Are you a business on the verge to scale? Are cash flow and expense management your major roadblocks to entrepreneurial success?
We know how difficult it gets for small businesses to make a mark in the entrepreneurial ecosystem. You have multiple traveling employees closing business deals across the globe. You may even conduct various events and seminars to gain the competitive edge. All this costs you time, manpower, effort and most importantly, money.
All these expenses are either managed partly by third-party agencies or by your employees. In some cases, they are entirely controlled by your employees. In these cases, they are required to collate, and manually enter expenses into an expense report. This report is then sent to higher-ups for approvals.
Missing bills opens up a whole new Pandora’s box.
Does this process sound tedious and unnecessary? By all means, it is.
What if we told you that cards could negate the requirement of your employees lugging bills around? What if there are automated software that can directly pull bills from your inbox, automatically extract, compile and produce expense reports?
Most importantly, what if all of this could be done in just a few clicks?
In this article, we will understand the nuances of incurring and managing expenses. We will also understand the best practices revolving around not only managing expenses but also streamlining the entire expense management process, itself.
Let’s dive in.
What do businesses spend on?
As a business looking for exponential scale, your employees are required to always be on the move. They are expected to travel across cities or countries to meet potential clients and close deals. Along with these meetings come long bills which bear expenses in acquiring potential clients. But, these expenses are mostly incurred only by your sales and senior teams.
Some of the additional expenses businesses bare are on events, seminars, office supplies, and other such activities. All these expenses mostly require upfront payment in the form of either cash or cards.
Broadly business expenses can be bucketed into:
- Travel and transportation: Your sales professionals and senior team members are the most frequent users of this expense. Due to the nature of their jobs, they are required to travel locally, nationally and sometimes even globally, if need be. While most businesses use the help of a travel agency to make bookings, others leave it up to the employees to make their pick. Employees will then be required to submit bills for reimbursements. Local business trips cover employee expenses on cabs, buses, and other local transportation. National and international business trips involve flight and local transportation to be included.
- Food and beverages: It goes without saying that this is an unavoidable bill. Be it for your traveling employees or employees who meet potential clients on business deals. Most businesses these days also provide their employees' daily lunch meals or food coupons. Additionally, businesses also spend on food for events such as team outings, office parties, and others. While some enterprises approve of reimbursing alcoholic beverages, others don't. Depending on your travel and expense policies, the value your business attributes to this variable may either significantly increase or decrease.
- Accommodation: Your employees who travel require a place to rest. Most businesses book them with the travel agency or allow the employees to do so themselves. Depending on who makes the bookings, employees will then need to collect bills and submit them for reimbursement. If you are a business which hosts events or seminars, you might also incur expenses hosting and accommodating your guests. Your costs will vary depending on the type of business and events you cater too.
- Fuel and mileage: Marketing and sales teams are always required to be on the move. This mostly involves multiple client meetings within the city. While some employees prefer using cabs as a means, most employees prefer to use their own vehicles. Owing to their ease of use, bikes are the most preferred means of local transport. Employees who use cabs are required to provide bills for reimbursements. While employees who use their personal vehicles are expected to produce rough estimates for the kilometers and the fuel used.
- AdHoc and miscellaneous expenses: As a business, you may require to buy various things for the office. This could range from stationery and office supplies to even just coffee. Additionally, any unforeseen or unidentified expenses during events or client meetings fall under this category of business spends.
These bills are later compiled into expense reports and sent to the finance teams for approvals and reimbursements.
Types of instruments that enable business spends:
Your employees require hard cash or cards to make expenses. Be it paying up for client dinners, booking flight tickets or even buying office supplies. While most businesses provide business credit or prepaid cards, others require their employees to use their own money to make business spends. .
Broadly speaking, the following are how businesses enable spends:
- Provide cash or advances for expenses on business spends
- Issue per diems for expenses on business travels
- Get a corporate account and issue employees company cards
- Add employees to a small business prepaid card account
- Reimburse employees for business expenses from their personal money
Provide cash or advances for expenses on business spends:
Cash advance is the age-old method of managing travel expenses. They have existed since the inception of companies. Most organizations already have a reasonably simple workflow in place for issuing them. It is also one of the convenient ways to manage off-site travel expenses, unlike credit/debit cards that charge a fee whenever you swipe your card in a different country.
However, the convenience doesn’t offset the problems it causes to the company. Many times, the accounts payable issue an advance that may be more than what is necessary for the employee. Since the money doesn’t go from their pocket, employees don’t have the motivation to fyle their expense reports after a business trip. What follows is a delayed process of expense reporting, where you have to remind your employees to submit their reports regularly. The delay is quite inevitable since expense reports would also expose the unspent money, which would force the employees to return the money to the company.
Issue per diems for expenses on business travels
Per Diem, which is Latin for per day; is the allowance granted to the employee during long business trips. This includes expenses incurred on lodging, meals, conveyance and incidental expenses such as wifi, dry cleaning, tips, etc. Companies employ per diems because of the benefits it entails. A significant advantage of per diems is no paperwork. Employees don’t have to spend time recording their expenses, which in turn makes work easier for the finance team.
Given that employees already know about the allowance, they can make lodging and meal choices that are well within the limit. If the expenses are billable to the client, you don’t have to wait until your employee returns. You can pretty much predict the expenses.
However, it is quite challenging to maintain one, mainly because the cost of living at each place varies and increases over time. They need to be continually updated, thus increasing the responsibility of the finance team. Moreover, it provides an opportunity for employees to commit possible fraud. For some quick money, they would choose lodging and meals that are unsafe and not on par with company standards.
Issue employees corporate credit cards
One of the popular means of business spends is Corporate cards. It reduces paperwork and makes expense management quite smooth for your employees. With these cards, they would no longer have to use their cards or wait for reimbursements. Also, corporate cards bring many perks for employees and employers like travel insurance, free access to airport lounges, business miles and so on. With upfront payment using prepaid cards, you can also negotiate for better vendor credits. As for companies, they can monitor the spending pattern of their employees better than before. If managed well, it also improves the company’s credit score.
That said, they are not immune to fraud. Employees can still incur personal expenses and produce them as corporate expenses. Moreover, unlike its popular image, it doesn’t reduce paperwork either. Employees still have to provide receipts to meet IRS stipulations. If the company defaults the prepaid card payment, it affects its credit score, ultimately affecting the growth of the company.
Add employees to a business prepaid card account
Prepaid cards, like the name indicates, is a card preloaded with money. Many companies opt for prepaid cards because they are a lot safer than cash and much easier to control. You can call them the modern traveler’s check. Employees are aware of the money loaded on the card, and therefore spend accordingly. It also takes care of the risk of overdrawing cash from the card. Moreover, since it doesn’t take into account the spending pattern like credit cards, it is quite easy to issue them.
Although the advantages are enticing, there are some disadvantages that you should be wary of. First off, it upsets your liquid cash flow. You will have to load cash onto the card time and again, and pay a small fee for that every time. Almost every transaction on your prepaid card has some fee attached to it. Some may be low, and some really high.S And since they are not a form of credit, you cannot build your credit history, nor can you enjoy the incentives that come with credit cards.
Reimburse employees for business expenses from their personal money
Most businesses provide their employees with some backup in terms of advances, per diems or cards. Some enterprises require spends to be borne on the employees' personal cards or money. The employee then needs to compile and collate each of these bills. Once done, he would then require to match each of these spends on similar projects.
This method of creating and managing business spends could prove detrimental to your business. Not only does it require your employee to spend, whether they are comfortable with it or not. It also needs them to always have money in terms of physical cash or a personal card. Costs incurred on individual cards, which do not get paid on time also result in a bad credit score.
Prevalence of Fraud in the corporate world
As per a recent study, here are a few statistics to help you gauge the health of your business.
- 82.9 percent of expense fraud was committed by employees under the age of 44, making them the most likely group to submit incorrect expenses.
- Vice presidents and senior VPs were the least likely to cheat on their expenses at 6.2 percent.
- Men tend to be more fraudulent than their female counterparts, being nearly twice as likely to submit false claims and also four times more likely to pad out an expense report by a shocking $ 1,000.
- Conversely, women were more likely to misreport amounts under $100.
- Companies that use manual reporting with hard-copy receipts are twice as likely to be hit by expense fraud than those that utilize automated solutions.
- A quarter of those surveyed said they have been caught committing fraud, with 75 percent reporting a warning was the most severe consequences of their actions.
- According to the Association of Certified Fraud Examiners, expense reimbursement fraud accounts for 17 percent of all business fraud.
Employees with a lenient finance team, most often indulge in fraudulent behavior. This might happen due to sheer negligence or intentional malice. Eager to make a few quick bucks, employees may do the following:
- Submit duplicate bills to record a new spend
- Submit exaggerated amounts on expense claims
- Make fraudulent claims under petty cash claims
If these expenses get billed directly to the company, these fraudulent claims can be identified at the source. Since these expense claims are made on the personal cards of employees, finance teams lack the complete picture. This is the major pain points that finance teams face today.
Additionally, most businesses have extensive and detailed travel and expense policies. This comes in incredibly handy in curbing unnecessary spends by employees. While some enterprises need receipts for every expense made, others have exceptions. Most businesses allot a small amount of money to run errands, make small purchases and simply, manage the business. This sum of money is known as petty cash.
Businesses have capping points, only above which mandates a receipt. Bills and expenses made below the capping point do away without receipts. Expenses made under the category of petty cash, also do not require receipts as evidence.
How does expense management help streamline spends on prepaid or corporate credit cards?
To help businesses combat this challenge, they require an automated, non-human intervention. Cards hence become the next logical step to help counter fraudulent claims and streamline expense management.
Businesses need a software that could help them manage these expenses seamlessly. An ideal automated expense management software automatically checks expense claims for policy violations or fraudulent behavior. It also allows insight into spend categories, frequently associated vendors, frequent travelers, and more. Simply put, it automates all things unnecessary, so that you could tend to more daunting tasks.
Final verdict: What’s the best pick for your business?
Expense management is going to be there in the years to come and you need to opt for a solution that is easy for you and your employees. After weighing the pros and cons, we think Corporate credit cards may be the best pick. On combining your corporate card program with a smart expense management system, you can control the disadvantages it may have and reduce cash bleeding through fraud.