Expense management is the processes and policies by which companies track and reimburse employee-initiated expenses. Better expense management leads to better spend management.

This is really important right now for startups: Small businesses across industries have been disproportionately affected(opens in new tab) by the COVID-19 pandemic, according to McKinsey. Burn rate is a top concern, and meanwhile, the shift to working from home has stretched expense policies—if they even existed—as claims begin to flow in for goods and services such as home office equipment, software subscriptions and more.

Why Is Expense Management Important for Startups?

Startups are already typically working with limited cash, time and resources. And not paying attention to expense management policies consumes more of all three. For one thing, it costs money just to process employee expense reports—and more money if they’re not accurate. How much? On average, $58 per report plus an additional $52 to correct one, according to GBTA(opens in new tab).

Small gains in efficiency make a huge difference. Take Spark MicroGrants, a startup that gives seed grants to communities in east Africa so that people can launch their own businesses. For each of the four countries across which Spark operates, it took a day for the finance officer to reconcile all expense reports.

The finance director would review those reports, and back and forth would commence. Better expense management processes—namely, implementing an expense management software system—have saved 64 hours each month.

Common errors in not implementing expense management processes early on include:

  • Not developing an expense management policy that defines what is covered, what is not covered and the limits and thresholds for triggering approvals.
  • Not clearly communicating and enforcing the policy.
  • Not keeping an easily accessible database of information for regular internal auditing as well as reporting and the external audits required for tax compliance and, sometimes, by lenders and regulatory agencies.
  • Not regularly examining and updating the policy to keep pace with business demands and economic climate.

How is Expense Management Different for Startups?

Enterprises can dedicate a person or several people in finance to handle processing expenses. There is at least one layer between the employee submitting the expenses and the finance team to help flag improper expenses and enforce policies.

Startups aren’t enterprises. Often everyone is reporting to someone in senior leadership—who does not have the time to comb through expense reports. There may not even be a finance person, let alone a team, to process expenses. Hiring professional accounting help here is a really good idea—even if that means contracting with an agency to help build and define the policy, as well as get best practices on how other startups are integrating technologies to streamline the process, to start.

What’s more, startups do not have the luxury enjoyed by enterprises of “we’ve always done it this way,” policies that result in untimely payments and unruly processes. Startups are fiercely competing to hold on to talent, and for employees expected to travel as a big part of their role, the expense management process will be a huge part of their overall employee experience. They will expect expense management to include mobile payment capabilities, mobile apps for easy entry and more.

What’s more, expense management guidance that is relevant for more established businesses or enterprises doesn’t always apply to startups, and being able to drill into and analyze data can help small firms categorize and justify spend.

Take Buffer,(opens in new tab) which sells social media scheduling software, for instance. A deep dive of Buffer’s finances by Inc. revealed that among its largest expenses is “employee retreats.” Those trips cost three times the average amount companies spend on business travel as a percentage of revenue, according to Inc. But, the company could trace two major product ideas to those retreats, so spending more than the industry norm may be a sound business strategy. But how will a company know that if it can’t track and analyze expenses?

Startup Expense Management Basics

Keeping track of employee-initiated expenses is necessary for tax purposes. That’s true for all companies. For startups, added benefits include finding insights to reduce burn rates and for making changes according to industry, market and environmental conditions, according to GrowthRate(opens in new tab).

How do you get started with expense management as a startup?

  1. Determine how much your company will spend on travel and other expenses. A basic guideline from the Global Business Travel Association(opens in new tab) is about 1% of annual revenue, but this can be more or less depending on your business model.
  2. Write an expense policy. This should include:
    • A list of qualified expenses, how to submit a claim and the schedule for reimbursement. According to Orba(opens in new tab), categories should include travel, meals, entertainment and supplies. Also include examples of expenses that are not qualified.
    • Expense limits that fall within reasonable parameters. For guidance on travel-related expenses, the U.S. GSA(opens in new tab) has a calculator that shows allowances for lodging, meals and incidentals for federal employees depending on travel location. The IRS releases standard mileage reimbursement rates annually. And the Bureau of Transportation Statistics(opens in new tab) provides guidance on average airfare.
  3. Consider subcontractors: Will standard policies extend to them, or do you need a separate document?
  4. Have top executives communicate the policy. Set the tone early on about the consequences of not adhering to guidelines. In cases where employees use their own credit cards and are reimbursed, the process for denials will be different from employees who use company-paid cards.
  5. Establish a process to review and approve expenses and to retain those records. Log all expenses so that they can be easily accessed and tracked according to the IRS rules by which the business chooses to report income and expenses—the process is different for the cash method(opens in new tab) versus the accrual method(opens in new tab).

By putting these processes in place, you’ll be in a position to use expense data to inform growth strategies.

How Does Expense Tracking Help a Startup Grow?

Tracking expenses helps startups properly fund initiatives to give them their biggest chance at success. For example, Spark MicroGrants can see how much a taxi ride costs in Burundi vs. Rwanda; that insight helps them equip their field teams with proper resources. Maybe a rental is more economical for some trips.

It also helps them make more strategic decisions about where to control costs and expand services based on data, not guesswork. A solid expense management process allows the company to be “ready for those crazy conversations,” said Spark MicroGrants’ director of finance and operations.

Automating the process of tracking and processing expenses also frees up time for more value-added work. Philz Coffee(opens in new tab) boils down its growth strategy to replicating its first store 1,000 times to “keep that specialness that made us successful.” Proper expense management cuts the company’s credit card reconciliation time—what once took four days now takes a couple of hours. That gives the finance team time to focus on strategic goals.

Both of these businesses use expense management software to better track, manage and process expenses.

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How Does Expense Management Software for Startups Work?

For employees, expense management software makes it easier to file expense reports, saving time. For startups, the key benefit is to flag outliers and better track expense claims for a better picture of employee initiated spend.

Choose the right expense management software for your business by considering the following:

  • Will you need multi-language or multi-currency support?
  • Will your employees be working from multiple locations across the country or the globe?
  • Is there mobile support, especially for capturing paper receipts, as well as GPS integration for mileage tracking?
  • Are there prebuilt integrators that will make it easier for the expense management system to communicate with the AP and payroll systems for streamlining transaction-to-reconciliation processes?
  • Will the software scale as the business grows and changes?
  • Does it have dashboard and reporting capabilities for easy access to information for audits, both for internal analysis and external regulatory compliance?

Because it supports these scenarios, cloud-based expense management software is a good choice for startups.