Expense Management; Definition, Types & Tips
Effective expense management is a critical aspect of any organization's financial health, ensuring smooth operation through controlled employee spending. Employees frequently incur various business expenses, from travel and entertainment to office supplies. To facilitate reimbursement, these expenses must be meticulously reported with detailed descriptions and receipts, subsequently reviewed and approved by line managers and finance teams. This process, central to expense management, not only streamlines how employees pay for business expenses but also provides a comprehensive track of their spending through organized expense reports.
What is expense management?
Expense management is the process of tracking, processing, and reimbursing employee spending. This involves scrutinizing expense reports, evaluating reimbursement claims, and enforcing company policies on permissible expenses. It is a key practice in ensuring adherence to the organization's expense policy while maintaining accurate financial records.
Why is expense management important?
As an essential part of any business, expense management is vital for various segments of a company, such as the following:
1. Finance teams
An expense management process is the most important to a finance team or accounting department. Their main goal is to sustain accurate business financial records and analyze past trends to determine future business decisions.
Additionally, it can help identify cost-saving opportunities and risks by providing insights into the company's financial health.
2. C-level executives & managers
Owners, managers, or C-levels are more concerned about growing revenue, managing risk, reducing expenses, satisfying employees, and having a productive business.
Having reimbursements processed quickly creates a feeling of trust and satisfaction among employees. This greatly influences the productivity of your employees and your company.
Maintaining detailed records of your business expenses ensures that your company stays compliant and assists companies in audit activity in case of fraudulent behavior.
Nevertheless, with the corporate income tax being introduced in 2023, expense management makes it simpler for businesses to file their taxes.
Expense management process
The expense management process is designed to safeguard against policy violations and mishaps, and it typically follows a uniform sequence across most businesses:
- Employee Expenditure: An employee makes a purchase for business purposes.
- Reimbursement Claim Submission: The employee submits a claim for reimbursement of the incurred expense.
- Claim Review: The submitted claim is reviewed and either approved or rejected.
- Payment Processing: Upon approval, the reimbursement is scheduled, often aligning with the employee's End-of-Month (EOM) salary.
Types of expense management
Approaches to expense management may differ from company to company. Here you'll find the different ways in which expenses are managed:
1. Paper tracking
Employees collect paper receipts and submit them to the accounting department for approval monthly or quarterly. This is the traditional (and outdated) method of managing expenses.
Businesses, especially in the UAE, usually use spreadsheets to manage their expenses and reduce dependency on paper receipts. Some common spreadsheet software is Microsoft Excel, Google Sheets, and Zoho Sheets.
3. Expense management software
An expense management software simplifies the process for companies by automating it. After an employee makes an expense, the managers are alerted to either accept or reject the expense. If the expense is accepted, it is usually scheduled to be reimbursed with the employee's EOM salary.
4. Pluto: Automated expense management software
Pluto is an expense management software that helps accounting teams save time by automating reimbursements, expense reporting, expense tracking, and budget control.
When a business expense is made, a Whatsapp notification is sent to the employee, prompting them to upload their receipt by snapping a photo; this also simplifies the reconciliation process. When that is done, the admin/manager is notified to accept or reject the expense. If the expense is accepted, it is reimbursed to the employee's bank account in seconds.
On the other hand, Pluto gives you the ability to create unlimited corporate cards with spend limits so you won't have to go through an approval workflow.
Real-time expense reports are also one of the many benefits Pluto offers, helping finance teams, CFOs and accountants make informed decisions. Learn how to improve internal control over financial reporting on our new post.
Traditional vs. automated expense management
Despite the benefits of automated expense management, a large percentage of organizations in the UAE still perform manual expense management. This leads to expense reports that are time-consuming and prone to error.
Traditional expense management
Traditional expense management is one expense management process that relies on several steps to manage spending and ensure the process for an expense claim is correct. As an expense management solution, expense tracking is usually in the form of paper tracking or excel sheets, as mentioned above.
Typically, once employee-initiated expenses are made, the employee must store the expense receipts and file them as reimbursable expenses at the end of the month when the accounting department is doing the end-of-month closing. After the expenses are submitted, the approval process begins. The employee's manager either accepts or rejects the reimbursable expense; if it is accepted, it is sent to the accounting team for reimbursement.
This is considered a nightmare for accounting departments, as they will have to go through manual data entry and spend countless hours on expense reporting at the end of month closing.
Automated expense management
Unlike traditional expense management, automated expense management software reduces time spent on processing expense reports, managing the business's cash flow, reconciliation processing, and controlling expenses incurred for finance teams.
Automated spend management software, such as Pluto, eliminates the manual process and automates the process for finance teams from A-Z. With expense management software like Pluto, you can automate different flows.
Benefits of using an expense management software like Pluto
1. Automate Reimbursements
Pluto helps you manage expenses incurred by digitizing the reimbursement process. Once an expense is made, Pluto sends you a Whatsapp notification prompting you to upload your receipt by replying to the Whatsapp or by uploading it onto the Pluto app. Once that is done, the expense record is saved, so employees don't lose it, and the expense is submitted for approval.
As an added perk, Pluto also auto-categorizes expenses made so employees and finance teams won't have to worry about categorization!
2. Streamline expense reporting
With Pluto, all expense records are in one place, meaning expense reports are automated; this helps accounting departments save hundreds of hours on manual work.
Additionally, expense reports are trackable in real-time, giving managers, finance teams, and accounting departments complete visibility over the business's finances.
3. Accounting automation
Close your books 5x faster!
Whether you use Zoho expense, SAP Concur, or Quickbooks, your accounting software can integrate directly with Pluto's platform.
Through our integration, you can also sync your chart of accounts and your GL codes to automate bookkeeping.
4. Smart budget control
Pluto allows you to issue your employees unlimited corporate cards with spend control. If you have daily allowances, weekly budgets, or travel expenses, you can get better control over your employee spending by setting custom limits on their corporate credit cards.
Expense management advantages for business
If you've reached this far, you might already know the advantages of automated expense management.
1. Accurate expense reporting
- Real-time, automated expense reports
- Sort reports by day, week, month, or by department, or category
2. Quick reimbursements
- Faster approval process for employees and finance teams
- Auto-categorization when uploading receipts
3. Monitor employee spending
- See what is being spent and where in real-time
- Set daily, weekly, or monthly allowances
4. Close books faster
- Integrate with all major accounting software to close your books 5x faster
- Sync your GL codes
What is an expense management policy?
Employee spending can be controlled by implementing an expense management policy. The policy can function as grounds for rejecting or questioning expenses and help determine whether they should be reimbursed.
In every expense management policy, the following items should be included:
Types of expenses
A complete list of everything employees may purchase and what they may not purchase.
The current budget should be disclosed to everyone, and those with questions should be able to contact those responsible.
A reimbursement policy must specify the reimbursement method, such as online, by credit card, or by other payment methods.
Key features to look for in an expense management software
If you're purchasing an expense management solution, make sure it fills your company's unique needs, offers the right level of functionality, and comes with a dedicated account manager.
Some of the key features you should be looking for are:
1. Real-time expense tracking and reporting
Having real-time expense reports is vital, as it helps finance teams monitor employees' expenses and manage them on the go.
For example, if the company's marketing department uses 70% of its monthly budget in the first two weeks of the month, the finance team can notify them that 70% of the budget has been used so they can plan and budget for the remaining 30%.
With Pluto, you can:
- Get notified as soon as an expense is made, so you know who spends what, where, and when
- Keep track of all business expenses, such as reimbursement, travel, and employee expenditure data, to avoid going over budget
2. Quick reimbursements
End-to-end reimbursements are crucial for a business to operate seamlessly. With quick end-to-end reimbursements, employees no longer have to wait till payroll to get reimbursed.
With Pluto, you can:
- File a reimbursement request through Whatsapp or the Pluto app
- Get reimbursed in seconds
3. Approval flows
Approval processes should be hassle-free. It's essential to have automated approval flows to ensure employee expenses and expense claims are approved by the right managers.
With Pluto, you can:
- Automatically assign expenses to the right reviewer
- Create your own customized approval flow
4. Integration with accounting software
Integrating your accounting platform with your expense management software reduces the time spent on bookkeeping.
With Pluto, you can:
- Integrate most major accounting platforms
- Sync your chart of accounts
- Sync your GL codes
- Close your books 5x faster
5. Customizable budget control
Setting limits and budgets is essential to control your company's financials fully. This helps your company stay within its budget and avoid mishaps with company spending.
With Pluto, you can:
- Create unlimited corporate cards with set limits
- Increase limits on corporate cards in seconds
- Issue vendor-specific cards
Pluto combines the above features with easy integrations, complete visibility, and total control over every aspect of your company's expense management.
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Why A Legacy ERP Is Not Enough For Modern Procurement Teams
In today's fast-paced business environment, most organisations rely on Enterprise Resource Planning (ERP) systems as foundational tools to manage and integrate various business processes. ERPs traditionally offer a broad spectrum of functionalities, assisting in handling essential operations such as procurement, data management, accounting, and supply chain management.
ERP systems provide a comprehensive suite of software functionalities to enhance and optimise various aspects of business operations. Over time, these systems have evolved, shifting from on-premises solutions to cloud-based platforms. However, organisations still face challenges when implementing ERP solutions across their enterprise.
One significant aspect often overlooked in ERP systems is their limitation regarding financial operations & intelligence. ERP solutions primarily focus on improving business processes and management but do not directly handle monetary transactions or provide financial products. This necessitates the integration of external financial institutions and banks with ERP systems.
Moreover, traditional ERP systems struggle to keep pace with the dynamic demands of modern procurement, particularly in the ever-evolving supply chain environment. Today, ERP systems need to be more proactive, incorporating features like real-time analytics and flexible processes to meet the ever-shifting requirements of procurement. Adapting to these changes is essential for businesses aiming to enhance their procurement efficiency and agility.
ERP Systems vs Procurement Solutions: How Are They Different?
ERP systems were initially designed to automate business processes and offer insights for internal controls, while procurement solutions comprehensively manage the ecosystem.
A P2P or a procurement solution is primarily built to meet an organisation's procurement and supply chain needs, an arena always problematic for traditional ERP.
Innovative organisations are now adopting leaner and cheaper solutions for their procurement processes. These tools can deftly handle specialised tasks and yield instant results.
Limitations of ERP
Factors like market volatility, evolving work dynamics, and shifting supply chains have made it challenging for businesses to integrate their procurement processes into their current ERP systems. Hence, it is vital to use specialised solutions to cater to dynamic business processes.
But before exploring the benefits of specialised solutions, let us consider the limitations of ERP:
Long Implementation Duration that Impedes ROI
Customising legacy ERP to meet procurement or supply needs is a hassle. It contributes to a longer implementation duration lasting several months. Customisation projects are resource-intensive. That makes a fast ROI virtually impossible to achieve.
Moreover, businesses must hire ERP consultants or trained partners for the implementation. The success rate and the implementation duration heavily depend on the expertise of such third parties.
With many companies already strung tight regarding capital, implementing legacy ERP to function as procurement systems may prove counterproductive.
Expensive Implementation and Maintenance
Legacy ERP licenses come at a high price. Depending on your software, ERP implementation costs can range from $150,000 to $750,000.
Moreover, procurement processes almost always require extra modules that can further increase costs. It also includes the additional burden of maintenance costs and training employees to use the software.
Failures To Meet Business Goals
The success rate of ERP implementation is dwindling. Recent studies from Gartner indicate that the failure rates of ERP implementations can exceed 75%. McKinsey, a reputed global consultancy, supports this claim as it quantifies the failure rate of all digital transformations to be higher than 70%.
One famous example is Hershey's ERP implementation failure in 1996 as they set out to replace their legacy IT systems with an integrated ERP environment. They chose SAP's R/3 ERP software, and an implementation time of 48 months was recommended, which was later cut down to 30 months. The result - a $10 million investment leading to a loss of $150 million in revenue, a 19% reduction in share price, and a 12% loss in international market share.
With such massive costs and periods involved in achieving numbers from legacy ERP solutions, using specialized procurement systems can make achieving business objectives far easier.
Lack of analytics and insights
ERP systems often fail to deliver the necessary analytics and data for effective operations. Managing vast volumes of data within these systems can be daunting. Challenges include ensuring data quality, the lack of real-time insights, limited data analysis capabilities, and integration issues with other software applications.
Poor User Experience
Many ERP systems require makeshift solutions to modify their functionality according to user demands, leading to frustration with end-users.
Legacy ERP systems are notoriously complex, making them challenging for end-users. Frequently, users must navigate between multiple interfaces, hindering productivity and adoption.
Furthermore, the lack of mobile apps and scattered functionalities exacerbate the issue—problems that a dedicated procurement solution can readily address.
Complex User Interfaces
ERP systems offer enterprise-grade capabilities, yet their inherent complexity and poor user experience pose significant challenges. Users often struggle with confusion, as traditional ERPs are overly intricate. The need for add-ons further exacerbates the complexity, as these additions must seamlessly integrate with the existing ERP system. This constant juggling of different user interfaces not only hampers productivity but also hinders widespread adoption.
One of the most disappointing aspects of legacy ERP systems is the lack of in-built communication channels. ERP systems struggle with establishing themselves as a medium of dialogue between internal business users and external suppliers, as they are not accessible from outside the business network. It tangles communication channels through unnecessary phone calls and scattered information exchange lines.
They are also severely limited in their capacity to maintain supplier pipelines, requiring most data to be entered and managed through several spreadsheets.
Urgent reports, design changes, and other important information cannot be communicated promptly, which may lead to losses. It leads to unnecessary time consumption and inaccuracies.
Solving ERP Issues with Dedicated Procurement Solutions
Addressing the limitations of ERP systems, organisations are increasingly turning to dedicated procurement solutions to streamline their purchasing processes and enhance efficiency. These specialised solutions offer advanced analytics, real-time insights, and improved data quality, making it easier for businesses to manage their procurement operations effectively.
By integrating dedicated procurement solutions with their ERP systems, organisations can bridge the gap between data management challenges and their need for comprehensive procurement intelligence, ultimately driving better decision-making and cost savings.
Addresses Overspending Issues
Integrating P2P software with ERP can prevent overspending in procurement. By harnessing ERP with eProcurement solutions, you can efficiently assess expenses across purchasing categories.
It allows you to manage budgets and increase savings. Moreover, integrating procurement solutions with ERP simplifies procurement management by automating approval processes.
Boosts Vendor Collaboration
Vendor collaboration is one of the most essential aspects of procurement. Keeping them informed of the relevant business operations helps avoid miscommunication.
By integrating procurement solutions with ERP systems, buyers and suppliers can access real-time data, empowering them to make informed decisions. This integration brings advantages such as:
- Enhanced collaboration: Seamless collaboration between buyers and sellers, achieved through transparent access to purchase orders, invoices, and receipts.
- Supplier empowerment: Suppliers are empowered with real-time insights into payment statuses via a supplier portal, which enables sound financial planning.
- Stronger buyer-supplier relationship: Heightened transparency nurtures and strengthens the critical relationships between buyers and suppliers, a fundamental cornerstone for any successful business.
- Improves Scalability and Flexibility
As businesses expand, stakeholders must seek platforms that can swiftly adapt to increased operational demands and changes in the operational cycle.
Procurement software provides essential features like mobile and remote access that most businesses require to scale operations. It also allows businesses to create highly specialised and efficient platforms, saving money, time, and human resources.
Helps Eradicate Duplication Issues
Procurement solutions can help connect all departments to ensure office supply orders are placed through a centralised system. They help share real-time data across tech, IT, finance and accounting, HR, sales, and marketing teams. It helps prevent duplicate purchases by coordinating buying across departments. Improved coordination also allows teams to maximise discounts and negotiation opportunities while saving time, money, and effort.
Reduces Procurement Errors Through Automation
Specialised software can help organisations optimise deals, accelerate processes, and reduce errors through automation. It helps allocate repetitive and simple tasks to the system rather than to users.
For example, businesses can automate their supply ordering with this technology. Automation helps set limits to ensure timely orders, prevent shortages, and follow any restrictions they have in place.
Handles Compliance and Risk Management Issues
Managing procurement-related risks and complying with regulations can be pretty challenging. An ERP-procurement integration empowers the software to handle compliance matters and mitigate risks during procurement processes, even involving multi-currency transactions.
Supplier Performance Management
Managing supplier performance during the procurement process can be quite challenging without the right tools at your disposal. However, by integrating procurement software with an ERP system, you can simplify collecting and analysing data related to supplier performance.
This valuable information encompasses delivery times, product quality, and responsiveness, enabling you to decide whether to maintain or end supplier relationships.
Inadequate inventory management can result in too much or too little stock. These outcomes affect working capital and operational efficiency. One practical approach to tackle this problem is integrating procurement solutions with ERP systems. Such integration offers benefits like:
- Real-time visibility into inventory levels, allowing for monitoring.
- Automated reordering process, reducing the burden on manual efforts.
For example, a supermarket chain can leverage sales data to automate the reordering of items, minimising waste and ensuring the availability of products.
Provides Analytics for Better Insights
By integrating procurement solutions with ERP, businesses gain a flexible data model capable of handling big data. It manages the data and offers valuable insights to enhance information generation, storage, and decision-making. Procurement software encompasses advanced spend analytics, supplier benchmarks, and comprehensive performance management.
Drastically Improves End-User Experience
Procurement solutions are built from the ground up, keeping procurement operations as the top priority. It helps avoid a cluttered, mismanaged UI that comes with legacy ERPs, enabling users to be more productive.
End-users can adapt to changes in the software much quicker, increasing efficiency.
Procurement and sourcing processes require a dedicated platform in 2023. Unlike legacy ERP, such dedicated solutions can handle complex sourcing and procurement operations. They ensure a streamlined and seamless flow of relevant information between internal business organisations and external suppliers, allowing all stakeholders to have complete project visibility.
The outcome of implementing a smaller yet far more efficient tool will facilitate faster time to market, subsequently letting you achieve your ROI at an expedited rate.
While customising an ERP may sound enticing, opting for an eProcurement solution is smarter.
What is an Expense Report? How to Create One?
One crucial aspect of business finance management is knowing how the money of your organization is being spent. You can’t paint a complete picture of your organization’s financial health without understanding how the money is flowing first. This clarity is precisely what effective expense reports provide. When properly maintained, expense reports give you a clear perspective over your organization's finances.
In this comprehensive guide, we delve into:
- The Definition of Expense Reports: What are they and why are they crucial?
- The Importance of Accurate Expense Reporting: How does it affect your organization's financial health?
- Creating Effective Expense Reports: We'll explore two practical methods to craft accurate and insightful expense reports, empowering you to make informed financial decisions.
What is an expense report?
An expense report is a crucial tool in business finance management. It is a categorized and itemized list of expenses made on behalf of the organization. These reports assist employers or finance teams in determining what money was spent, what was purchased, and how much of the expenditure is eligible for reimbursement.
The purpose of an expense report is to track the expenditures of a business and expense forms should include all purchases necessary to operate a business, such as food, gas, or parking.
It is most commonly used by employees when requesting reimbursement for expenditures.
When expenditure amounts exceed a certain threshold, receipts are usually attached to the form.
Employees are paid the requested amounts after the employer examines their submissions for accuracy and validity.
In this case, the employer will be able to recognize accounting profit and taxable profit based on the reimbursements.
Business expense reports are usually generated on a monthly, quarterly, or annual basis to track business spending:
- It is important for a company to maintain monthly and quarterly expense reports to track all of its purchases during that period. The reports are used to determine whether spending within the organization's budget is within its limits and to identify areas for cost reductions.
- Yearly expense reports are in turn used for tax purposes. A company's tax returns are prepared using its annual expense reports.
It is also possible to use expense reports to detail expenditures made against an initial employee advance.
Employers still record employee expenses as business expenses, but they do not reimburse employees; instead, they deduct the expenditures from employee advances.
Why use an expense report?
Expense reports are essential for small businesses, enabling a clear tracking of business expenses often paid out-of-pocket by employees. These reports detail all reimbursable expenses and require attaching receipts for accurate verification. Once reviewed for accuracy, employees are reimbursed accordingly. Additionally, small business owners and accountants use these reports to analyze total expenses over specific periods, employing accounting tools to assess whether costs align with budget expectations
The following are some benefits of generating a expense report:
1. Facilitates efficient expense tracking and cost control
Analyzing expense report data is the ideal starting point for cost control. This allows you to track your firm's spending over time by giving you a clearer picture of what your money is being spent on.
Additionally, you can analyze how much your employees are spending on different expense categories, determine which categories are driving up costs, and implement strategies to reduce or eliminate them. In addition to identifying loopholes in expense policies, these reports can help you decide which vendors to prioritize and which ones to let go by identifying loopholes in expense policies.
Tracking expenses over time allows you to identify whether a particular expense category (such as transportation or hotels) is increasing costs excessively. As a result, you can strategize on how to reduce or eliminate these costs.
2. Helps with budgeting
A business's budget is essential to its smooth operation. A detailed and accurate expense report can help your organization develop a strong and informed financial plan. As a result, various departments and projects can be allocated more appropriate budgets. You can maintain your business's financial security long-term by consistently tracking expenses in order to ensure that different departments and projects adhere to their budgets.
3. Makes for accurate reimbursements
In the event that an employee paid for business expenses out of pocket, they would expect a fair and accurate reimbursement.
Also, you want to make sure that the request is fair so that you don't pay more than you are owed.
It allows organizations to determine if a claim is legitimate faster by providing employees with a standardized process to learn what can and cannot be expensed.
In addition to providing solid evidence of when, where, and how expenses were incurred, itemized expense reports with receipts do the same for proving compliance with your organization's expense policy.
4. Simplifies tax deductions
Tax deductions are available for many business expenses incurred by employees at work. In order to claim expenses as deductions, you must properly record them and provide proof that they were actually incurred.
Business owners sometimes use their bank account or corporate card statements to keep track of their deductible expenses. It's important to keep in mind that these statements may not include all expenses.
In contrast, expense reports simplify the process of keeping track and deducting deductible expenses during tax season. The finance team simply needs to add up all the expenses that can be deducted and enter them into the appropriate tax forms.
What should be in the expense report?
By creating an expense report, you (or your accountant) can easily add up all expenses so that they can be entered into your tax return.
Some crucial elements to include in an expense report include:
- The name, department, designation, and contact information of the employee who submitted the report.
- The date and amount of each expense (corresponding to the date and amount on the receipt)
- What type of expense is being incurred (meals, mileage, internet, etc.)?
- Vendor or merchant who sold the item
- If applicable, the client or project for which it was purchased
- From your accounting chart, determine the account where the expense should be charged
- A description of each expense in more detail
- Expense subtotals and total costs, including taxes, for each type of expense
- (If applicable) a deduction for prior advances made to the employee
How to create expense reports
Companies most often generate and track expense reports using spreadsheets, templates, or expense reporting software.
You can generate expense reports in two different ways: manually through templates, or through Pluto.
Manual expense reporting with custom templates
To make the task of preparing expense reports easier for employees, some organizations provide customizable, ready-made templates to download and use. To report expenses in this way, follow these steps:
- The employee outlines their name, contact information, designation, the dates covered, and the purpose of the report in the appropriate fields.
- Following that, they determine how many rows and columns the expense report should contain. For example, some firms have mandatory columns and categories that correspond to the expense categories and columns in tax returns.
- In the report, expenses should be listed chronologically with brief descriptions, with the most recent expense appearing at the end.
- In order to calculate the grand total, the employee must first calculate the subtotals for each expense category followed by the total for all expenses. Subtotals assist the finance department in analyzing expenses.
- Finally, all expenses mentioned above must be accompanied by receipts. The receipts can either be scanned or photocopied depending on whether the report is being submitted digitally.
- Reports are submitted to the line manager or department manager for validation and fraud detection.
- As soon as they approve the report, it is forwarded to the finance department for reimbursement.
Automated expense reporting
The use of expense report templates is a quick way to keep track of expenses for small businesses.
The problem arises when your business grows, at which point the process of filling out a report, even if using a template, can become a time-consuming task.
When multiple departments process several expense reports a day, it is important to switch to an automated expense reporting solution like Pluto, so that these reports can be tracked and managed more efficiently.
- Pluto enables employees to create expense reports on the fly. Their receipts need to be captured digitally or filled out in the mandatory fields within the application.
- By grouping all the expense claims together, a report can be created and submitted effortlessly.
- Pluto also provides virtual and physical cards, so the expense data are booked straight into the platform for later use.
- Line managers and department managers review reports to identify policy violations, fraud, duplicate expenses, or warnings about them.
How to simplify the expense reporting process
While expense reports are important when it comes to gaining an overall view of the way money is moving, creating them can be a hassle when your organization incurs too many expenses to keep track of manually.
However, there are a few ways that you can simplify your expense reporting. These include:
Switching to expense reporting software
The first step in expense management is to file expense reports. You must also maintain policy compliance, reimburse expenses on time, and conduct successful expense audits to stay on top of your business expenses.
This is where Pluto can help. By providing multiple ways to record expenses on the go, we eliminate the need for manual data entry and paperwork. You can benefit from an expense management solution by:
- Generating and submitting reports automatically;
- The ability to support multiple expense policies and spend limits;
- Eliminates policy violations and fraudulent expenditures
- Analytical reports and intuitive dashboards increase spend visibility
With all of these features, you can save time and money while keeping your employees productive.
Make expenses easy to report and track
Provide your employees with Pluto real-time reporting system where they can track expenses, submit receipts, and report business expenses.
Business expense reports can be updated in real-time using online or smartphone apps, and receipt images can be added for total transparency, if you use digital technology.
Time-stamping and expense classification make it easy to catch fraud, which is beneficial to both you and your employees.
Embrace mobile devices
By scanning receipts and automatically extracting and reporting the key data, Pluto saves your employees' time and improves their expense reporting accuracy.
It makes perfect sense for you to use an app that allows your employees to track expenses easily from their phones since most (if not all) of your employees spend a lot of time on their smartphones.
Set up a routine audit
Ensure that you also incorporate a routine audit process into your business expense report policies. Your expense report should be audited quarterly, biannually, or annually, depending on the number of expenditures your employees incur.
You can catch fraud cases through audits, but you can also understand where the biggest expenditures are and reduce them.
Routine audits can also help you improve management and tracking of your business expenses by letting you know how to refine your reporting process.
Automated expense reporting with Pluto
Pluto allows you to issue virtual cards and physical cards and that immediately solves two things:
- No need for petty cash or out of pocket expenses;
- Real-time reporting of all the incurred expenses;
The spend management system allows you to issues cards for a particular employee, vendor, or even expense type.
It also allows you to set the limits on the go, and see all the expenses in the real-time report. All that, while your employees can easily categorize the expenses and upload the physical receipts just by taking a photo on their mobile device.
Reporting expenses manually is very time consuming, but having them all digitally stored and automatically reported solves the problem.
Expense reports are a crucial aspect of the financial bookkeeping of any business organization. Not only are they important for knowing how much money is being spent by the company, whether as a whole or for a specific project, but also for the purpose of reimbursing employees for business-related expenses.
Plus, they also help you with budgeting, tax reporting, and cost control measures.
You can easily create an expense report using a premade or personalized template, but you’ll have a much easier time in the long run if you start using Pluto.
Guide to Accounts Payable Audit With Step-by-Step Process and Checklist
Your employee receives the vendor invoice and goes to the department manager and procurement department for three-way matching — invoice, purchase order, and goods receipt. Once approved, the finance department prepares to clear the payment. Finally, the accounting department makes the journal entries and updates accounting records. This is an end-to-end accounts payable process.
But it isn't as simple and straightforward. The chances of errors increase with various stakeholders involved. These range from manual data entry mistakes and invoice duplications to missed discounts, late payments, and inaccurate coding. This intricate process further results in unapproved invoices, incomplete documentation, vendor communication gaps, and mismatched purchase orders.
Hence, it becomes imperative to conduct regular checks. The inspections look into the internal processes to identify loopholes and act as an early sign. This post will discuss what an accounts payable audit is and how you can prepare for it.
What is an Accounts Payable Audit?
An accounts payable (AP) audit is a type of accounting audit that investigates a company's accounts payable records, statements, and processes for potential errors, fraud, and non-compliance.
In an AP audit, auditors track AP transactions from beginning to end, including the purchase order, invoice, approval steps, payment, and reconciliation, ensuring that everything has been recorded and documented correctly.
The auditors assess the internal records and documentation for the following:
- Validity - Are all invoices and transactions verified as genuine, preventing payment for unauthorized items?
- Completeness - Are the invoices, purchase orders, and delivery receipts recorded correctly to avoid missing any payments?
- Accuracy - Is every invoice amount cross-checked against corresponding purchase orders and delivery receipts to prevent payment errors?
- Compliance - Are the accounts payable documents compliant with tax and company policies to avoid penalties and ensure ethical financial practices?
Further, the auditors inspect the internal processes for the following:
- Segregation of Duties -Are responsibilities clearly divided to prevent conflicts and maintain a system of checks and balances
- Approvals - Are transaction approval processes in place, ensuring compliance with policies and accountability?
- Access Controls - Are access controls effectively implemented to protect sensitive information, preventing unauthorized access and potential breaches?
By addressing these questions, the auditors find areas to improve and strengthen the accounts payable system. This process provides a thorough picture of financial operations, identifying weaknesses that could affect accuracy, efficiency, and compliance.
How to Conduct an Accounts Payable Audit
Before establishing an audit plan, you need three things to prepare for an accounts payable audit:
1. Stakeholder Input
Schedule meetings with key stakeholders such as finance managers, approvers, and document handlers. Ask for their insights on pain points, challenges, and expectations related to the accounts payable process. Document their feedback and use it to tailor the audit plan. It helps to address specific concerns and improve efficiency.
2. Documents Repository
Conduct a comprehensive review of the current document storage system. Ensure all relevant documents are organized, labeled, and stored in a secure, easily accessible location. If you are using digital AP software for the repository, validate that it has proper version control and is updated.
Checklist of Documents Required
- Vendor Invoices
- Purchase Orders
- Goods/Services Receipts
- Vendor Contracts and Agreements
- Payment Records
- Expense Reports
- Vendor Statements
- Credit Memos
- Internal Controls and Policies
- General Ledger Entries
- Tax Documents
- Bank Reconciliation Statements
- Vendor Information
- Access Logs
- Expense Allocation Documentation
- Documentation of Disputed Invoices
- Employee Authorization Forms
- Proof of Payment
- Inventory Records (if applicable)
- Regulatory Compliance Documentation
3. Access Control
Review and update access controls to restrict access to sensitive financial data. Work with IT and security teams to ensure only authorized personnel can access critical systems and repositories. Also, periodically verify user access levels and promptly revoke access for individuals who no longer require it. This helps maintain a secure and controlled environment.
4-Step AP Audit Procedure
With all the documents ready, inputs gathered, and access shared, you can initiate the AP audit procedure. It includes the following steps:
Establish an audit plan to define the scope of the audit, specifying the departments and time frame under consideration. Assign audit team members and allocate necessary resources for the audit. Identify potential risks such as errors or compliance issues.
Here is what an audit plan looks like.
Objective: The primary aim of this audit is to express an opinion on the fairness of XYZ Company's financial statements in accordance with Generally Accepted Accounting Principles (GAAP).
Scope: The audit will cover the financial statements of XYZ Company for the year ended December 31, 20XX, including the balance sheet, income statement, statement of cash flows, and accompanying notes.
Audit Team: The audit team will consist of the lead auditor, staff auditors, and specialists as needed. The team members will be assigned specific tasks based on their expertise and the areas to be audited.
Audit Approach: The audit will be conducted as per the auditing standards and guidelines issued by the relevant regulatory bodies. The approach will include substantive testing, tests of controls, analytical procedures, and other audit procedures as deemed necessary.
Materiality Threshold: The materiality threshold for the financial statements is set at $XXX. Any misstatements or discrepancies exceeding this threshold will be considered material.
Risk Assessment: The audit team will conduct a risk assessment to identify and assess the risks of material misstatement in the financial statements. The evaluation will consider both inherent and control risks.
- Cash and Cash Equivalents:
- Confirm bank balances and reconciliations
- Test cash transactions and cutoff procedures
- Review bank statements and related agreements
- Revenue Recognition:
- Test sales transactions and revenue recognition policies
- Review contracts and agreements for completeness and accuracy
- Verify the accuracy of recorded revenue
- Observe the physical inventory count
- Test inventory valuation methods
- Review inventory turnover and obsolescence
- Accounts Payable:
- Confirm outstanding payables with vendors
- Test completeness and accuracy of recorded payables
- Review payment terms and agreements
- Fixed Assets:
- Verify the existence and valuation of fixed assets
- Test depreciation calculations
- Review additions and disposals
Documentation: All audit procedures, findings, and conclusions will be documented in working papers, including supporting evidence and references to applicable accounting standards.
Reporting: A draft of an audit report will be prepared for management review before issuing the final report. The report will include the auditor's opinion on the financial statements and any relevant disclosures.
With the audit plan in place, the audit team moves on to a detailed examination of the accounts payable process. Simultaneously, it also engages with key stakeholders to get valuable insights into the practical aspects of the AP process. In this stage, it ascertains the effectiveness of internal processes in safeguarding against potential risks. It performs the following assessments:
- Verify completeness and accuracy of invoices, purchase orders, and payment records
- Match invoices with purchase orders and delivery receipts
- Check for discrepancies in amounts or quantities
- Evaluate the adherence of the approval process to established policies
- Confirm proper authorization before payment processing
- Review vendor master file for accuracy and up-to-date information
- Implement checks to identify and rectify duplicate payments
- Ensure compliance with internal policies, industry regulations, and legal requirements
- Review accruals and prepaid expenses for accurate reflection of the financial statements
- Verify the accuracy of data entry in the financial system
However, an audit team struggles the most with finding the proper documents. Either the internal team fails to provide the specific invoices, purchase requests, and purchase orders, or it gets lost in the pile of documents. This slowdown in the audit process increases the risk of oversight and incomplete scrutiny, compromising accuracy and thoroughness.
The best way to fix this leak is to go for accounts payable automation.
With AP automation, you streamline approvals and payments and create a centralized hub for bookkeeping. Instead of manual record-keeping, the tool automatically captures and extracts all necessary documents. Its integration capabilities ensure consistent data across the organization, simplifying data management and retrieval.
Finally, the audit team prepares a detailed audit report, including an executive summary, methodology, findings, and recommendations. The report provides a comprehensive overview, detailing identified issues and areas of strength.
To read an audit report and implement it effectively, follow these steps:
- Involve the audit committee, executive director, and senior financial staff in reviewing the report.
- Identify significant issues, such as financial conflicts of interest, and address them promptly. Classify minor concerns, such as operational inefficiencies and technological deficiencies, for resolution over several months.
- Consider the list of best practices and custom recommendations provided by the auditors. Use them to plan and prioritize your organization's next steps.
- Evaluate the "scope, nature, and timing" of the audit conducted by the audit team to assess the auditors' efficiency in utilizing resources without redundancy. Explore ways to make the audit process more efficient for the next cycle.
Regardless of the audit cycle, continuously assess and improve auditing procedures. Explore options such as accounts payable automation, process optimizations, and strategic partnerships.
During this stage, the audit team monitors the implementation of recommended changes. It involves continuous communication with stakeholders to address concerns or questions arising from the audit report. The team also ensures that the proposed improvements are effectively integrated into the organization's processes.
Preparing for Your Next Accounts Payable Audit
To make your next audit easier for the auditors and the internal team, address past findings and consider adopting accounts payable automation for efficiency. By addressing previous audit issues, you proactively improve your internal processes by resolving identified issues. It builds a culture of accountability and responsibility, laying the groundwork for a more efficient and effective audit process in the future.
An AP automation software becomes a central hub for the documentation, streamlining the intricate process. Automated document capture and retrieval ensure swift access, minimizing errors. Also, it highlights areas for improvement, enabling the team to address issues beforehand.
As a result, audits become more streamlined, faster, and less stressful, ensuring strict adherence to rules and optimal functionality. We have curated a list of top AP automation software to help you pick the right one. Check the top 7 accounts payable automation solutions that simplify the accounts payable process and audits.
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