By Sam Fetchero on July 15, 2020

Posted in Expense Management

Having accurate and timely data is critical to any finance team doing their job properly. And, you need both. If data is accurate but not timely, you may miss the window to take action. If the data is timely but not accurate, it’s worthless.

In the absence of accurate and timely data, people and organizations make poor decisions. What’s worse, they often don’t realize that they’ve made a poor decision, so they can’t course correct.

Many finance teams struggle with the accuracy and timeliness of expense data. One or both could be an issue:

  • Accuracy: Expense reports are submitted with errors, like charging expenses to the wrong categories and cost centers. The Global Business Travel Association estimates that 19% of expense reports are submitted with errors.
  • Timeliness: Expenses are batched into monthly reports at the end of the month, so managers and finance teams lack visibility into who’s spending what until it’s too late to take corrective action. Because these expenses are arbitrarily grouped, teams lose granular levels of control and the ability to create dynamic reports and approval workflows.

Let’s zoom in on accuracy. There are several drivers of inaccurate expense data:

  • Employees dread the monthly expense report. Usually, employees wait until the last possible second to submit their report and try to spend as little time on it as possible. Because they wait to submit the report until the end of the month, they often forget the context behind the transactions. For example, an employee incorrectly marks a $100 lunch expense as a travel expense vs. a meal expense.
  • Managers are often rushed at the end of month to review expenses, and they often just rubber stamp them. As a result, managers miss 90% of expenses that audit flags as potentially non-reimbursable.
  • The finance team doesn’t have the time to manually review every transaction or expense report. They of course do their best and spot-check, usually exporting the data to Excel and manually parsing the data to look for anomalies. However, it’s an impossible task to catch everything.

The impact is significant. Errors in coding expenses that start with the original expense report flow through to the GL. As a result, the business lacks accurate data to account for true costs, impacting every decision the company makes. Inaccurate records around how company money has been spent also creates challenges for future planning and budgeting.

For Comparison: Intelligent Coding in Medicine 

My wife is a physical therapist, and she and her team use SaaS software to document notes for both treatment purposes and insurance reimbursement. The software is intelligent and proactively recommends Current Procedural Terminology codes (CPT codes), the American Medical Association standard of diagnostic codes for medical services. When my wife sees a patient, the software automatically recommends the right codes to use based on the last treatment, simplifying the process for the doctor and reducing mistakes. For example, the software suggests “neuromuscular re-education” vs. “therapeutic activities” when my wife is entering a balance activity that she has done with the patient before.

If doctors can get proactive recommendations for their documentation and insurance submittal process across over 7,800 CPT codes, why can’t finance teams and individual spenders get recommendations too, across a less complex set of data? Why doesn’t expense management software have built-in features to improve the accuracy of expense coding? The challenge is that every organization has its own unique GL code mapping, so it’s difficult to predict the right match from the data.

The Challenge of Mapping Expense Codes

Every credit card transaction includes a merchant category code, or MCC for short, which determines the type of expense (e.g. hotel vs. restaurant) along with the amount of interchange fee that a merchant pays to the credit network. There are over 500 MCCs.

Some expense management software will attempt to map these MCC codes to an organization’s expense categories, usually for an added fee. However, this mapping is static and doesn’t reflect the dynamic nature of expenses. And, it lacks the granularity of accounting for transactions that organizations need. For example, the MCC code for restaurants needs to flow into multiple expense types. For Center’s internal expense management process, a restaurant transaction could flow into multiple expense categories, including:

  • Meals & Entertainment (non-travel)
  • Travel – Meals & Entertainment
  • Recruiting

So how do you map these MCC codes to the correct category on an ongoing basis?

Our customers struggled with this issue prior to moving to Center. Some solutions will default all transactions to a single category - for example, all restaurant MCC codes go to “Travel - Meals & Entertainment” automatically. This can create errors because employees often don’t know the difference between categories and therefore won’t correct the expense type manually. Other software solutions will force the user to manually select a category, which is a poor end-user experience and can also result in errors. What happens most often is that users will select a category that’s “close enough” and not spend the time to choose the proper expense type.

How Center Improves the Accuracy of Accounting for Expenses

Center has built a proprietary algorithm to properly categorize these transactions. Center uses the individual’s and organization’s historic data to automatically populate its best guess for expense type, saving the employee time up front and saving the finance team from later manual fixes during review and ultimately from booking incorrectly coded expenses to the GL.

Center looks at the transaction history for the individual to see if the employee has spent with that merchant before and how the expense was categorized.

For example, when I travel to DC, I have a favorite restaurant called Chinatown Express that I always visit for at least one meal before I leave. I would categorize this expense as “Travel – Meals & Entertainment.” On the other hand, here in Bellevue, WA, there’s a restaurant near Center headquarters called Fonte that makes the best coffee and offers a quiet place to interview potential candidates. When I take a candidate to Fonte, I categorize that transaction as “Recruiting.” Both use the same MCC code.

Center learns from my behavior, so the next time I visit Chinatown Express, Center knows to categorize that expense as “Travel – Meals & Entertainment,” and similarly, when there’s an expense from Fonte, Center knows to mark that as “Recruiting.” I always have the option to override the recommendation if the expense is for a different purpose, and my manager and the finance team can change it, too. This flexibility saves me time and effort, avoids mistakes, and gives the accounting team more confidence in the accuracy of the data while reducing the manual work to fix errors.

Center also looks for previous transactions at that merchant from other employees when recommending a category. For example, when someone else takes a candidate to Fonte for a coffee interview, Center recommends “Recruiting” as the expense type automatically based on my previous behavior.

The final factor Center considers when making recommendations is the data that comes through on the transaction from CenterCard, the connected corporate credit card. Center analyzes the text in the transaction data to provide an informed recommendation to the user for expense type.

This approach improves the accuracy of expense coding, which helps the controller, CFO, and executive team make more informed decisions about the business and maintain control over expenses. Controllers, CFOs, and executives have better visibility into what trends are happening and how spend is tracking daily, monthly, and quarterly. And when they need to get a deeper understanding of something, they can drill into those details immediately.

Want to see how Center can help streamline your expense process and improve the accuracy of your expense data? Sign up to see a demo of Center in action.