May 12, 2022
5 mins read

Expense categories: Why you need them and how to use them

Trish Toovey - Content Director at Payhawk - The financial system of tomorrowTrish Toovey
Accountants reading our Official Guide to Expense Categories for Your Business
Quick summary

Expense categories can help businesses stay in control of finances. They help maintain more precise budgeting, forecasting, and speed up accounting; especially when you can customise the labels to sync up with your accounting.

Table of Contents

    Submitting expenses

    We classify things in order to understand them.

    Humans and now tech, thanks to machine learning will typically organise things by grouping them together for analysis, manipulation, and understanding. Whether it’s animals, trees, or man-made objects, we classify everything by default.

    In business, of course we do the same thing. We use data to understand and make decisions. The better data, the better the decisions. By combining categorisation and data gathering, businesses can allow teams to make informed decisions and achieve their objectives.

    What are expense categories?

    Let’s say you’ve already taken the first step to managing expenses in your company and you’re using company cards. Providing your company cards are connected to sophisticated software you should have good visibility of expenses and how much money is being spent.

    When an employee makes a payment, the supporting software allows it to be classified into set categories such as “Advertising”, “Tools”, “Meals”, etc. These categories can be labelled to match the way the budgets are drawn up allowing for easy analysis and reporting.

    Easily track & manage project and team spend.

    What makes Payhawk expense categories special?

    Expense categories need to be flexible and adapt to a business’ needs. Many expense management platforms are so outdated that they include categories that aren’t useful for many businesses or don’t really reflect the way employees work. This approach can then become more than an annoyance; it can lead to mistakes and employee disengagement within the finance team.

    Payhawk allows the finance team to customise the label names, so that they reflect actual projects, enabling faster analysis, and more relevant spend categorisation.

    Also, these categories can sit in a hierarchy, for example, “Marketing” could be the main category, with subcategories underneath like, “Marketing events”, and “Content creation” to allow for further categorisation.

    Benefits of expense categories

    With Payhawk, when employees submit expenses, they can pick from any category you create (with nested categories also available).

    By having a customisable and granular way of collating team spending, the finance team get great benefits:

    Easier to set business budgets

    The finance team sets up business budgets for the financial year by relying on each team’s planning. Teams are able to get approval on the budget for the year, but they won’t take into account the added expenses of meals, transportation, entertainment and other “petty cash”.

    Having this data is useful because it allows finance teams to forecast a lot better, as shown by the experience of one of Payhawk’s customers.

    As an example, let’s say that you know the sales team spent €2,000 on transportation to visit clients, whilst the account management team spent €4,000.

    If this year the sales team has doubled, you can budget €4,000 on transportation for the sales team. And the account management team? Maybe now that a few clients have left perhaps €2,500 would be enough.

    With accurate expense categorisation, setting budgets will feel more like a precise science.

    Easier and faster analysis of team spend

    Maintaining financial control is so much easier for the finance team. By having the right data, there is a good view of actual company expenses.

    This data enables finance teams to also work with the company leaders to ensure team spend is tracking well against budgets.

    It can also make things easier if the business needs to curb spending, for example, if some revenue stream has been lost. Categorised expenses enable businesses to prioritise where costs need to be made.

    Pre-accounting automation

    By setting the names and descriptions of the categories, the finance team can achieve total alignment between the business and accounting. If administrators link each expense category to their bookkeeping account number, then pre-accounting is automated! Controlling teams will view this data in the exported excel files. They can start right away analysing and slicing the numbers.

    Tips when labelling expense categories

    Expense categories are customisable in Payhawk to suit every possibility. Here are a few tips on how to label those categories:

    • Discuss with heads of teams what projects are happening so that categories can be set to capture meaningful data. Consider also regular happenings such as Christmas Parties.
    • Keep labels up to date to stay relevant with the employees, who will appreciate a more user-friendly experience too.
      If in doubt, include. Not being extensive enough will lead to miscategorisations as employees won’t be able to pick the right label.
    • But; don’t make it too complicated either. This could also confuse employees who might also pick the wrong category.

    Customisable expense categories can simplify your expense management and accounting processes. But it’s just one of the features Payhawk customers find valuable. Click here to download our guide to closing the month and learn more about useful expense management features and hear insightful tips from expert CFOs.

    Or, if you’re ready to discuss how customisable spend categories could change the way you build budgets, book a demo.

    FAQs

    How can I sign up and try out Payhawk?

    We offer all our prospective customers the opportunity to Book a Demo so that we can share all of the features of our expense management system before you decide whether it’s the right solution for your business. If you have any questions about our software or how it can benefit your organisation, please don’t hesitate to contact us. Our team would be more than happy to discuss your specific needs and provide you with a demonstration of the software.

    How will expense categorisation on Payhawk allow me to manage company expenses more efficiently?

    Payhawk’s expense categorisation feature will enable you to manage company expenses more efficiently by providing you with a clear and concise overview of where your company’s money is being spent. As a CFO or member of a finance team, this will give you valuable insights into making informed decisions about where cuts can be made in future budget periods or which areas of expenditure may need more attention. In addition, this feature will also help to ensure that all company expenses are correctly accounted for and allocated to the appropriate department or cost centre.

    How can expense categories be used to optimise future budgets?

    You can begin to optimise future budgets by understanding which categories of expenses are the most costly for your company. For example, if you find that travel is a significant expense for your organisation, you may consider ways to reduce this cost in future budget periods. This could involve looking at alternative methods of travel or negotiating better rates with travel agents or providers.

    Why are expense categories important for CFOs and finance teams?

    Expense categories are important for CFOs and finance teams because they allow you to identify how your company’s budget is being spent by activity. This will allow more clarity when it comes down to analysing company budgets and assessing where employees are spending the most. In order to maintain a good level of control over your company’s finances, it is essential to understand where each penny is being spent. This can only be done through careful categorisation of expenses.

    Trish Toovey - Content Director at Payhawk - The financial system of tomorrow
    Trish Toovey
    Senior Content Manager
    LinkedIn

    Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.

    See all articles by Trish →
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