Knowing where to start with expense management can be confusing. For the majority of startups, processes for managing expenses tend to evolve according to day-to-day demands and personal preferences. In these early stages, you’ll mostly just be grateful to keep the train on the tracks – you probably won’t have time to make sure everything’s perfect. You may find yourself a fair way down the line before you have the luxury of taking a good hard look at your expense management systems and procedures.
Managing expenses efficiently is key to maximizing the business growth of a startup. It also helps in keeping cash flow in check. According to recent statistics, 82% of businesses close their doors because of inadequate cash management.
Allocating and tracking employee business-related expenses will only get more complex with growth. Your business needs to have a strategic approach in place to tackle whatever challenges expense reporting and management brings forth. It can be a daunting task to add up all the expenses and make future projections with little financial history to go about. But that shouldn’t stop you from being serious about your finances.
Common expense management mistakes made by startups
Whether a business is a startup or a large enterprise, it’s essential to safeguard a company against any potential losses, it is necessary first to identify the possible factors that can cause a company to fail.
- Losing track of receipts to validate business expenses. Businesses should look for solutions to maintain, track and manage receipts.
- Unclear travel and expense policies with poor enforcement. Loosely defined and poorly enforced policies can also cause employees to make purchases above the budget.
- Little-to-no visibility into employee business expenses. Knowing where your business stands financially can help you make accurate purchasing decisions, optimize strategies, and tweak operations.
- Not maintaining detailed expense records. Maintaining detailed expense records includes having proof of expenses (receipts, invoices, forms, etc.) This helps you to stay audit-ready, in case there is an inquiry regarding your tax returns.
- Spending too much time on manual tasks, opt for automation for accurate and timely record keeping.
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As your business scales, cost and expenses will increase as well. The wise thing to do is have a process in place which is ready for future growth. Below, we have listed some expense management ideas that can help your start-up prepare for future growth and scale.
- Lease instead of buying.
If you’re looking at buying expensive equipment, consider leasing instead of buying. Leasing has several advantages over buying, even if you’re buying used. The most obvious benefit is that you’ll save money in the short term. When buying equipment, you’ll be responsible for purchasing the item outright. Alternatively, you could secure a down payment and get a loan to pay for the rest, but loan interest rates can be high (and you may not want to take on that liability). You may still be required to provide a down payment with a lease, but your total upfront costs will be lower, making the financial barrier to entry more accessible.
- Ensure expense validation
Validating business expenses is necessary to ensure clarity around your company’s financial standing. When it is a small company, this can be quickly done by placing receipts on a table and mapping it with expenses. But as the company grows, it might no longer be a plausible method.
The corporate credit card reconciliation process is one of the methods to ensure expense validation. The reconciliation process is done to check if the company’s financial records match with the external financial records (credit card statements, vendor invoices, bank statements, etc.) This is done to ensure there are no missing records or suspicious activity around business expenses.
- Office
Once you’re staffing up, you’ll need somewhere to put your employees. On that front, things have changed significantly since the Covid-19 crisis has forced most knowledge workers to work remotely. That will reduce costs for startups, at least for the short term. And it’s possible, even likely, that work-from-home will become a feature of many more workplaces going forward. Also, co-working spaces are very common and cost-saving, especially when you are a budding company and need to take care of expenses in the most significant manner.
Still, over time, you’re probably going to need or want office space for some percentage of your employees. Not only that, the estimated 125-225 square feet necessary per employee may no longer be sufficient if social distancing requirements remain in place. Knowing what rents will be post-crisis is difficult to gauge, as the office market has been upended.
- Carefully track all spending
There are few things in the startup world scarier than the looming threat of an audit. Unfortunately, in the grand tradition of death and taxes, it will come for your company in time. When it does, you need to be ready. This means keeping a detailed record of every expense payment made, along with the relevant proof of purchase. It also means having a system in place to help categorize and itemize these expenses and to aggregate and break down information in the most helpful way possible.
Create a cash flow statement and forecast. These very simple financial documents will give you a snapshot of your actual monthly cash flow and your forecast monthly cash flow. Next, a comprehensive spend management system is one of the best ways for you and your team to stay audit-ready. An expense management system will help you to comply with relevant tax regulations and filing requirements.
- Minimize overhead expenses.
You also need to think about your overhead expenses. These expenses are ongoing and can’t be directly associated with a cost unit. This makes them difficult for new business owners to estimate and control and makes them potentially highly impactful to your bottom line. One of the easiest ways to reduce overhead expenses is to reduce the size of your workspace. If you’re launching a manufacturing business or if you need warehousing, there’s only so much you can cut; but many modern businesses can operate almost fully remotely, cutting the need to pay for a large office space.
The bottom line
With a high percentage of startups facing failure, it is inherent that the task at hand is not for the faint-hearted. Every startup has to go through tough challenges to emerge stronger. As the company evolves, there is no doubt there will be an increase in the number of employees, as well. It is now when the same, easy, and simplistic traditional approaches might not work. The larger a company grows, the more complex its expense management processes get. Companies have to get wiser and come up with effective strategies that can help them scale seamlessly.
