Launching and managing a business in today’s fast-paced, online & offline world continues to be a vast undertaking. Companies are able to start and complete business filings online and open a bank account, but the actual day-to-day operations lack support. Business owners end up wearing multiple hats when it comes to invoicing, payroll, and accounting. Despite increased convenience in transacting digitally, tracking and management of cash flow doesn’t come easy.

Ultimately, expense management falls on the entrepreneur in the first years of launching a company. Even if a bookkeeper becomes involved, there’s still a manual process in researching, reconciling, and properly reporting the true revenue and expenses of a business. Failing to do so can lead to tax audits and fines, which take time to address and are expensive. Once a business owner starts hiring staff, there’s further complexity added — especially if employees are authorized to make purchases on behalf of their employer.

Let’s take a deeper dive into the sector of expense management for small to medium-sized businesses (SMBs) to identify the critical issues, how financial technology addresses these areas, and the top fintech companies leading the way.

PEELING BACK THE LAYERS IN EXPENSE MANAGEMENT

The most common understanding of expense management relates to employee-initiated expense and the systems/processes that a company must put in place to authorize, pay, and audit these transactions. These costs generally include travel and entertainment. Employees must follow workplace policies or have pre-approval before spending, then provide proof of the transaction (typically with a receipt).

While this consideration is definitely critical for companies that are scaling and hiring staff, what about small businesses that are starting out and managed by the owner? There may be no team to manage in the first year, but multiple expenses to incur and report. This can include digital advertising, subscriptions for software, consulting, home office equipment, and utilities. Sole proprietors, freelancers, consultants, and other entity/business types still need help with expense management. Here are the top 3 items that business owners and finance teams must control with expense management.

reporting AND REIMBURSEMENT

With newly formed companies, entrepreneurs end up making business purchases on personal credit cards — also common with employees & managers (over 50% of the time) in established workplaces. At the end of the month, credit card statements and receipts need to be reported and reimbursement requests submitted. Non-business transactions, balances, and limits are often shared as part of the process (exposing personal information of the employee/owner).

With reimbursement, there can be lag times in processing these types of request, which can cause personal cash flow issues. Before a credit is provided, business owners (or accounting teams) need to ensure the transaction is valid and that they have all the necessary documents for end of year reporting. The whole reimbursement process can take weeks based on submission deadlines and payroll cycles.

For the solopreneur especially, the critical concern comes down to timely reporting, organization of expenses, and recordkeeping for tax purposes. Making sure each transaction is properly registered and maintaining records for potential audits is vital. Even more so, being able to do this while still running their daily business operations!

TAX, EXPENSE POLICY AWARENESS

What are proper expenses to report as a business owner?

What employee purchases are eligible for reimbursement?

These are critical questions all companies must address upfront. It’s too manual (and painful) of a process to go back through months of transactions (after the fact). When managers and employees follow what’s ‘in policy’ and keep proper transaction records, there’s minimal work to be done afterward (in this happy path).

The difficulty comes when policies are documented in an outdated employee handbook, or continuously changed without notifying staff. New transaction types may emerge that aren’t covered by policy, but should be considered valid expenses. Business travel, conference tickets, marketing placements are categories that are constant influx.

Companies are making strides in updating internal polices in near real-time and quickly posting in employee portals for visibility. There is still opportunity in modernizing the overall process with the latest financial products.

REDUCING fraud

Nearly 20% of overall fraud (in US & Canada) during the pandemic came from reimbursing business expenses.

Even though business travel slowed down in the last 2 years, the number of out-of-policy reimbursement requests doubled — impacting more than 20% fraud reported by small businesses.

Lack of internal policy updates and open-use corporate cards allowed rampant abuse and fraud in the workplace.

Beyond the monetary loss and resources needed to process fraud disputes, internal investigations need to take place into employee activities. Those who are found to be at fault are often terminated immediately — impacting a company’s staffing resources and workplace culture.

MODERN FINANCIAL SERVICES ARE AVAILABLE

Financial technology addresses these expense management issues with innovative products and features. FinTech companies provide banking infrastructure that offers a customized experience for business owners, employees, and finance teams. An organization’s expense policies are built into financial products from Day 1. Changes to a company’s policy can go into effect immediately without negative impact to an employee or manager.

The level of customization in banking was the gap that fintech expense management platforms bridged. Businesses are able to assign transaction limits, block purchase categories and merchants, control overall spend, act on authorization requests in real-time, and automate reporting and reconciliation. The company-wide benefits are decreased fraud attempts and losses, and all staff operating within company policy.

The corporate expense card is a key tool for fintechs. These can be deployed as virtual cards with security built-in at time of card authorization (via transaction decisioning), real-time data flow to a business, and instant expense reporting. These cards can be single-use, reloaded, and turned on/off as needed by business owners and finance teams. If a physical card is needed for in-person purchases, similar controls and functions can be mapped over.

Transaction reporting can also be programmatically fulfilled upon card swipe as expense management platforms filter merchant, purchase category, amount, location, and date of transaction. An employee/manager can then upload their receipt through an app by taking a picture, and add notes about transaction purpose (if needed). No further follow-up or need to save a physical receipt. Companies are able to run detailed reports by employee, event/function, and month via reporting and analytic tools through an admin dashboard. This reconciliation can also be scheduled to happen automatically so that business owners receive recurring reports as needed.

TOP FINTECH PLAYERS in expense/SPEND management

This niche sector within business banking witnessed an influx of companies launching platforms in the last 5-7 years. On one hand there are software companies expanding into banking (like Emburse) — on the other hand, banking providers are adding expense management capabilities (e.g. Brex launching Empower). Much of this activity can be attributed to the size of the B2B payments market (at about $25T in the U.S.), of which company spend cards represent nearly 5%.

Within the sector, fintechs are going after different market segments (ranging from solopreneurs to mid-market and enterprise firms). Another defining factor is that some providers are partnering with banks and financial institutions, instead of competing with them — this is effective when it comes to lending partnerships (in which licensing and capital is needed). Here’s a quick list of well-known players in this space:

• Airbase - offers multiple integrations with banks, ledger systems, and workflows;

• Zact - Platform is broken down into multiple applications which provide standalone products/features (such as bill pay) or travel solutions;

• Emburse - Over 12M customers in 120+ countries, this fintech has solution sets for companies of all sizes (from micro-business to enterprise);

• TripActions - Launched in 2015, TA offers a suite of products covers spend, personal and business travel — serving more than 8K companies;

• Ramp - Making headlines for revenue growth earlier this year, Ramp offers various free tools, numerous integrations, and partnerships;

• Mesh - a fast-growing spend management platform in the US that powers global spend, automates manual accounting tasks, and optimizes finance workflows.

OUTLOOK

With so many options for businesses, where does the expense/spend management sector go from here? Differentiation.

End of month reporting, card issuance, transaction decisioning controls, etc. are all standard features that are tablestakes. The next generation of fintech providers needs to stay ahead of the game with innovative options — bookkeeping integrations, bank connections, employee access to platform. Analytics & data management are other critical functions with room to grow.

Similar to other financial service areas, the overlap of functionality and transacting will only increase into 2023. Software embedded with banking is here to stay — businesses will be able to continue to use their trusted ledgering and database solutions without connecting external bank accounts. A checking, savings, or credit account will be opened and accessible through the same software partner. We can see these trends already coming through with payroll and HR.

As VCs and fintechs observe the success of growth firms (like Ramp) and program expansion from industry veterans (like Brex), expect to see even more variety and volume in expense/spend management.

 Join our community @FinTechtris for more industry content & insights (including deep dives & sector spotlights).

As a bonus, access our subscriber-only resources for evaluating and building the next generation of financial services. Signup today !