review their expenses to maintain balance, because as the environment inevitably changes, so will spending habits, as well as your organization’s visibility. Here’s what you can do to optimize your expense management process.
Three Best Practices to Optimize Your Current Expense Types
1.Refine Existing Expense Categories
Are you getting too much detail? Or not enough? Are employees having a difficult time picking the right expense type? Or are finance teams needing to dig into receipts to see exactly what is being expensed? These are some questions that you should ask while reviewing your current list of expense types.
Start by grouping expense types together into similar categories. For example, under an Office Expenses category, there could be:
- Office Supplies
- Building Expenses
Once you have these categories, see if anything could be expanded or condensed. Should Building Expenses be expanded into Rent and Utilities? Could Hardware and Equipment be combined into one?
And don’t forget to dig into the data – what you think employees should be doing, and what they’re actually doing, could be completely different. Sometimes it’s easier to adjust your strategy based on what employees are already doing, rather than trying to re-train them to adopt a new method. For example, when gift cards are used, Starbucks cards might turn into meals, or Best Buy cards could be applied to office equipment. Reviewing past purchases can help you spot trends and establish criteria for future purchases. Utilize auditing and reporting to review receipts, and cross-check with the expense type that was used to look for trends. Of course, routinely training employees to adopt widespread rules is always the best policy to make sure everyone is onboard with the adjustments.
A refined list of expense types will make the expensing process easier for your employees, reducing the chance of error and fraud, while giving your back-office enough data to accurately manage budgets, forecast future spend, and ensure policy compliance.
2.Unpack the Expense Type “Other” or Miscellaneous
The pandemic drastically changed the definition of “business as usual.” Employees started working from home and traveling less. But that doesn’t mean they stopped submitting expense reports – they just started spending on other things.
According to SAP Concur Customer Data, many organizations saw the use of the “Other”, or “Miscellaneous”, expense type account for more than 60 percent of spending from 2019 through 2021. This jump is largely due to an increase in expenses most companies haven’t used before, such as PPE, so a separate expense category was never needed to track this spend.
Reexamine your “other” category and find out what employees are spending on. This could result in adding new expense types and revising your expense policy to include, and possibly limit, these areas of spend. Also, consider requiring receipts for any expense labeled as “Other” so you know exactly where money is being spent and ensure compliance with your policies going forward.
3.Ensure Your Policies Align with Your Expense Categories
Managing employee spending across a growing number of expense categories and payment methods often leaves room for error and non-compliance. These are serious (and time-consuming) issues that can create mistrust, misuse, and an overall waste of your organization’s time. But with clear expense policies, you can reduce most of the ambiguity and non-compliance – saving you time and money while reducing your organization’s risk.
If employees are frequently out of compliance, it could be that your T&E policies are not clear enough to understand; or that your policies aren’t tight enough to prevent misuse and overspend. Read through your policy and ask yourself these questions:
- When is the last time it was updated?
- Have any expense spending limits changed?
- Does it give clear parameters around every T&E spending scenario?
- Is it easy to understand?
- Do employees know where they can access it?
- When was the last time we trained employees?
Don’t forget to make sure any policy adjustments are clearly communicated to your employees. We recommend holding trainings or sending out an alert with changes highlighted to ensure users are aware. This will help reduce the number of policy violations, saving your employees, and your finance team, both time and frustration.
Expense Management for the Future and Beyond
Aligning expense types with the way employees travel and spend can be tricky, and there’s not always a perfect solution. A key lesson many organizations learned during the pandemic is that new patterns of travel – or lack of travel – and spending are always arising. How you manage to track and record these changes in spending can provide insight into where to tighten the reins or redirect spending to impact revenue.
With the constant evaluation and updating of your expense policies to accommodate new categories of spending, SAP Concur solutions can help make your employee spend program more efficient and accurate. Contact us to learn more.
Are your expense categories and policies already up to date? Take the next step of controlling costs by reading this eBook.