Chances are you asked your CFO for a budget to buy an expense management software for reimbursements. You might also be the CFO trying to understand the ROI of using an expense management software. Irrespective of who you are, it is necessary that you are aware of the costs and potential returns of such an investment.
The returns of investment in an expense management software can be categorized into two: the tangible ones and the intangible ones. The tangible results include the monetary benefits like savings on fraudulent expenses, savings from higher compliance with expense policies, and like. The intangible results include benefits like higher employee satisfaction levels, higher retention rates, and better operational performance.
In this article, we try to explore both the quantitative and qualitative benefits of using expense management software.
Quantifying the ROI of an expense management software
Most expense management software charges are on the basis of active users. In the industry, active users are people who submit at least one expense report in a month.
When calculating the quantitative ROI of an expense management software, the following are the parameters taken into account -
- Average time spent on one expense report by employees - This includes the time spent by employees in compiling all receipts, reporting all expenses, and submitting them.
- Average hourly salary - This includes the average hourly salary in dollars of employees who are spending time tracking their expenses.
- Average time spent on one expense report by the finance team - This includes the time spent by approvers and accountants before the report gets finally reimbursed.
- Average hourly salary of the finance team employees - This includes the average hourly salary in dollars of employees in the finance team who are spending time tracking expenses.
- The percentage error in expense reports - Not all submitted reports are fault-proof, and this is the number of reports with an error that needs to be corrected.
According to Oxford Economics and US travel association,
For every dollar invested in business travel, businesses generate $9.50 in revenue and $2.90 in profits.
The same study also highlights that business travel done to meet customers or prospects generate $15-$19.99 for every dollar invested in business travel. These numbers make it even more important to manage expenses efficiently so that you can maximize the value of your buck.
For calculating the ROI of an expense management software, we take the following data points from a GBTA study:
- Average time to complete an expense report - 20 minutes
- The average cost of processing an expense report - $58
- Percentage of expense reports with errors - approximately 20%
- Time to correct an expense report - approximately 20 minutes
- Cost to correct an expense report - $52
Let us suppose you have 100 expense reports a month, and you are using a manual spreadsheet-based system for expense tracking. It will cost you the following -
- Total processing cost - 100X58 = $5800(A)
- Number of erroneous expense reports - 20(20% of all expense reports)(B)
- Cost of correcting those expense reports - 20X52 = $1040 (C)
- Total cost of managing expenses on sheet - A + C = $6840 for 100 expense reports
- This comes down to approximately $68 per expense report
Alternatively, if you are using expense management software, it costs you as little as $5 per active user per month. If we account for the hourly wages for an accountant and the number of expense reports which are processed in that period, we can calculate the total cost of using the software.
The following data points are handy -
- With automated expense management software, the time taken to process a report comes down by a third. For simplicity, we will assume a 50% decline in the processing time, which equals 10 minutes.
- So, in an hour, an accountant can process six expense reports or more.
- Median hourly wages of an accountant - $29
- Since an automated solution, checks for expense policy violations, the cost of correcting the report is only the time taken to send such reports back.
- Assuming the previous 20% of incorrect expense reports, we can say every hour accountants encounter at least one incorrect expense report.
- Thus, five expense reports are processed every hour at the cost of $29.
- Total cost per expense report is - 29/5 + $5 = approximately $11.
Thus the ROI on each expense report is - (68-11)/11, which is about 5x or 500% of your original investment.
How much does a free expense management software cost you?
Intangible benefits of using an expense management software
We have seen that the investment in expense management software is worthwhile. Especially if you have a considerable amount of business travel, it makes all the more sense.
Higher retention rates
Did you know delayed reimbursements can sometimes provoke employees to make the switch?
70% of employees surveyed in a recent study said they would look for another employer in case they face regular delays in reimbursements.
With a manual process, every step could have a delay leading to an overall delay in reimbursement. In contrast, with expense management software, bottlenecks can be identified at any step of the process without affecting other processes.
An employee who pays upfront for the business is an active lender to the company. More importantly, since the business doesn’t pay any interest to such borrowed money, it makes sense that the faster you reimburse, the better. Overall this can lead to happier employees and higher trust in the systems in place in the organization.