An expense is an expense, right? In the sense that they all hit your budget, yes. In most other respects, not really. The team dinner check, the hotel block-booking for a trade show, the rush print job for the key customer visit, the dreaded expense that’s transferred in from another department, the CRM subscription...different types of expenses have very different life cycles. Some of them you can - and should - plan for. Some you need to know will happen anyway and accommodate in your planning.
There’s a pretty finite set of expense types that you will have to deal with. In this blog, we’re first going to deal with the life cycle of a typical expense, and then we’ll talk about how different expense categories fit within - or occasionally violate - this life cycle. Once you know this, you will be able to look at the expenses in your plan and budget with a fresh eye, and make sure you’re treating them in the way that’s most useful to you and your team.
The Expense Life Cycle: Estimated→ Committed → Charged → Reconciled
Estimated - We have to estimate expenses all the time: we know we’re going to need to book some rooms and pay for some meals at that upcoming event; we’re going to need a creative agency for our upcoming campaign; we’re going to publish some billboards downtown. When we know about these expenses in advance, we should estimate what the expenses will be. Planned expenses should have estimated amounts
Committed - Some expenses will be large enough and far enough in the future that we decide to negotiate the price with a vendor. We may sign a contract to lock in that price along with other terms. You might sign up a PR agency for a campaign, a creative agency to help you prepare for an event, or a new technology platform to automate some of your marketing processes. Once you’ve signed the contract, you have a more precise view of the cost than your initial estimate, and you know you’re really on the hook to pay that money (unless the vendor somehow breaches the contract). You haven’t been invoiced, the service hasn’t been delivered, but you know you’re going to be paying a precise amount in the future. Negotiated expenses should have very accurate cost estimates.
Charged - Expenses are charged, from the marketers’ perspective, once the service has been delivered, or once an invoice has been sent. Note - the expense should be marked as charged regardless of whether or not it has been paid by finance. What the marketing team should care about first and foremost is how much budget has been consumed and how much is left. Surprisingly frequently, we have met marketers who are concerned about when and whether a bill has been paid. When a bill is charged against your budget is important to understand - see our article on accruals vs cash-based accounting to see why. But when a bill is paid is a finance team concern that does not affect how much marketing budget is left. Our recommendation is that you treat invoicing as the trigger to mark an expense as charged. Likewise, you should treat credit card expenses as charged.
Reconciled - There’s more after charged? Yup. The majority of marketing teams receive a periodic report from finance that includes the accounting system view of all the paid bills that have been charged to marketing. Most of the time this will contain line-by-line confirmations of what you already know and have in your plan. However, the final accounting of expenses may well contain changes that you need to know about and pay attention to, e.g.
- You didn’t anticipate the sales tax for your finally negotiated price, and the cost that finance has to account for is a little higher than you thought
- Finance has charged something to marketing that is a surprise to you - it wasn’t in your plan. This might include some credit card expense that you didn’t know existed until now; an expense transferred in from another department; a change of date to an expense due to accruals-based accounting
In any case, it’s imperative that you snap your plan into line with the finance team’s report to ensure that your pretty-darn accurate view of the charged marketing expenses ultimately lock in to the financial system of record. The problem is, you can’t wait weeks or months for those finance reports or you’re flying blind, and it’s impossible to spend accurately, decisively, and at the right budget burn rate. So you need to develop and manage the highly accurate team-sourced view of the reality of your charged expenses, well ahead of the finance report. Demanding accurate, real-time expense status from the entire marketing team will enable you to make fact-based, accurate decisions on time.
Now we have our model, and understand the stages, we’re going to review the different types of expenses and how to manage them to best achieve your marketing goals. Not all expenses go all the way through this process; some just appear at different stages - even at the last stage. We’ll cover those at a high level in the subsequent section, and then we’ll capture them all in a single model.
When you enter your budget year, your budget will - should, at least - contain a number of expenses that are estimated, committed and possibly even charged and reconciled. You should try to get those into your plan in as much detail as possible so you have an accurate forecast of spend and a clear understanding of what’s left to spend. Examples of these include: campaigns that cross fiscal year boundaries; events that you do every year; subscription fees for data or technology; open PO’s for contractors, agencies, etc; corporate allocations; depreciation. Many of these expenses will be at least charged, and often reconciled on day 1 of the fiscal year.
The way it happens in the marketing textbooks, and some of the time this is the way it happens in reality.
If you have a new campaign, set of expenses, or an individual expense that you know is new for the fiscal year, you should enter it into your plan with the most accurate estimate of the expense that you can manage. It doesn’t matter if it’s imperfect - it’s much better to have something in your budget than nothing.
Examples include event expenses that are known in advance (e.g. block room booking, travel, meals, booth expenses, printing, agencies, etc); a digital campaign with an estimated spend-per-day ceiling; technology and data subscriptions; contractor retainers, and so on. There are many unplanned expenses that will crop up through the year, so the more thoroughly you can add your planned expenses into your budget, the better your visibility into what remains to be spent, and how close to over budget you are.
Planned expenses may be large enough that you have to raise a PO, and negotiate price and payment terms, or they may be small, or fast-moving enough that they are charged to a credit card without a PO or contract.
Planned Expense Buckets - You may plan an aggregate cost for a group of expenses and reserve budget for them. In Plannuh we call this an expense bucket. In this context, we use expense buckets to estimate the cost of a set of expenses for which it may not be possible - or a good use of time - to estimate the line-by-line costs for each individual expense. For example, you might budget an amount for travel every month even though you don’t know the precise make-up of taxi rides, train fares, air fares and car mileage that is going to come in. Such expenses will likely be charged to credit cards - maybe even paid by cash - and won’t be explicitly in the marketing plan with line-by-line precision. When you first see them as individual expenses, they will already be committed, or even reconciled, and they should be charged to the marketing budget you reserved for them as they come in.
No-one likes these, but they happen all the time. We normally become aware of these expenses when we receive our finance report. What’s unpleasant about these costs is that they are (1) unplanned by definition (2) often already charged and accounted for the first time you see them.
It makes a lot of sense to try to understand your surprise-expense run-rate if you can. If you don’t know what it is, look at some historical data and try to find expenses like this: accounting reclassifications (i.e. an expense is moved in to your budget from another department); corporate allocation you didn’t know about; someone did something bad with the corporate credit card and you have to eat the cost.
You may also encounter surprise expenses from unforeseen issues. You may have unexpected PR costs from a crisis management project (e.g. customer, press, investor and analyst communications after a data breach), for example, or you may have to make a major mid-year adjustment in your plan due to some major external factor, like a natural disaster.
When you get a surprise expense, you may conclude it doesn’t really belong in your budget. This is a very common occurrence, and it pays to be diligent - you have enough to worry about with paying another department’s bills.
Corporate and departmental allocations are frequent candidates to be disputed. You need to track the expense in your budget as if it’s going to be paid by you until finance agrees to move it.
You planned it. You know what date the invoice arrived and how much it was for. You know it belongs to marketing. So why can’t you find it in the expense report?
As we’ve written about 5 financial things you need to know it’s important to understand how your finance team accounts for expenses. Otherwise you may find that expenses you thought hit your budget in one time period actually were applied in a different time frame. This can lead to inadvertent underspend or overspend, even if you’ve been diligently tracking your expenses prior to interlocking with the finance team.
The Unified Expense Model
The figure below is the unified expense model. It shows when during the expense life cycle different types of expense may be initiated, the evidence for their existence, and the phases they will occupy until they are reconciled. It’s possible that your expenses won’t work exactly like this. That will depend on the specific policies and practices adopted by your company.
What is important is that you and your marketing team understand how your expenses are handled for your company’s marketing budget. If you understand this well, you will be able to both plan and execute your spending with a high degree of accuracy to achieve your marketing goals.
Diligent, accurate expense management is impossible in a spreadsheet. In Plannuh, it is highly automated, clearly visible, and easily editable.
Contact us to learn how you can get your expenses under control and maintain a real-time, accurate, team-sourced understanding of the state of your budget, and the complete life-cycle of your diverse expenses.
If you're interested in learning more, download our eBook on the Financial Fundamentals every Marketer Needs to Understand for Success.
Dan Faulkner is the CTO of Plannuh. Dan has degrees in speech and language processing and marketing. He got his marketing degree after running research for text-to-speech synthesis research at SpeechWorks (now Nuance) and must have been looking for something easy to do. You can follow him on Twitter and LinkedIn.