T&E Expenses - It's All About Control
Financial managers universally acknowledge that they worry about leakage around ‘soft’ budget items, such as corporate entertainment and travel expenses. Companies are able to negotiate with vendors for the raw components of their businesses; however, it is much more difficult to track and control whether travel and expense costs are within budget or not or whether employees are abiding by company policy or taking advantage of low visibility into travel and entertainment expenses.
Factors, such as whether or not employees are maximizing advanced purchase discounts, to seeing how many bottles of wine the sales team consumed during their team building meeting, are difficult to track in the travel and entertainment (T&E) spend category.
Companies have several options available to them in their effort to gain better control of travel and expense management. Expense resource planning (ERP) systems provide one stream of data. So, too, do expense management systems, which help both employees to complete their expense reports and accounting teams to facilitate general ledger reporting. ERP and expense management systems frequently rely on third-party software to auto-populate data – or companies rely on their employees to manually enter data to get load information into their systems.
It is very important for financial managers, individuals who purchase travel and career corporate travel management specialists to understand the variances – indeed, the vagaries – of these different systems. It is often the third-party systems that have taken the lead and developed solutions that can provide tangible returns to their corporate clients.
Collecting travel data has its own unique challenges because all the pieces of information that are required to understand what a corporation is buying and by whom do not reside in one place. Typical sources of travel data include travel agency reporting, the general ledger, any expense management systems, and corporate credit card reporting.
With regard to credit card systems, there are two types: the closed loop and the open loop. Theoretically, in a closed loop system, all detailed purchasing data passes through the credit card transaction processing channels and ends up on reports. However, when the corporation utilizes a network of travel suppliers that uses franchises, or non-participating locations (often quite numerous), this is not the case and information is dropped. Even the variance of a 5% loss of information can have a significant impact on the bottom line as savings on a well managed program drop straight to the bottom line. 5% leakage would be a high bar to benchmark against. It is a worthwhile exercise for corporations to identify and track this number. Frequently, corporations report that their leakage is closer to 30%.
In an open loop system, the transaction’s information is collected by the selling entity and then only a redacted record passes through the credit card processing channels. This limited financial information does not contain the detail and backup that is now required. Reporting on such information might supply basic cost information, but not the amount of detail required to understand the why, which drives the ability to analyze the data and take action on the travel program.
Corporations generally leverage only one to two sources of travel data to track and analyze their global spending – most find that one to two sources of data doesn’t provide a complete picture of travel spending. Are CFOs really in ‘control’ of travel spending in this scenario?
To evaluate and manage savings opportunities, let’s take a look at airline data. At a minimum, corporations should attempt to collect:
Recent advancements to some third-party systems include CO2 emissions figures, as well as real-time impact on budget allocations. Armed with the above-referenced flight data, corporations open significant analysis opportunities and gain the ability to proactively manage travel reservations, rather than react to travel spend after the fact.
With significant hotel price hikes of late, hotel spend is frequently the most expensive component of an employee’s trip. Yet, hotel spend often appears as a single line item. Increasingly third-party vendors and companies are using folio data to provide a more complete picture of hotel spending. When exported into an expense reporting tool, the time saved in completing expense reports is significant. Companies that require this level of detail for employees hotel stays have a far easier time with compliance issues. The travel agent may have the booking, the credit card company may have the financial amount, but only the hotel has the detail. Credit card companies are liaising with third parties to enhance the financial record with the booking detail from the agent, the hotel folio breakdown and the totals of the financial records. The same systems are now becoming important in the meeting management field, as hotel and entertainment expenses in this category can be very significant and often harder to control.
Obviously, all this detailed information is not required at the CFO level; but CFOs may want to requiretheir companies provide line managers with better systems that will enable them to track and control travel spending more effectively.
A further benefit of independent reporting tools available on the market today is that they provide controlled access on a need to know basis. Third parties also serve as an independent filter for the data, and can objectively report on the data accuracy and completeness – even benchmark it against their industry averages. There can be real danger in relying on data supplied by the party with whom one is negotiating.
Gone are the days when sum totals were effective to negotiate with travel suppliers. Contract managers need to be able to understand the impact of changes in policy, their likelihood of success, and the cost/benefits. They need to arm themselves with more and better data than the negotiator sitting across the table from them. With airline contracts they need to understand how their purchasing pattern provides unique benefits to a carrier. The simple days are over.
Gone too are the days of controlling budgets on a monthly basis, particularly travel budgets. It is all about real or near real-time reporting. Inventories are controlled on a speed to market basis. Those most nimble with their travel and entertainment budgets demonstrate wiser fiscal responsibility by expecting this from their travel managers.
So how can companies and CFOs feel more comfortable with their travel spending controls in this complex environment? Today, there are the two ‘Ds’ of travel reporting: drill down and dashboard. Most third party systems provide both. CFOs need a dashboard that, at a glance, provides expense to budget information. Such systems, through their drill down and report writing capabilities, can also be customized to address what the CFO wants to know: who is travelling, where, the costs, or are those divisions above or below budget?
The contract administrator and the travel manager have different needs in addition to a dashboard that shows expenses. They may wish to track performance against contract, the whereabouts of employees for security issues, as well as potential opportunities for new contracts or savings.
The financial reporting tools for T&E expenses have achieved a new level of sophistication, one that has demonstrated valuable ROIs for companies that make the investment. It is no longer business as usual in this arena. Monitoring and calculating savings, as well as addressing compliance requirements, necessitate systems that can gather and integrate information and provide tools that turn that information into bottom line profits. It is definitely worth reviewing your current systems and comparing them with new solutions now on the market.