Spend Management vs Expense Management: Is There a Difference?
Expense management is not the same as spend management
With businesses increasingly recognizing the importance of employee-driven initiatives, the need to incur indirect costs in supporting these initiatives becomes unavoidable.
Accountants refer to the system designed to process, pay and audit employee expenses as expense management. These are out of pocket expenses incurred by employees when on business-related issues, with Travel and Entertainment being the most common type of expense in this category.
When tracking expenses, expense forms includes the following elements:
- Date and time of the expenditure
- Purpose of the expenditure
- Person responsible
- Sub-totals of different categories
- Grand total
- Amounts advanced (if any)
Ways of Expense Management
This is a straightforward but labor-intensive way of tracking expenses. Physical receipts often add a layer of security and documentation in case the loss of data or record. Although cost-effective, the risk of errors with manual entry and data loss could happen.
Paper is an old-fashioned and cheap way to manage expenses. In today’s distributed workplace, approvers, accounting teams and requesters all exist in separate locations. This slows down purchasing workflows and reduce a business’s operational efficiency. Although cost efficient, paper oftentimes leads to errors.
A spend management system automates logging and tracking any spend that occurs, with a clear approval workflow. You can submit spend requests prior to approval, increasing financial control and visibility. Investing in a spend management software has the added advantage of better expenses reporting as there is also an audit trail for bookkeeping purposes.
Spend management is a broader financial term. It explains how, when and why you spend money. This encompasses procurement (including e-procurement and procure to pay), invoicing, outsourcing, and supply chain management. While the norm has been to process each of these elements separately, some spend management experts question if this is the efficient way of going about things and present a holistic management design.
Some of the proponents of this theory argue that the words only matter, for example, when procurement is helping serve different stakeholder roles that involve different spend categories. Expense management is strategic only when considered as part of spend management.
Also, businesses are preferring business credit card transactions over ACH and check transactions. Credit card transactions come with up to 30 additional days of float plus rebates of 1 percent or more.
There is also the issue of more efficient controlling. When different tools are used to view the three pillars separately, it becomes harder to get the clear picture of spend visibility. A good example would be in strategic sourcing when a business has to source for materials from a distant location. There will be indirect spend management for the employee involved, and maybe license costs to move items across borders. Reporting this on different tools might not show on how much money the business has spent on the whole engagement. Spend management software that overlaps all the three pillars would work better.
Spending vs costs vs expenses
‘Cost’ and ‘expenses’ are often interchangeable. However, for accounting expenses, these terms have different implications.
What is a cost?
This is the amount of spent required to obtain a product or service, either for business purposes or consumption. This term is often used when describing one-off events. Purchasing a car, for example, is a cost, but maintaining it requires expenses.
What is an expense?
An expense often describes a recurring cost that has no asset associated with it. For example, a business call to a lead will cost money. But, if the representative is good, this could lead to a deal closed, too. Other expenses include transportation costs, the cost of office supplies, and utilities.
What is spending?
This term really encompasses all the payments that a business uses in the course of its efforts to stay in business and make profits. This could be costs like purchasing capital equipment, expenses like insurance, or inventory purchases.
Why you shouldn’t expense
In the interests of tighter fiscal controls, the practice of expensing may not be the best strategy. Here are a few reasons:
Expenses tracing to an asset
Most business assets are expenses. Insurance on a business car, for example, makes the car a useful asset, obtaining value from the vehicle to earn revenue.
Fiscal government purposes
Best practices in spend management would include merging expenses like in the material sourcing example above, gives easier and presents a better and simpler cash flow picture of how much is going out of the business.
The money has already left the bank
While recording expenses is a good practice from an accounting perspective — from a controls perspective, it is too late to catch the expense if the spend already occurred.
Expensing ‘after the fact’ is a common trend and practice in many companies — one way of mitigating this is implementing a pre-approval process for purchases.
While accountants have been doing expense management to track indirect expenses better, there is room for improvement in this way of doing things. Spend management is an umbrella for perceived expenditure.
Any accountant would see a rise in efficiency with a holistic approach to spending. The good thing is that there are software apps to make this process easy. Investing in spend management solutions such as Procurify can help your organization conduct more effective spend analysis, help you with data analytics, improve your business processes and give your organization a competitive advantage.