Expense management software allows education organisations to easily track and categorise their finances. Learn more.
Role of Expense Management in Maximising Business Profitability [Tips & Tricks]
Discover the importance of categorising and tracking your business expenses, and learn how ProSpend can streamline your expense tracking process.
Business expenses are necessary costs incurred by a company to operate and generate revenue. These expenses include various expenditures, such as, but not limited to: operating expenses, cost of goods sold, taxes, employee benefits, marketing and advertising expenses, legal and professional services, maintenance and repairs, and miscellaneous expenses.
Proper accounting and record-keeping of business expenses are essential for financial management, tax reporting and compliance with applicable laws and regulations.
Categorising Business Expenses
Business expenses broadly fall under five primary categories:
- Fixed expenses remain relatively constant regardless of the level of business activity or sales volume. These do not typically fluctuate with changes in production or sales and are considered recurring expenses necessary for business operations, such as lease payments for office space and salaries of permanent employees.
- Variable expenses change in proportion to the level of business activity or sales volume. As business activity increases or decreases, variable expenses increase or decrease accordingly. Examples of these are shipping costs.
- Periodic expenses are incurred irregularly or sporadically rather than regularly. These are not part of a business's day-to-day operations, are often unique or infrequent and may arise from special circumstances or events, such as equipment or machinery purchases, renovation costs or charitable donations.
- Interest expenses are the costs of borrowing money to finance a business or investment activities. A business incurs interest expenses when they borrow funds from external sources, such as loans, lines of credit or other forms of debt, and must pay interest on the borrowed amount over a specified period. Interest expenses can be deducted from the business's taxable income.
- Depreciation expenses refer to the gradual reduction in the value of tangible assets used in a business over time due to wear and tear, obsolescence, or other factors. It is typically calculated using various depreciation methods, such as straight-line, declining balance or units-of-production, and is spread out over the asset's useful life.
To maximise your profitability, you need to know where your money comes from and how you spend it. Categorising your expenses allows you to make critical business decisions regarding matters such as investments or tax planning. It also helps you with accurate financial reporting, budgeting and forecasting, tax compliance, financial analysis and expense management, allowing you to make data-driven decisions to improve profitability and operational efficiency.
Business Expense Tracking Methods
You can use several different methods to track your expenses, from manual processes to sophisticated expense management systems.
- Manual methods This involves manually recording and tracking business expenses using spreadsheets, paper forms, or simple accounting tools. It's simple and cost-effective but is time-consuming, prone to errors, and lacks advanced features like automation and integration.
- Mobile apps Numerous mobile apps are available for expense tracking, which allow businesses to track expenses on the go. These apps often offer features such as receipt scanning, expense categorisation, and reporting, making them a convenient option for businesses with employees who are frequently on the move.
- Expense Management Systems (EMS) Expense management systems provide comprehensive solutions for managing business expenses. These systems typically offer features such as receipt capture via mobile apps, automated expense categorisation, approval workflows, policy enforcement, reimbursement management, and detailed reporting. EMS provides real-time visibility into expenses, streamlines the expense management process, reduces manual efforts, and improves compliance with expense policies.
Tips and Tricks for Accurate Business Expense Tracking
In addition to the different methods you can use to keep track of your expenses, here are some helpful tips to guide you:
1. Know what constitutes a business expense
Keep your business and personal expenses separate, from the very beginning, to avoid confusion over whether a cost was for business or personal reasons. Set up a separate business credit card, a checking account, and a savings account, and properly categorise your expenses so that you know what actually counts as a business expense.
Remember that business expenses may be tax deductible. If you need clarification on whether an item should be considered a valid business expense, ask for professional advice from your accountant or a tax attorney.
2. Immediately record any transaction and always save receipts
Record any transaction as soon as possible. Whether you're making an online purchase, using a check to pay a bill or using cash at a restaurant for a business lunch.
Save every receipt you get in a designated place, such as a file organiser, or save them using an EMS's receipt capture feature so you can always refer to them if you have a question, need a reference or need to submit a claim..
3. Follow a simple and consistent expense tracking process
Develop a simple, transparent and standardised method for tracking business expenses, including using expense categories, a system for recording transactions and saving receipts. Sometimes it's not the actual spending that needs to be curbed for improved business performance—just the processes around it. It's no wonder a CFO's role has evolved over the years, and digital transformation has become a priority to streamline these processes and allow for better and more efficient business operations.
With a simple and organised process, you and your employees can divert the hours per week previously spent filing and re-filing expense reports to more critical business tasks. This efficiency and simplicity will yield greater short and long-term returns.
4. Utilise automated expense management tools
In 2020, a McKinsey and Co. survey showed that 66% of businesses had piloted automation in their business processes. This number will only grow as global digital transformation (DX) spending is projected to reach 2.7 trillion AUD this year and 4.2 trillion AUD by 2025. Additionally, since COVID, this projection is rapidly accelerating!
With 97% of organisations believing that automation is crucial for digital transformation, using automated systems like an EMS is highly beneficial. With an EMS, you can efficiently and effectively track expenses by streamlining processes through the following features:
- receipt capture
- approval workflows
- policy enforcement
- bill cycle management
- daily data feeds
With real-time visibility into expenses, your business reduces manual efforts, minimises errors, and ensures compliance with expense policies.
5. Educate employees on expense policies
Communicate and train employees on your business's expense policies, including what expenses are allowed, what documentation is required, and the process for reimbursement.
Educating your employees on expense policies is crucial for maintaining transparency, accountability, and compliance in your business's expense management process. You can avoid misunderstandings and potential violations by providing clear guidelines on allowed expenses, required documentation, and the reimbursement process.
Informed employees are more likely to follow expense policies, reducing the risk of unauthorised or fraudulent costs and ensuring that expenses align with your business's financial goals and budget.
ProSpend: Expense Management Simplified
ProSpend (formerly expensemanager) is your all-in-one platform for managing expenses, supplier invoices, purchase orders and travel spending—all with complete budget visibility.
Our intuitively designed, cloud-based, modular platform is designed for organisations that want to proactively manage business spend whilst automating and streamlining their processes.
Our expense management solution allows your organisation to benefit from the speed, simplicity, efficiency and accuracy of an automated expense claim and reimbursement process. It has daily feeds for corporate, personal and business cards, automatic coding and matching of receipts, a split feature, configurable Fringe Benefit Tax (FBT) and tax wizards, approval workflows and receipt exceptions.
Our proven methodology ensures a successful and stress-free implementation process. You'll have a tailored expense manager ready in just seven phases. Our personalised implementation and user onboarding program trains staff quickly and ensures they can use our expense manager solution confidently.
Effective management of business expenses is crucial for financial success. By promptly recording transactions, saving receipts, and utilising an expense management system like ProSpend, businesses can streamline their expense tracking process, ensure accurate financial records, minimise errors, and save time.