An annual budget is the corporate equivalent of a New Year’s resolution. Both are well intentioned, and both rarely work out as well as planned. Kenneth Merchant, Deloitte & Touche LLP chair of accountancy at the University of Southern California, wrote in the Wall Street Journal about why it is that “almost all companies prepare a budget ... and almost all companies do it wrong.”
At many companies, the budgeting process, “mainly serves to distract managers from doing their jobs.” It involves “endless meetings where managers crunch and discuss numbers that have long since gone out of date,” and “budget targets [that] are almost universally defined in backward-looking financial terms and as a result don't reflect what successes—or failures—an organization may currently be having.”
In the ideal world, an annual budget would translate a company’s strategic objectives into financial terms, accurately forecasting how funds will be allocated and earned over the course of the next year. But in practice, annual budget projections often turn out to be inaccurate, even counterproductive. Merchant writes that annual budgeting can create perverse incentives for managers to “manipulate numbers in their budget reports to inflate results and artificially achieve short-term targets,” or “spend money wastefully so as not to see a reduction in next year's budget allocation.”
Travel and entertainment (T&E) is one of the most difficult of all expense categories for which to budget. As any frequent business travelers can attest, it’s not always possible to plan a trip more than a week in advance, let alone project a year of travel for an entire organization. Not only is overall travel volume unpredictable, the cost of any given trip is highly variable based on market rates and demand. Moreover, the amount a company spends on travel depends on thousands of purchasing decisions made by individual employees: unlike other procurement spending, travel spending is decentralized, and hence, harder to control.
T&E isn’t just a complex expense, it’s a significant one. A survey conducted by JP Morgan Chase* found that for a typical organization, T&E accounted for 10 - 12% of annual budget, and was second only to payroll as a business expense.
Though it’s challenging to forecast travel expenses on an annual basis, it’s not impossible. Formally analyzing how employees are spending on their business trips will allow for more accurate estimates of the company’s overall cost structures.
Here’s an overview of how to incorporate travel expenses into an annual budgeting process.
Know Current Travel Spending
Budgeting for upcoming travel expenses starts with an audit of the previous period. Data on travel spending can be collected from two main sources.
A travel management company (TMC) provides detailed information on travel purchased through an officially approved channel, such as an online booking tool (OBT) or over the phone with a corporate agent. TMC data is thorough, but not comprehensive. It does not capture spending that occurs when employees book on the open market - either directly with suppliers, or on a site like Expedia.
Expense reporting systems can help close data gaps. Though less detailed than reporting provided by a TMC, employee expense reports should contain information such as vendor name and expense purpose, which can be used to identify travel-related spending. For some companies, the most important takeaway from their review of historical spending is that low travel policy compliance and a flawed expense reporting process have compromised data capture.
Forecast Travel Volume
T&E is usually projected by department within the larger category of Sales, General & Administrative (SG&A) expenses. Historical figures for trip count and/or travel spending is used to come up with a per-employee average per month. Estimates of upcoming travel spending is based on these averages, and adjusted to account for expected changes in headcount. Travel volume follows from a company’s overall growth and sales plan, so prior-year averages should be modified if there will be a significant change in strategy - for instance, a shift to or from a territorial sales structure, or expansion into an overseas market.
As a starting point for these projections, it’s useful to understand the most common reasons for employee travel. One study from the Global Business Travel Association identified the three most common reasons for business trips as:maintaining customer relationships (42% of trips), internal meetings (22%), and developing new business (20%). That suggests there’s no predominant reason for business travel; to be accurate, the annual budgeting process should involve all areas of a company’s operations.
Creating a travel budget presents an opportunity to make advanced arrangements for certain trips in the upcoming year. Identifying known travel occasions improves the accuracy of budget forecasts, and allows for cost-effective booking. Though last-minute business travel is occasionally unavoidable, a non-trivial portion of trips can be planned well in advance of departure, which can lead to significant savings. Booking early is especially important for major conferences and trade shows, when demand and prices spike. A company might also consider asking employees to plan ahead of all hand meetings or regularly occurring client visits.
Target Areas for Cost Reductions
Building an organizational travel budget helps a company efficiently allocate its financial resources. Actual spending will invariably diverge from annualized projections, so it’s important to periodically assess whether the assumptions used to create the budget remain valid. Even if spending is in line with the initial projections, there's almost always room to cut costs by targeting specific T&E expenses. Using a combination of sensible policy guidelines and smart incentive structures, it’s possible for a company to reduce travel spending by 25% or more.
Want to learn more about the specific factors driving T&E expenses at your company? Read more about Rocketrip’s free travel analysis to see how you could be saving.
*JP Morgan Chase, Corporate T&E Spend Benchmarks