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

Submitting expenses

We classify things in order to understand them.

Humans and now tech, thanks to machine learning will typically organize 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 categorization 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.

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 Many expense management platforms are so outdated that they include categories that aren’t useful for many businesses or don’t really reflect the way employees work.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 customize the label names, so that they reflect actual projects, enabling faster analysis, and more relevant spend categorization.

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 categorization.

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 customizable 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 categorization, 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. Categorized expenses enable businesses to prioritize 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 customizable 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 miscategorizations 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.

Customizable 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 customizable spend categories could change the way you build budgets, book a demo.