Spend Management vs Expense Management: Why You Need to Know the Difference
'Spend management' and 'expense management' - these two terms are often used interchangeably within business. Even though as concepts they have similarities, it's important to realize that they are different ideas with their own specific operational nuances. Let’s explore the essence of each term, explain the differences between spend management vs expense management, and present examples of SaaS tools that help facilitate each process.
Differences Between Costs, Spend & Expense
It’s important to start with a bit of confusion. Just kidding (kind of).
I’ve seen different blog posts claim there’s a fundamental difference between the terms cost, spend, and expense… but I’m not going for it. Costs = Spend = Expenses.
Time for the caveat. There are instances where these terms are used differently. Expense management is often specifically referring to reimbursable expenses. Accountants tend to call all things “spend”, expenses (aka, the costs associated with doing business), however, anytime you’re talking about expense management, “expense” is likely referring to the process of approving, tracking, and reimbursing expenses incurred by individual employees.
Defining Spend Management
Spend management refers to the comprehensive strategy & initiatives employed by organizations to control and optimize their spending across the entire procurement lifecycle. This includes everything from identifying a need to fulfilling it through sourcing, purchasing, receiving, and payment.
A tool like Coupa, a cloud-based spend management platform, provides an integrated solution covering procurement, invoicing, and expense management, offering full visibility into all categories of business spending. This clear view allows companies to comprehend their expenditure patterns, spot inefficiencies, and strategize improvements. Companies using Spend management gain benefits from more broadly accessible budget visibility and approval workflows to reign in “rogue” spend, and force more rigorous reviews.
Industries like manufacturing, retail, and logistics, which handle extensive procurement processes, often implement rigorous spend management strategies. These industries, due to their substantial and diverse spending, stand to gain significantly from the efficiencies and cost reductions brought about by comprehensive spend management.
Unpacking Expense Management
Expense management, a component of spend management, zeroes in on the control and reimbursement of business expenses incurred by employees. This category may include operational costs such as travel, entertainment, and office supplies that employees expend in the course of their duties.
A SaaS solution like Expensify or Concur provides a streamlined process to track, report, and reimburse these expenses. With automated receipt tracking, policy compliance checks, and swift reimbursement processes, these tools simplify and expedite expense management.
Expense management is a vital aspect for industries with a high degree of employee-initiated expenses, such as consulting, sales, and professional services firms. These sectors require meticulous tracking of individual expenses to ensure accurate client billing and employee reimbursement.
Ways Of Doing Expense Management
I’ve talked about software a bit already but there’s more than one way to skin a cat (though I’d recommend not harming animals and just using software instead). Here are the most common ways professionals do expense management.
Pen & Paper
Traditional expense management involves physically keeping and sorting receipts, writing down expenses in a ledger or notebook, and manually adding up costs. This approach, while straightforward, can be time-consuming and prone to human errors. Moreover, it can be challenging to keep track of and organize paper receipts, especially for larger businesses with more significant expenses.
Spreadsheets
A step up from pen and paper, many businesses use Excel or Google Sheets for expense management. Typically, this involves entering each expense into a dedicated spreadsheet, often categorized by type, date, or project. Spreadsheets can automatically calculate totals and provide basic data analysis. However, this method still requires manual data entry, and the complexity can increase with the volume of transactions. Spreadsheets also don't easily accommodate receipt storage or integrate with other financial systems, which can lead to fragmented and inefficient processes.
Software
Expense management software brings this tedious process into the 21st century by automating many manual tasks and providing real-time visibility into expenses. Users can easily capture and upload receipts digitally, categorize expenses, and submit reports for approval, all within the platform. The software can integrate with other financial systems for seamless data transfer, reducing the risk of errors. Additionally, these solutions often include analytics features, providing valuable insights into spending patterns, which aid in budgeting and strategic decision-making. Expense management software is the most efficient and effective method, particularly for larger organizations or those with significant employee-incurred expenses.
It also results in senior leaders actually processing their expenses properly!
Most Helpful Functionality Of Spend Management Software
Any tool that helps reign in company spending, ensure accurate expense reports, and improve pricing structure should be considered; however, there are a number of functional things that spend management software need to help you achieve. These have historically been the most helpful for me.
Accounts Payable (AP) Automation
Automation plays a significant role in both spend management and expense management. It streamlines the process of invoice approval and payment, reducing manual efforts, and minimizing errors. In the context of spend management, AP automation — a built-in feature of many of the best accounts payable software — provides an integrated view of all company-wide expenditures, enabling organizations to analyze spending patterns and identify cost-saving opportunities.
As for expense management, AP automation ensures efficient handling of employee expenses, from company credit card audits and receipt submission to reimbursement, promoting transparency and policy compliance. Tools like AvidXchange and Bill.com offer AP automation, driving efficiency, reducing fraud risk, and offering a clearer view of a company's financial status.
By adopting AP automation, companies can achieve an additional layer of control and optimization, further enhancing their spend and expense management practices.
Real-time Updates
Real-time updates on expense and spend are crucial for businesses for several reasons.
- Improved Decision-Making: Having access to real-time data ensures that management can make timely, informed decisions based on the most accurate, up-to-date information. This allows businesses to adapt quickly to changes and optimally allocate resources.
- Enhanced Cash Flow Management: Real-time visibility into expenses and spending patterns helps in predicting and managing cash flow more effectively. This way, companies can plan for future expenditures, avoid cash shortages, and ensure financial stability.
- Cost Control: Immediate updates enable businesses to spot and address overspending issues promptly. Early detection of budget variances can help prevent small issues from ballooning into significant financial problems.
- Increased Transparency: This visibility can improve compliance, reduce fraud, and encourage responsibility and accountability for spending.
Faster Reimbursement: In terms of employee expenses, real-time updates ensure that reimbursements can be processed promptly, boosting employee satisfaction.
Budgeting Capabilities
Spend management software plays a vital role in budgeting by bringing structure, automation, controls, and deeper analytics to the process of managing company spending & cash flow. Here's how:
- Forecasting: With access to historical spending data, spend management software can help forecast future spending trends. This data-driven approach allows for more accurate and effective budget planning.
- Automated Processes: Spend management tools can automate various elements of budget management, including expense approval workflows and tracking spending against budget. This can save significant time and reduce the potential for human error.
- Reporting and Analysis: These platforms often include reporting and analytics capabilities, which can provide insights into spending patterns, identify cost-saving opportunities, and support strategic decision-making related to the budget.
- Compliance: By setting predefined spending limits within the software based on the budget, companies can ensure policy compliance and prevent overspending.
Integration: Spend management software can often be integrated with other financial systems, such as accounting or ERP software, ensuring seamless data flow and more coherent budget management.
By enhancing visibility, enabling real-time tracking, automating processes, and providing valuable insights, spend management software can significantly improve the effectiveness of budgeting and contribute to better financial management overall.
Proper Integrations
The integration of spend management software with accounting systems brings a multitude of benefits, proving to be essential for efficient financial management.
- Improved Accuracy: Manual data entry between systems can be prone to human errors and inconsistencies. Integration between spend management and accounting systems helps automate data transfer, eliminating entry errors and enhancing data accuracy.
- Time and Cost Efficiency: Manual data entry is time-consuming and requires considerable resources. By automating this process, businesses can save valuable time and reduce operational costs.
- Real-Time Updates: Integrations are crucial to ensuring that any changes made in the spend management system are automatically reflected in the accounting system, providing up-to-date, accurate financial data and cutting back on expensive investigations and troubleshooting.
- Streamlined Processes: Automated data transfer between systems streamlines financial operations, enhancing productivity and efficiency. For instance, purchase details can automatically populate within the accounting system for faster invoice processing and payment.
- Enhanced Visibility and Control: The integration allows finance teams to have a holistic view of the organization's spend in the context of broader financial data. This comprehensive view aids in better financial planning, budgeting, and control.
- Audit and Compliance: Having a seamless flow of data between spend management and accounting systems ensures a complete, accurate audit trail. It simplifies the audit process, supports compliance, and helps detect any anomalies or fraudulent activities.
In essence, the integration of spend management software with accounting systems is a strategic move that can significantly enhance an organization's financial operations, leading to improved decision-making, cost savings, and overall business efficiency.
The Divergence Of Spend Management And Expense Management
The principal distinction between spend management and expense management lies in their scope. Expense management is a tactical process focused on tracking, validating, and reimbursing employee expenses. In contrast, spend management offers a strategic, macroscopic view of the organization's total expenditure, incorporating (but not limited to) employee expenses.
For instance, a travel management company might use an expense management tool like Expensify to track its employees' travel costs, while simultaneously leveraging a spend management tool like Coupa to get a bird's-eye view of all business expenditures, including marketing campaigns, supplier contracts, and IT infrastructure investments. This holistic perspective is key to identifying broader cost-saving opportunities and driving process improvements.
Differences From 10,000 Feet
While spend management and expense management share common elements, they are not identical. Understanding their unique functions and applications is critical for organizations aiming to manage their costs effectively.
Spend management provides a panoramic view of all organizational expenditures (including expense tracking), fostering cost reductions and efficiency gains across all procurement processes.
In contrast, expense management hones in on employee-incurred costs to ensure policy compliance, prevent fraud, and streamline reimbursements. In other words, Spend Management solutions tend to be more cost-control focused and can be considered proactive cash management solutions.
A bit of an alien concept for many VC-backed SaaS businesses that are looking to grow at all costs, Spend Management is often overlooked in early-stage startups. The trigger point for implementing spend controls usually comes when an irate finance leader uncovers an overdue invoice for a marketing event from months ago, or an overly enthusiastic sales leader expenses a sales trip complete with steak and lobster dinners for a client without prior approval.
It’s not always Marketing and Sales’ fault, but it almost always is.
With the proliferation of SaaS tool stacks becoming a challenge for finance and IT teams to track, the initial foray into more rigorous processes often looks like tracking subscriptions.
In the current economic climate, businesses must skillfully navigate both these disciplines to fortify their bottom line. Leveraging the right SaaS tools can help organizations achieve this, providing an effective strategy for cost management and value creation.
The Quick Way To Better Margins
Instead of waiting until that irate executive calls you out for missing something, or worse, having to be that irate executive, you should get ahead of the curve, figure out what you’re missing, and delight your board & CEO.
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