Five Steps to Automate Deal Expense Allocations

Expense allocation—and its effect on P&L—is more important than ever. Unfortunately, allocating expenses remains a time-consuming and error-prone process, and mistakes carry the risk of an SEC penalty. For private funds that must factor deals into allocations, the situation is even more challenging.

While a typical expense is associated with a single invoice, deals usually involve travel, which requires the collection of employee expense reports. While invoice allocations reflect a snapshot in time, deals constantly change as they move through the lifecycle. Not only are deal allocations more complex to begin with, they must be repeatedly updated until they break or close.

Simplify Deal Expense Allocations

Here are five steps private funds can take to simplify this complex process.

1. Define the expense legal matrix

A thorough expense legal matrix is the foundation for smooth deal expense allocation. An expense legal matrix is a compliance document that defines what, how, when, and to whom expenses can be allocated. The industry best practice is to establish an expense legal matrix around business purposes and expense types. For most private funds, deal-related expenses will be categorized as due diligence, portfolio monitoring, or deal oversight. Using a clear expense legal matrix, the compliance team can remove ambiguity and mitigate risk when the time comes to allocate these expenses.

2. Organize reference data

Disorganized data makes the allocation process vulnerable to breaks and errors. Clean, consistent reference data allows for proper expense tagging, accurate allocations, and integrations between allocation-related systems. To get started, organize deal names, status, fund ownership, and other reference data around a golden or master copy. This single source of truth standardizes relevant data, enabling synchronization among systems. Organized reference data also enables a more standardized process with consistent inputs, faster processing, and little risk of error.

 3. Train your employees

Any process is only as good as the source data. Deal expenses are often travel-related, so the data source is employee expense reports. For this reason, it is critically important to train employees how to tag expenses with the correct deal code and business purpose at the time of capture. Adding these key details long after the fact is inefficient and more prone to errors. With just a little more effort up front, private funds can ensure straight-through expense allocations and eliminate the need to question employees about incomplete expense reports.

4. Automate your allocation process

With these three steps in place, private funds can supercharge deal expense allocations with automation. Automating allocations with solutions like the Expense Allocation System (EAS)™ by IntegriDATA, an Indus Valley Partners company, speeds up processing, saving your team time and effort. Automated solutions continually evaluate each deal throughout the lifecycle. For example, if a deal is pending, allocated expenses are left on the deal or booked to a holding entity. When the deal is consummated or breaks, the expenses are automatically reallocated according to your fund’s preferred policy.

5. Integrate with the general ledger

Integrating an automated allocation solution with the general ledger is the final step in the process. Deals can sit in a pending state for months, so it is important to keep all books and records up to date throughout the deal lifecycle. For example, if a deal is pending, most private funds book entries to the general ledger, showing a balance on the deal or holding entity. When the deal closes, integration with the general ledger enables the automated allocation solution to reallocate the deal’s expenses, reversing out the pending deal transactions and replacing them with receivables associated with the deal’s investing funds. Simultaneously, invoices can even be created and sent to the funds to expedite reimbursement.

Learn more about the Expense Allocation System (EAS)™ by IntegriDATA, an Indus Valley Partners Company or contact us at sales@ivp.in to set up a live or online demo.