Understanding FinTech: Streamlining Expense Management for SMBs
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Chapter 1: The Challenge of Expense Management
Navigating the complexities of launching and managing a business in today's digital landscape is no easy feat. While entrepreneurs can now complete business registrations and open bank accounts online, the daily financial operations often lack adequate tools and support. Owners of small businesses frequently juggle multiple responsibilities, from invoicing and payroll to accounting. Despite the convenience of online transactions, effectively tracking and managing cash flow remains a daunting task.
In the early stages of a startup, the burden of expense management largely falls on the business owner. Even when a bookkeeper is brought on board, the processes of researching, reconciling, and reporting financial activities remain largely manual. Neglecting these tasks can result in costly tax audits and penalties. As businesses expand and start hiring, the complexity only increases, especially when employees have the authority to make purchases on behalf of the company.
This article delves into the realm of expense management for small to medium-sized businesses (SMBs), exploring the major challenges, the role of financial technology in addressing these issues, and the leading fintech companies that are innovating in this space.
Pulling Back the Layers in Expense Management
Expense management is commonly associated with tracking employee-initiated expenditures, including systems for authorizing, processing, and auditing these transactions. Typical expenses include travel and entertainment, where employees must adhere to company policies or obtain pre-approval prior to spending, followed by submitting proof of the transaction.
However, for small businesses, especially those run solely by the owner, the situation is different. In the initial year, there may not be a team to manage, but expenses are still numerous and varied. These can include costs related to digital marketing, software subscriptions, consulting services, home office supplies, and utilities. Thus, freelancers, consultants, sole proprietors, and other business types also require effective expense management strategies. Here are three critical areas that business owners and finance teams must focus on:
Reporting and Reimbursement
Newly established businesses often find owners making purchases using personal credit cards, a practice that is also common among employees and managers in established organizations. At the month's end, they must compile credit card statements and receipts to submit reimbursement requests. This process can expose personal financial information, as non-business transactions are often included in the reports.
Delays in processing reimbursements can create cash flow challenges for business owners. Prior to issuing credits, entrepreneurs or accounting teams must verify the validity of transactions and ensure all required documentation is submitted. This reimbursement process can take weeks, depending on submission deadlines and payroll cycles.
For solopreneurs, the primary concerns center on timely reporting, organized expense tracking, and maintaining records for tax compliance. Properly documenting each transaction and keeping records for potential audits is crucial, all while managing daily operations.
Tax and Expense Policy Awareness
What expenses should business owners properly report? Which employee purchases are eligible for reimbursement? The manual nature of reviewing months' worth of transactions can be burdensome. When employees and managers adhere to documented policies and maintain accurate transaction records, it minimizes the workload later on.
Challenges arise when policies are outdated or change frequently without proper communication. New transaction types may emerge that aren't covered by existing policies but should be recognized as valid expenses. Categories such as business travel, conference registrations, and marketing expenditures are in constant flux.
Companies are making progress in updating internal policies in real-time and posting them on employee portals for better visibility. However, there remains significant potential for modernizing the overall process through contemporary financial products.
Reducing Fraud
During the pandemic, nearly 20% of fraud incidents in the U.S. and Canada stemmed from reimbursing business expenses. Even with reduced business travel, the number of out-of-policy reimbursement requests surged, leading to more than 20% of reported fraud cases among small businesses.
The absence of updated internal policies and unrestricted corporate card usage contributed to rampant abuse and fraudulent activities. Beyond the financial loss and the resources spent on fraud investigations, companies face potential staffing issues when employees are terminated for misconduct, which can affect workplace morale.
Modern Financial Services Are Now Available
Financial technology is addressing these expense management challenges through innovative products and features. Fintech companies provide tailored banking solutions for business owners, employees, and finance teams, integrating expense policies directly into financial products from the outset. Policy changes are implemented immediately, minimizing disruption for employees and managers.
The customization offered by fintech solutions fills a critical gap in the expense management sector. Businesses can set transaction limits, restrict certain purchase categories and merchants, manage overall spending, respond to authorization requests in real-time, and automate reporting and reconciliation. The benefits for the entire organization include reduced instances of fraud and enhanced compliance with company policies.
Corporate expense cards play a vital role in this transformation. These cards can be virtual, with built-in security features activated at the point of authorization, allowing for real-time data monitoring and instant expense reporting. They can be single-use, reloaded, or activated/deactivated as needed by business owners and finance teams. For in-person purchases, similar functionalities can be applied to physical cards.
Transaction reporting can be automated at the point of sale, as expense management platforms can filter transactions based on merchant, category, amount, location, and date. Employees can upload receipts via an app, taking pictures and adding notes as necessary. This eliminates the need to retain physical receipts, enabling companies to generate detailed reports by employee, event, or month through robust reporting and analytic tools. Additionally, reconciliation processes can be set to occur automatically, providing business owners with regular updates.
Top Fintech Players in Expense/Spend Management
The expense management sector has seen a surge of companies developing programs over the last 5 to 7 years. Some software firms, like Emburse, are expanding into banking, while traditional banking providers, such as Brex, are adding expense management functionalities. This activity is largely driven by the size of the B2B payments market, which is estimated to be around $25 trillion in the U.S., with corporate spending cards accounting for nearly 5%.
Fintechs cater to various market segments, from solopreneurs to mid-sized enterprises and large corporations. Some companies choose to partner with banks and financial institutions rather than compete against them, especially in lending partnerships where licensing and capital are crucial. Notable players in this sector include:
- Airbase: Offers multiple integrations with banks, accounting systems, and workflows.
- Zact: A platform with multiple applications providing standalone features like bill payment and travel solutions.
- Emburse: Serving over 12 million customers across 120+ countries, this fintech provides solutions for businesses of all sizes.
- TripActions: Launched in 2015, it offers a comprehensive suite of products for spend management and travel services, supporting over 8,000 companies.
- Ramp: Gaining attention for its revenue growth, Ramp offers various free tools and extensive integrations.
- Mesh: A rapidly growing spend management platform that automates accounting tasks and streamlines financial workflows globally.
Outlook for the Future
With numerous options available, what does the future hold for the expense/spend management sector? Differentiation will be key. Standard features like end-of-month reporting, card issuance, and transaction decision-making controls are now commonplace. The next wave of fintech providers must innovate with unique offerings, such as bookkeeping integrations, bank connections, and enhanced employee access to platforms.
Data analytics and management functions are also ripe for growth. As with other areas of financial services, the overlap between functionality and transactions will likely increase in the coming years. Software embedded with banking capabilities is here to stay, allowing businesses to continue using their preferred accounting solutions without needing to link to external bank accounts. Checking, savings, or credit accounts can be opened and managed through the same software partner.
Expect to see continued variety and increased activity in the expense/spend management sector as venture capitalists and fintech firms watch the success of emerging companies like Ramp and the ongoing expansion of established players like Brex.
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