Gaining financial control: Identifying and eliminating expense leakage

Do you know how much money your organization is losing due to avoidable expenses? If not, you could be in for a surprise – and not the good kind.

Expense leakage is the loss of a business’s cash due to gaps in the expense management process. It occurs when a company loses money due to inefficient processes, fraud, non-compliance or uncontrolled spending. And it can have a massive impact on cash flow and operational efficiency.

Oren Geshuri, former T&E consultant for the Lyndon Group, reported the following in a CFO.com webinar:

• Roughly $10,150 per year per employee (12% of an organization’s operational costs) is T&E expenses. 
• 5% of that total T&E spend, or $507.50 per employee per year, is fraudulent.
• 6% of annual T&E costs are out of compliance due to duplicate out-of-pocket expenses.

Let’s say your organization’s operational costs are $1M per year. If 12% is T&E spend, that’s $120,000. If 5% of that $120,000 is fraudulent and 6% is out of compliance, that means you’re losing 11% – or $13,200. And that’s just on those two categories, fraud and non-compliance. 

How expense leakage affects the bottom line

Inefficient processes

Manual, time-consuming expense management processes can cause big time deficits for both employees and finance staff. That lost time has a monetary value. 

If a traveling sales executive has to keep track of paper receipts and a spreadsheet expense report, that’s time they could have used on closing deals. A finance manager might have to request missing receipts and correct report entries for that expense report. They’re also missing out on proactive activities like spending analysis or forecasting. 

These scenarios come with real costs. The Global Business Travel Association (GBTA) found that it costs $58 on average to process an expense report and $52 on average to correct an expense report. And almost 20% of expense reports contain errors and need to be corrected.

If your organization has 25 employees submitting expense reports twice per month, that’s 600 expense reports per year. You’ll pay $34,800 just to process those reports and $5,928 to correct those that have errors. That’s a little over $40,000 that the business could use on other activities. 

Fraud

Unchecked expense fraud can create a financial drain on businesses. Personal purchases mischaracterized as business expenses, false expense reports and inflated expenses are all examples of expense fraud. 

Let’s say an employee goes to a conference and stays the weekend after for personal travel. That employee might attempt to submit their personal hotel fees, which is a mischaracterized expense. Or an employee might create fake invoices to submit as a false expense report. A typical example of an inflated expense is inflated mileage reimbursements.

What may seem like small instances of fraud can add up to huge costs for companies. Global employee fraud costs nearly $5 trillion per year, and  over ⅓ of businesses lost an average of over $1M to fraud in 2023.

Non-compliance

“Out of compliance” can have different meanings for different types of organizations. Being out of compliance might mean that the company is not submitting regulatory reporting, or what they’ve submitted is incorrect. Both issues can bring hefty fines from regulatory bodies. 

Companies could also be out of compliance with donor requirements. If spending limits are set per category or merchant and the business goes over those limits, donors could pull funding. Or they might ask for a detailed analysis of spending, taking extra time from finance teams. 

Regulatory fines for non-compliance can range from thousands to millions of dollars. And revoked funding can mean the dollar value plus the loss of donor trust.

Unapproved spending

Unapproved spending covers anything that violates the organization’s expense policy. Maybe there’s a spending limit for client dinners. Or employees are supposed to make purchases in New Jersey rather than New York for tax purposes. 

All the onus is on the employee to comply with expense policy rules. That means keeping a mental accounting of what’s approved and what’s not, which is a hefty lift when you’re trying to do your job. 

Without spending controls, finance teams find unapproved spending after the fact. Then they are forced to make a decision: ask the employee to cover the unapproved spend, or have the company cover it. And this is definitely the norm: ⅔ of finance leaders reporting that employees frequently violate travel & expense policies.  

Eliminating expense leakage with automation and financial controls

Automate manual work

The biggest contributor to inefficient expense management is manual work. Employees keep track of paper receipts, submit reports in spreadsheets and play phone tag with finance staff as questions arise. Finance teams constantly chase receipts and GL codes, correct errors and manually upload data to accounting systems. 

All that manual work adds up. It takes an employee an average of 20 minutes to complete an expense report, and finance staff need 18 minutes on average to correct an expense report. If your company processes 21,000 expense reports per year at 30 minutes per report, that’s 7,000 hours. And that’s not even counting correction time. 

Automation and AI can take that massive manual load and transfer it to machines that are much faster than humans. Employees can snap pictures of receipts via their mobile phone and have AI match them to transaction details. Finance teams can pre-program GL codes that auto-populate with each transaction. And they can create compliance rules that block card usage until receipts are uploaded.

Create rigid spend controls

Fraud, non-compliance and unapproved spending can also be huge contributors to expense leakage. Employees can make purchases and submit expense reports for whatever they want. Non-compliance with regulatory requirements can cause large penalties. And unapproved spending drains cash on unauthorized purchases. 

Spending controls empower finance teams to prevent unauthorized purchases before they happen. Admins can whitelist merchants that are approved and block those that aren’t. They can also set group-specific spending limits, pre-approve certain types of purchases and create spending rules by location or even day and time. And automated approvals also allow finance teams to pre-program approving managers into the expense management process. 

Leverage a range of payment options

Limited payment options are frequently a source of expense leakage. Requests for petty cash can be a source of losses. Employees may overestimate what they need and pocket the rest. Or staff might be using personal credit cards for business purchases without getting budget approval. 

Expense management platforms frequently offer a variety of payment options. Petty cash can be replaced with reloadable prepaid cards. Unique virtual cards ensure secure transactions that are only used per vendor (or one-time use). And corporate cards offer business travelers the flexibility of a credit line on the go.

Access real-time expense tracking data

Expense leakage might be slipping through just based on the lack of visibility. With manual processes, finance leaders can only see a backward-looking view. If an expense policy changes mid-cycle, finance staff can only see who has complied and who has violated the policy after the fact.

With real-time access to expense details, finance teams can see transactions as they happen. Maybe there’s a new sales push that doesn’t have a lot of spending controls around it. Finance leaders can observe spending in real-time, and then communicate with the sales team about what’s ok and what’s not – and create new spending rules as they go. 

PEX: the smarter choice for financial control

With PEX, customers have the ability to eliminate the majority of expense leakage. Automated receipt capture through our mobile app, AI-based receipt matching, pre-programmed GL codes and auto-syncing to accounting platforms are just a few ways we increase efficiency for our customers. ¼ of customers save over 10 hours per month using our platform (PEX customer survey, 2023).

PEX’s custom spend rules combined with our automated approval workflows provide a rigid framework for spending that prevents fraud, increases compliance and eliminates unapproved spending. Almost 2/3 of PEX customers have saved money using our custom spend rules (PEX customer survey, 2023). And our prepaid, virtual and corporate card options offer varying payment methods for each employee’s spending needs.

Learn how PEX’s automations and controls can help your organization get rid of expense leakage. Contact us today for a customized demo.