Tips To Optimize Expense Management For Startups

Every business has expenses, so every business should have proper expense tracking and reconciliation in place. However, when it comes to expense management, startups often look only at their overall outgoings each month. This can lead to spending more than the business can afford, incorrectly calculating cash on hand and cash zero date, and not maintaining audit-ready financials.

“This can lead to spending more than the business can afford, incorrectly calculating cash on hand and cash zero date, and not maintaining audit-ready financials.” 

Proper expense management should include:

• Clear expense policies
• Recording every business expense
• Reconciling bank statements with books
• Storing receipts
• Reimbursing employees
• Generating monthly expense reports

To ensure you have a complete view of your business’s outgoings, follow these four tips to achieve better expense management for startups.

4 Tips To Optimize Expense Management For Startups

1. Begin proper expense management as soon as possible.

Startup founders should begin keeping track of expenses from the earliest days of the business, even if this is simply keeping a log of transactions in an Excel doc. As your business grows, it becomes increasingly complex and time-consuming to retrospectively organize your expenses for past months or years, so investing the time in expense management from the beginning will save hassle in the future.

It’s also important to define clear company policies regarding expenses for your organization. Make sure your employees understand which types of expenses are permitted, and the process for which they should document and submit their expenses.

Without accurate and comprehensive expense records, you won’t know how your business is performing against vital startup KPIs, such as customer acquisition cost (CAC) and the ratio to customer lifetime value (LTV:CAC). Plus, proper expense management allows you to project how long your business’s cash will last, making it a vital element of accurate financial planning for early-stage startups.

2. Manage your expenses with software.

You’ll want to begin using expense management software to record expense data, generate expense reports, and process expenses as your startup grows. Most accounting software (for example, QuickBooks or Xero) support integrations with expense management software, which can automatically import, sync, and categorize expense data, helping streamline the expense management system for your finance team.

If you have multiple employees who need to be reimbursed for business expenses or use corporate credit cards, you’ll likely benefit from supplementing your accounting system with a specific employee expense management software like Expensify. These platforms help convert paper receipts to digital and collate data from different bank accounts so it’s easier to gain a full picture of employee expenditures, and have easy-to-use portals for your team to submit expenses for approval.

Many startups also use corporate credit cards designed specifically for startup business needs, like Brex, Ramp, and Divvy, which have built-in expense management features that further streamline the expense management process. Read more about the best corporate credit cards for startups in our blog post, “Brex vs Divvy vs Ramp vs Stripe: Head-to-Head Comparison of the Top 4 Corporate Credit Cards for Startups.”

3. Organize your expenses into categories.

Looking only at total expenses for the month, you won’t know how well (or how poorly) your business is actually performing. When the total outgoings are less than the total income, you might assume that your startup is financially healthy, but this isn’t necessarily the case. For example, it’s important to sort your expenses into categories to understand how much it costs your business to produce the goods it sells (COGS). When COGS exceeds the revenue the goods are generating, the business is not sustainable.

Establish categories for your expenses, including both fixed costs (such as rent, business insurance, and website hosting) and variable costs (such as paid advertising, legal fees, travel expenses, and business income taxes), and set up these categories in your accounting software to classify all expenses. Generally Accepted Accounting Principles (GAAP) don’t include hard-and-fast rules on the expenses to include in each category, so it’s essential to define a categorization system that makes sense for your startup’s business model and vertical.

4. Limit overspending with granular expense tracking.

Recording expenses in a highly granular way allows you to identify areas in which your startup has unnecessary spending. For example, the total expenses of your sales team may look reasonable, but if you break down these figures to reveal each salesperson’s individual expenses, you may find that some employees spend twice as much as others but generate below-average sales figures. It also pays to record the exact products your employees purchase, rather than recording them generally as ‘software licenses,’ for example. If multiple employees buy the same product, you may be able to save money by terminating duplicate subscriptions or negotiating an enterprise discount.

Source: https://www.zeni.ai/blog/expense-management-for-startups