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The Definitive Guide to Spend Management

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04

Three functional areas of spend management.

A spend management platform combines the following three functional areas into one unified system with consistent workflows to capture all non-payroll spend:

1. Accounts payable.

Accounts payable solutions have been available for decades and have focused on helping accounting teams automate the processing of invoices using checks, ACH, and wires. Companies like Bill.com have led the field and many of the GL systems have some AP functionality. The limited scope of these systems, however, reflects the type of incrementalism that design thinking shuns.

While legacy bill payment functionality is a vast improvement on manual processes, much of distributed spending occurs outside its bounds. The unfortunate result is that companies must run multiple systems for non-payroll spend — one for corporate cards, one for invoices, and one for employee reimbursements — which creates the need for reconciliations, slows down month-end close, and makes it difficult to report on real-time spending. Accounts payable found in spend management solutions eliminates manual tasks that multiple systems create.

AP core functionality.

Spend management systems provide comprehensive accounts payable functionality found in bill payments products, and more.
  • Handling traditional POs and invoices.
  • Intelligently building invoices with context from emails.
  • Bill creation from an invoice using OCR, or manually.
  • Amortization schedule options.
  • Vendor portals.
  • Vendor credits.
  • Scheduling payments via check, ACH, virtual card.
  • International payments.
  • Support for international subsidiaries.
  • W-9 compliance settings.
  • Auto-categorizations and invoice splitting by category.
  • Direct syncing to a GL.
  • Receipt compliance settings.
  • Reporting of spend in real time by type, department, and individual.
The cashback hack.
Consolidating card spend within a broader AP payment system creates efficiencies for AP managers by giving them access to all payment types. Using virtual cards to make payments that would normally be paid by check or ACH, means companies earn cashback instead of paying fees. The earnings generated from his hack may even position AP as a profit center!
Vendor portals.
Vendor portals facilitate communication between users and their vendors. They provide a channel for POs and invoices, and they also can be customized to send alerts (e.g., with regard to missing documentation) to both parties. A vendor can use the portal to submit an invoice, provide account information, and track payments due to them. Spend management systems offer this functionality.
Invoice inbox.
When an invoice arrives in a finance team's inbox without any context, it places a burden on the team to track down information. A powerful tool, then, is the invoice inbox that automatically captures information about an invoice (e.g., the entire email thread connected to an invoice and any additional files that were shared, like W-9s) to provide holistic context for the creation of a corresponding bill. An invoice inbox serves as a helpful repository for teams to automatically route invoices for the same vendor for easy processing.

GL updates keep the ledger current.

When automation is applied to a full range of activities, including approval workflows, invoice handling, amortizations, and syncing all transactions to the GL, time is freed up from manual tasks. Because the GL is kept current, and captures centralized and decentralized spending, reporting is in real time, and supports better decision-making. Spend management platforms allow finance teams to move from a laborious and lengthy month-end close towards the idea of a continuous, or rolling, close.

2. Corporate cards.

Corporate cards have been a staple of the business world for decades, and are widely used for distributed spending. These payment instruments have been evolving to overcome some of the risks and disadvantages inherent in their original design; their more modern capabilities include control settings and data transfer, making them an important functional area of a spend management platform.
Drawbacks of physical cards:
  • Often shared, which can cause confusion about who used a card.
  • Can be used for a variety of purposes and vendors, complicating reconciliation.
  • Higher risk of fraud compared to other payment methods.
  • Don’t sync directly to the General Ledger.
Despite these drawbacks, physical cards will remain as a preferred, or even necessary, payment method for the foreseeable future, such as when an employee pays for dinner on a business trip.

Traditional cards.

AMEX pioneered, and has long dominated, the corporate credit card market by making something designed as a B2C product available to businesses. But these traditional cards fall short of meeting the needs of company spending.

As previously discussed, it’s difficult to get visibility into card usage (especially more traditional credit cards) until after a card statement is received, which makes it harder for companies to control their budget. The problems generated by card use have motivated innovations by card suppliers to better fit the modern company.

Controllable cards.

Spend management platforms, as well as some more niche modern payment solutions, have addressed the issues of traditional cards by connecting their proprietary cards to software that enables control settings and recordkeeping. The benefits of these controllable, software-powered cards are myriad. They are powerful payment devices that give managers insight into spending, and the means to influence it, before the end of the month.

Beyond simply saving administrative time, these cards also have powerful functionality for employees, such as the ability to request control setting changes, or the ability to lock a card when necessary.
But even these cards can be improved upon. Enter virtual cards.
Corporate and Virtual Cards
Card reward programs.
Despite these drawbacks, physical cards will remain as a preferred, or even necessary, payment method for the foreseeable future, such as when an employee pays for dinner on a business trip.
Benefits of control features on cards:
  • Better recordkeeping, with a digital audit trail of spending details.
  • Greater control including:
    • Total spend limitations.
    • Vendor limitations.
    • Time limitations.
  • Streamlined reconciliations because:
    • Transaction data is captured in an easy-to-manage space.
    • Auto-categorization technology can be told — or predict, in more advanced systems — how to categorize transaction for the GL.

Virtual cards.

Digital payment innovations have given rise to virtual cards. They allow the card user to generate a one-time card number to make a payment. They have several benefits over physical cards, supporting greater spending efficiency, and may eventually replace them altogether.

Virtual cards are easy for employees to use and, largely because they use pre-approval workflows, they help managers control their budget. After receiving approval for a purchase, a quick tap generates a card number, and a simple share sends card details to a vendor securely. They can be managed entirely from within a unified spend management platform and, helping to reduce fraud, can be generated uniquely for:
  • Specific vendors.
  • Specific initiatives.
  • Specific employees.
  • Specific departments.
  • One-off purchases.
  • Specific expiration dates.
When a virtual card is created, the GL category for that purchase is specified and flows directly to the GL for automatic booking. Further still, virtual cards are tied to the full approval workflow, meaning a complete audit trail of purchase approvals is available to ensure compliance with company policies.

For the accounts payable team, virtual cards are available as another payment type, like checks or ACH. Virtual cards are accepted by anyone who accepts credit cards. Having this payment type readily available to AP managers gives them an opportunity to earn (cashback) instead of pay (ACH fees or check costs).

For companies, virtual cards provide a level of efficiency, visibility, and control that is unobtainable with traditional payment types.
Debit vs. credit:
There are two types of corporate cards: prepaid debit cards and credit cards. The prepaid model is particularly attractive for funded startups and other cashflow-positive companies who do not rely on credit cards for short-term cash management. Debit cards can often carry a higher percentage of cashback. Spend management platforms accommodate both types of cards.

Modern cards are a software product.

Corporate cards are increasingly differentiated by their software, both for the power of the control settings and the ability to pull data from card use. While many cards offer approval-based activations and some control settings (e.g., size and maturity of payments), advanced versions of cards automate two time-consuming back-office processes: receipt compliance and card reconciliation.

Finance teams often find themselves having to enforce receipt compliance by chasing colleagues for documentation. A spend management platform automates this by sending out reminders for missing receipts and, if selected as a setting, freezes card use until receipts have all been properly attached per company policy. This shifts the enforcer role from being played by the finance team to being handled by the system.

Reconciling credit card statements has long been a dreaded task for finance and accounting teams. Assigning categories and, for a shared card, even determining who made a purchase, can be difficult. And syncing data to the GL by pulling CSV files creates the need for manual work.

The virtual cards on a spend management platform do not generate a card statement — instead, they create a full audit trail and sync directly to the GL. Such automation-derived efficiencies free up finance teams for more strategic work, and multiply the work capacity of any given team size.
Surprise benefit of visibility and control.
A healthy spend culture is a key benefit of a spend management system. Increased visibility of budgets leads to greater accountability and a shared sense of budget ownership. The right controls allow managers to empower their employees to make purchases when necessary. It eliminates awkward conversations about whether monies spent qualify as reimbursable expenses. It also provides, to both employees and managers, peace of mind that spending complies with approved policies.

3. Employee expense reimbursements.

Many companies allow, and even expect, their employees to use personal funds to purchase company related items and services. Using personal credit cards for travel, on-the-go expenses, or to purchase one’s own software tools is commonplace in small to midsize companies. Employees then provide documentation in order to be reimbursed, and accounting departments must book the corresponding business expense, then make a non-taxable payment to the employee. Some companies make this payment through their payroll systems, which can create confusion for income being reported on a W-2.

Expense management software.

Expense management software, like Expensify and Concur, were built to handle reimbursements, which represents an important, but sub-section, of total non-payroll spend. These systems focus on expense reporting, which is notoriously cumbersome, both for employees inside and outside of the accounting team. These solutions have made the reporting of expenses easier for employees, and they have largely automated the workflow with smart rules that reflect company policies for approving employee spend. Some have advanced invoice ingestion capabilities, where OCR technology can read key details to automate inputting and avoid errors.

Still, accounting teams find themselves having to chase down receipts and transaction details to make sure that the entries are properly recorded. Delays in expense reporting can also force a restatement of the financials from one period to the next.

While spend management systems eliminate the need for expense reporting when using the platform’s cards, companies still, on occasion, need to reimburse an employee for out-of-pocket expenses. Whether it’s a matter from time-to-time necessity of using personal funds, or that companies prefer to give their employees the option to use their personal cards to earn rewards on purchases, accommodating reimbursements is important. When part of a spend management system, the process for reimbursements conforms to the same request and approval workflows, accounting automation, and real-time reporting that apply to all non-payroll spend.

Handling reimbursements is another good example of the principles of design thinking at work. A spend management system is agnostic with respect to payment type, handling them all — personal cards or personal checks (via reimbursements), corporate cards, checks, ACH, and even vendor credits — all from one unified system. Including everything means that finance teams don’t have to make adjustments to the books. The flexibility this offers a company is substantial: one system to give visibility and control over all non-payroll spend regardless of its origination.

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The Definitive Guide to Spend Management

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