Tips To Optimize Expense Management For Startups

Every business incurs expenses, so it's essential for all businesses to implement effective expense tracking and reconciliation. However, startups often focus solely on their total monthly expenditures. This oversight can result in overspending, miscalculating available cash, and failing to maintain financial records that are ready for audits.

Effective expense management should encompass:

- Clear expense policies

- Recording every business expense

- Reconciling bank statements with financial records

- Storing receipts

- Reimbursing employees

- Generating monthly expense reports

To gain a comprehensive understanding of your business’s expenditures, consider these four tips for improving expense management in startups.

4 Tips To Optimize Expense Management For Startups

1. Start managing expenses as early as possible.

Startup founders should begin tracking expenses from day one, even if it’s just logging transactions in an Excel spreadsheet. As your business expands, organizing past expenses can become increasingly complicated and time-consuming, so dedicating time to expense management from the outset will prevent future headaches.

It's also crucial to establish clear company policies regarding expenses. Ensure that your employees are aware of which expenses are acceptable and the procedure for documenting and submitting them.

Without precise and thorough expense records, you won't have a clear picture of your business's performance against key startup metrics, such as customer acquisition cost (CAC) and the ratio of customer lifetime value (LTV:CAC). Additionally, effective expense management helps you forecast how long your business’s cash reserves will last, making it a critical component of sound financial planning for early-stage startups.

2. To effectively manage your expenses, consider using dedicated software.

As your startup expands, implementing expense management software will help you track expenses, create reports, and handle reimbursements more efficiently. Many accounting platforms, such as QuickBooks and Xero, offer integrations with expense management tools that can automatically import, sync, and categorize your expense data, making it easier for your finance team to manage everything.

If you have several employees who need reimbursement for business expenses or utilize corporate credit cards, it’s beneficial to enhance your accounting system with specialized employee expense management software like Expensify. These tools can digitize paper receipts and gather data from various bank accounts, providing a comprehensive view of employee spending. They also feature user-friendly portals for your team to submit expenses for approval.

3. Organize your expenses into categories.

If you only look at the total expenses for the month, you won’t get a clear picture of how your business is really doing. Just because your total outgoings are less than your total income doesn’t mean your startup is financially sound. It’s crucial to categorize your expenses to see how much it costs to produce the goods you sell (COGS). If COGS is higher than the revenue generated from those goods, your business may not be sustainable.

Create categories for your expenses, including fixed costs (like rent, business insurance, and website hosting) and variable costs (such as paid advertising, legal fees, travel expenses, and business income taxes). Set these categories up in your accounting software to keep track of all expenses. While Generally Accepted Accounting Principles (GAAP) don’t provide strict rules on what expenses to include in each category, it’s important to establish a system that aligns with your startup’s business model and industry.

4. Limit overspending with detailed expense tracking.

Tracking expenses in a detailed manner helps you pinpoint areas where your startup might be overspending. For instance, the overall expenses of your sales team might seem reasonable, but if you analyze the data to see each salesperson’s individual costs, you might discover that some employees are spending significantly more than others while achieving below-average sales. It’s also beneficial to record the specific products your employees purchase instead of generalizing them as ‘software licenses.’ If several employees are buying the same product, you could save money by canceling duplicate subscriptions or negotiating a bulk discount.