Best practices for expense management

Quick insights

• Expense management refers to the process businesses use to plan, pay, track, report and reimburse business expenses.
• Implementing company-wide expense management policies can help businesses stay financially organized.
• Some businesses invest in expense management software to help automate the process.

Expense management can be a useful practice, even for freelancers and small businesses. Tracking everyday expenses can help business owners get a clearer picture of their current cash flow, create realistic budgets and plan for the future.

As businesses grow and hire employees, it can be even more crucial to stay on top of expense management. It can be important to consider categories like employee payroll, insurance and reimbursement for purchases made on behalf of the company.

Read on to learn more about how expense management works, plus some best practices for keeping track of business finances.

Understanding expense management for small businesses

Business expenses can range from travel costs to office rent to employee wages. While these costs may vary by company and industry, keeping tabs on finances can be a healthy practice for any business.

However, expense management is more comprehensive than budgeting for routine expenses. A few additional common parts of the process include:

• Processing payroll
• Reimbursing employees
• Tracking receipts
• Sending invoices
• Analyzing spending trends
• Comparing bookkeeping records with bank statements

When someone first opens a business, they may not yet need to worry about things like payroll or employees (if they haven't hired any). However, as businesses grow, related expenses may grow as well. This means it can be useful to track expenses, even if there are few to begin with.

It may be a helpful first step for small business owners to open a business bank account to manage their expenses. This way, they can separate personal and work-related finances, which can be helpful for both tracking expenses and filing taxes.

Best practices in expense management

While expense management may look different between business of varying sizes, there are a few things business owners can do that may help them stay organized:

Implement an effective expense policy

It's common for employees at a company to make purchases on behalf of the business. Businesses may find it beneficial to set ground rules so all employees are on the same page.

Consider creating guidelines about the following for a well-rounded expense management policy:

• Acceptable expense categories: Creating a defined list of allowable expenses can help provide clarity for employees. For example, an employee on a business trip will likely need to purchase meals. However, some businesses may choose to reimburse food but not alcohol.
• Expense limits: It may be helpful to set spending limits on specific categories. This could include maximum costs for individual meals or nightly hotel rates.
• Per diems: Per diems may be used in place of setting limits for specific categories. A per diem is a set amount of money an employee can spend (on allowed categories) on a given day of business travel. It may be wise to consider location for per diems, as some areas tend to be more expensive than others.
• Expense reports: Many businesses use expense reports to track money that goes in and out of the business. It's typically a good idea to create a policy around exactly what information needs to be included in each report, such as copies of receipts.

Create an employee reimbursement policy

If multiple employees make purchases on behalf of the business, it can be useful to have a reimbursement policy. This may help reimburse employees in a timely manner, and in turn, provide a more accurate picture of cash flow.

Consider the following when writing a reimbursement policy:

• Who will review and approve the reports
• If the reports will be created manually or via expense management software
• What details should be included in the report (expense categories, subtotals, related receipts, etc.)
• When reports are due each month
• When employees will be reimbursed each month

Select preferred vendors

Identifying preferred vendors can be a helpful practice for businesses who travel often. However, it could also apply to general expense categories like office supplies and utilities.

A few common examples of categories in which businesses may choose preferred vendors include hotels, rental cars, airlines and restaurants.

Some businesses may choose preferred vendors due to cost savings or overall quality of a product or service. It may also be possible to work out exclusivity or loyalty agreements with vendors for reduced prices.

Consider expense management software

Businesses that are just starting out may be able to adequately track expenses with manual spreadsheets. However, expense management software can provide time savings for businesses that have more expenses.

Expense management software often helps automate tasks like:

• Invoicing
• Tracking receipts
• Categorizing business expenses
• Creating and approving expense reports
• Reconciling bank accounts (or comparing bookkeeping records with a bank account)

While expense management software may not be the answer for every small business, it may allow businesses to save time on administrative tasks, decrease manual errors and devote more time to work that could increase revenue.

Categorize all expenses

Categorizing individual business expenses can help business owners create realistic budgets. For example, say your records show that your business spends significantly more on travel than it does on office supplies. In this case, you may want to allot more of your overall budget to travel expenses.

Regularly categorizing expenses can also help you adjust your budget over time. After analyzing your expenses over time, you may notice that your employees travel a lot less during certain seasons, such as during the end of year holiday season. You may choose to act accordingly and reallocate part of the budget during certain months.

Explore business credit cards

Business credit cards may provide cardmembers with access to a line of credit specifically for their business and the ability to earn rewards on everyday work-related purchases. Many business credit cards also issue individual employee credit cards. These cards are linked directly to the company account, which can help streamline the expense management process.

The Chase Ink suite of small business credit cards issues employee cards at no additional cost. Ink primary cardmembers can also set spending limits for employees.

In summary

Tracking expenses over time may allow business owners to stay on budget and stay on track to meet financial goals. Keeping a record of expenses can also provide business owners with a helpful way to review and analyze ongoing expenses.

While expense management software may not be the right choice for every business, it can be a helpful addition as businesses grow. Applying for a business credit card can be another way to access credit and, if approved, assist in tracking expenses and setting spending limits.