Although the industry has largely moved towards automation in recent years with the introduction of new tools and technology, several hedge funds and private equity firms are still grappling with the nuisances of manually managing their expense allocation process. While a few managers have made great strides by achieving partial automation of this process through reference data integration and invoice coding, many still rely on complex spreadsheets that are both tedious and error-prone.
A manual expense allocation process is quite the headache for CFOs and COOs as it exposes funds to unnecessary risks during financial and compliance audits. This situation warrants an expense allocation solution for both hedge fund and private equity managers that is equipped to automate parts of the process, reduce reliance on manual inputs, and meet regulatory compliance and financial reporting requirements.
When searching for an expense allocation solution, we believe there are six key factors to keep in mind :
1. Versatile Expense Entry (support for multiple sources)
The very first step in identifying a great expense management solution is to ensure that it is capable of coding an expense/invoice from a variety of sources. These could be system-to-system, API-based files coming from a remote source or directly from vendors via email. Check if the solution has optical character recognition (OCR) capabilities as it can save you hours of entering invoices. Additionally, ensure that you can still manually enter invoices/expenses for one-off cases.
The main function that this system will be performing is allocating expenses to various funds and entities, including management companies. Complete transparency is required for the fund controllers and accountants to show why a particular expense was allocated to an entity along with supporting data to back up the claim. This is required to not only make the fund controller comfortable but also the auditors who need to ensure that the funds have not been over-allocated any expenses — intentionally or unintentionally.
3. Support for Business Rules
Your system should be able to support a variety of business rules. These rules consist of allocation methodologies that are AUM-based, commitment-based, headcount-based, etc. If the system you are looking at has no or limited capabilities to support these rules, chances are you will end up performing a majority of this work manually, which is the very thing that you were looking to solve.
Similar to allocation rules, the system should also be able to support both compliance and expense routing rules. Adherence to compliance rules will ensure a smooth financial audit and enable you to proactively look at edge cases. Additionally, a workflow-based routing of invoices will ensure that only designated personnel can perform approvals/rejections.
Although it is not a crucial requirement, it is recommended that while looking for an expense allocation system, you pay attention to the system’s integration and automation capabilities. A lot of manual work can be automated by having the expense allocation system talk to your general ledger and cash/wire system. Not only will this further reduce manual touchpoints and the chance of error, but it also makes the entire process a seamlessly integrated experience.
Last but not least, take a deeper look at the system you are considering for signs of flexibility. Many software solutions in the market that are also used by other industries may seem very attractive due to their popularity and time to productionize, but their flexibility quotient is next to zero when it comes to configuring the system to your needs. These solutions can perform basic T&E data capture and to some extent payments too, but their expense allocation and approval functions have severe limitations and may not always meet your future needs.
Although there are certainly other factors that will impact a firm’s decision, these are some of the most frequent that hedge fund and private equity managers consider when selecting an expense allocation solution. Learn more about how IVP Expense Manager can help, or contact us at firstname.lastname@example.org.