How Tesla Could Reduce Expenses More Efficiently
Elon Musk’s latest austerity crusade illustrates the difficulty many companies have organizing and controlling their expenses. There is a better way.
Earlier this month, Tesla CEO Elon Musk sent a company-wide email warning employees that a “hardcore” cost-cutting effort would leave no stone unturned in an attempt to stretch operating capital.
Coming just two weeks after the electric car maker sold $2.7 billion of stock and convertible notes, Musk wrote that with a quarterly loss of $700 million, the new capital earned Tesla only 10 months of runway. The path to fiscal sustainability would require strict cost-cutting, he explained, and that demanded a radical method of reviewing and approving business expenses:
Going forward, all expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account must be reviewed, confirmed as critical and the top of every page of outgoing payments signed by our CFO.
I will personally review and sign every 10th page.
Furthermore, Musk offered guidance on the ownership of expense approval, which seemingly had started to get cloudy:
Please examine closely every expense where responsibility is, or probably should be, assigned to your group. If in doubt, assume it is on your plate, so that we don’t have anything slip through the cracks.
The intent of the email was clear to employees and the press: Tesla is serious about the “Spartan diet” Musk has teased for the past few quarters.
But as a technical matter, his remedy is primitive—and very un-Tesla-like.
Pages of expenses? Signing off on random bits of company spend? Wasting the CFO’s time with expense review?
Setting aside the symbolic impact of the CEO ruthlessly interrogating small expenses, this method is a terrible way to control, review, or analyze business spending. It encapsulates the difficulty many companies have adapting traditional expense reports, which is fundamentally a legacy process, to today’s data-driven workflows.
There is a better way to manage expenses. Real time expense reporting is a method that is more efficient, easier to understand, and far better at cutting costs. Here’s how it could help Tesla—or your organization—get spending under control.
First principles expense reporting
Elon Musk is a big fan of “first principles thinking,” which is an approach to problem solving that builds innovative solutions from scratch instead of attempting to iterate on precedent. Tesla and SpaceX have used this method to achieve unprecedented feats of engineering.
Real time expense reporting exemplifies first principles thinking. At its core, the goal of expense reporting is to organize a constant, diverse stream of transactions in a way that lets managers understand, process, and control them as efficiently as possible.
In a paper-based era, the most efficient version of this process required employees to package a log of multiple transactions with their corresponding receipts, and deliver it all at once to the managers who needed to approve it. Thus, the expense report was born.
Today we have smartphones and location-based data and machine learning. There’s no reason to retain an artifact of that dated set of circumstances. In a first principles approach, real time expense reporting directly captures and organizes a continuous flow of expense data, without expense reports.
We’re not landing rockets back on earth, but real time expense reporting does cut review time by about 80%. It also opens up a number of possibilities that are only achievable with this uniquely granular, automated workflow—all of which would help Tesla’s cost-cutting effort.
The key to efficient review, analysis, approval—pretty much anything you need to do with expenses—is the ability to organize them flexibly.
Instead of flipping through “pages” of expenses, Elon Musk could instantly pull up all recent expenses in the most hard-to-control categories (travel, big-ticket vendors, etc) and view his spend strategically.
Warning and blocking rules automate the expense-by-expense austerity Musk seeks to impose. Instead of spending his time looking at every expense, Tesla’s CFO could quickly pull up the average of every expense category in the company’s books and create a rule that flagged any similar expense greater than that amount. Instantly, he’d filter out cost-effective expenses and focus on the outliers.
Based on Musk’s instruction to “if in doubt, assume it’s on your plate,” it sounds like Tesla needs help defining which expenses get approved by which departments and managers.
In real time expense reporting, there’s Approval Routing: automation that sends every expense to specific approvers. Everyone who needs to approve an expense gets a chance to do so. “Don’t have anything slip through the cracks,” as Musk put it.
Obtain complete information
In a similar email last year, Musk told his employees to “comb through every expense worldwide, no matter how small, and cut everything that doesn’t have a strong value justification.” Drastic and inefficient, sure, but good practice in theory.
Real time expense reporting has this use case covered. The same rules that prevent expenses over a certain dollar amount can also be used to require that every expense include the necessary information, such as the business purpose and proper documentation, which is what every controller uses to understand the “value justification” of an expense.
At Tesla HQ, they’d be able to see every part purchase tagged with the model it was for; every potpourri bowl associated with its specific showroom location; every single expense showing the audit trail of which managers approved it.
Because it processes expense data on a granular level, real time expense reporting serves as a search engine for expenses. Reporting is easier to pull and analysis yields more insight. Plus, highly structured data amplifies the effect of machine learning and business intelligence tools.
The cost-cutting CFO could search by expense category and identify which departments seem to be buying redundant supplies. Searching by vendor would reveal the total amount and nature of your relationship, and open the door to negotiated discounts. Long-term trends would show price movement in specific types of expenses, or in the spending of a particular remote office, or in any data the finance team wanted to track.
Review smart, not hard
Obviously Tesla’s finance team has already conducted exhaustive analysis of the company’s spend. But by managing expenses strategically—and with cutting-edge tools built with the same philosophy that they use—Tesla might not have to exhaust quite so much effort to rein in their expenses.
To see how real time expense reporting would work at your company (even if you’re not sending out dire fiscal memos “To: Everybody”) schedule a demo of Abacus below.