The Elastic Risk Approach to Expense Management
The expense report as we know it is obsolete. There was a time, before accounting software, when the easiest way to submit receipts to the finance team was to tape them to pieces of paper and submit them in batches. When manual processing was the only option, a workflow based on expense reports made sense.
Since then, expense reporting has gone digital. Software is better at submitting and reviewing expenses than humans ever were. Yet for some reason, expense reports are still around, clogging up workflows.
It’s time to fix that. A new method of reviewing and approving expenses uses automation to create, review, and report on expenses—and it works entirely free of the clunky old expense report. It’s called the elastic risk approach. Here’s how it can transform your expense management.
Expense reports are creating problems
Every expense submitted to the finance team deserves a certain amount of attention before being approved or sent back for edits. The optimal level of that attention is determined by a number of factors, but overall, it is a matter of how much risk the expense potentially exposes the organization to.
Imagine you’re asked to approve an employee’s $5 coffee. There’s not much consequence if you do, even if it is out of policy. When that same employee submits an expensive client dinner with lots of alcohol, however, that demands a closer look. There’s a higher risk exposure with that expense, based on the context.
Let’s illustrate the concept.
What we see is that efficient processing means spending as much time on each transaction as it deserves. This is the goal of expense review and approval: being safe and responsible while wasting as little time as possible.
Here’s the challenge, though. Until you look at each expense, you don’t know how much risk it threatens or how much attention it needs. That’s effectively the roadblock you get with an expense report. It’s a black box of items that present varying — and totally unknowable — degrees of risk. It’s a package of transactions you can’t contextualize properly until they’ve all been reviewed.
The black line below is an expense report with five transactions within it. When you get the expense report, you know each of the transactions is somewhere along that line. You just don’t know where.
Once you open the expense report and see what’s inside, you can see where each expense lies.
You’d prefer to just approve those four low-risk items and spend additional time following up with that one risky outlier. But since these expenses are trapped in a report, you don’t have that luxury. You have to reject the entire report and send it back through the process. This adds insult to injury. You’ve already spent more energy on those low-risk items than you would have liked. See how far above the optimal curve they are? Now you’ll have to look at them again when they’re resubmitted, doubling your wasted time.
What if there was a way to drive those low-risk items downward on the graph, allowing you to touch them just once and free up the bandwidth necessary to devote more attention to the suspicious expense?
That level of optimization is possible with the elastic risk approach to expensing.
Stop wasting time
According to a sample of approximately one million expenses processed through Abacus in the past year, 83% of all expenses are approved exactly as they were submitted. In other words, finance teams only make changes to one in five expense submissions.
That means there’s a big opportunity for optimizing your workflow if only you know which 17% of expenses you have to spend time on — before they appear in front of you.
With an expense report, you don’t have the ability to figure that out. It’s not easy to re-group expenses when they’re trapped in arbitrary, opaque containers. But if you free expenses from reports, and instead had individual transactions flow into the system, you could start reviewing and approving expenses more precisely.
Achieving process efficiency
Expenses that are not confined to reports flow into the system dripping with data: category, amount, project, client, transaction versus submission date, and so forth. That makes it instant and simple to view and even approve expenses in endless sortations.
This is a big deal. It’s like going from flipping through library books to searching their contents on Google. Suddenly, it becomes effortless to report on all the expenses submitted by the team attending a marketing conference. Or to see how much your employees are collectively spending on a particular category of purchase, across all their various vendors. Your analysis becomes highly targeted.
With granular insight comes the ability to set granular controls. When a new expense is submitted, you’ll already know a great deal about previous expenses similar to it — including how much risk they carried, and how much attention you wanted to pay them. You can then configure your system to process them with the level of review attention they deserve.
Let’s walk through an example.
One day, you wake up asking yourself a question: am I spending too much time reviewing lunch expenses for employees on business trips?
Since your expense management system doesn’t use expense reports, you instantly pull up a filtered view of all employee travel lunches submitted in the past six months by employee. With the help of the system’s analysis, you notice that the vast majority of these expenses are coming in under $25 — and that in most of the occasions when you ask someone to resubmit, it’s because they need to write a note about the expense.
You and your manager agree that reviewing these expenses as carefully as you currently do is not a worthwhile use of your time. Here’s where you are.
The solution is to set the system’s automation to take on a greater role in reviewing and approving these expenses.
You create two new automated rules in your expense system. One blocks employees from submitting their travel lunch expense if they don’t have a note. The other auto-approves travel lunch expenses that have complete information, are under $25, and have not exceeded $100 per month for each employee.
Instantly, you’ve just reduced the amount of time you spend reviewing travel lunch expenses with only a tiny bit of added risk.
Here’s where you’re at now.
With a few changes to your policy, you’re now spending the appropriate amount of effort reviewing and approving travel lunches.
Risk curves for every type of expense
You don’t have to stop there. You can achieve this kind of optimization for all your expenses by defining an efficiency curve for each kind of expense, no matter what criteria you group them by.
There isn’t a one-size-fits-all efficiency curve. Different finance teams have different priorities. Fortunately, elastic risk expensing gives teams enormous latitude to define their optimal levels of efficiency.
Abacus has a customer, for example, who drives their expense policy through culture rather than enforced rules. They deliberately want to trust their employees to expense responsibly. So for that team, their optimal efficiency curve will look like this.
This means they want to spend little-to-no energy worrying about most expenses, and only want to commit attention to stuff that could cost a lot of money and headache if it’s done improperly. (After all, even that company wants to be able to stop an employee from expensing their vacation to Hawaii.) Overall, they put less value on avoiding expense risk.
For a more conservative company, their curve might look like this.
This finance team doesn’t mind spending more effort preventing anything remotely capable of exposing them to liability. They want to closely review every expense before approving.
These curves become extremely powerful when they’re drawn at granular levels. A company could have a different efficiency curve for each project. You could have one for the sales team and one for the executive committee. An efficiency curve for the CEO’s dinner expenses (you’ll let more slide) and an efficiency curve for client travel. The opportunities for customization are endless. And they’ll always change in response to your needs.
Embrace efficiency. Get rid of expense reports.
Finance teams that use expense reports generally see them as the key to responsible, informed expense management. In actuality, expense reports are holding them back from an optimal efficiency.
With an elastic risk approach to expense management, you’ll be able to optimize your process and gain previously unavailable insights. Essentially, this approach allows finance teams to systematize their expertise in risk modeling to T&E reporting for the very first time.