Ready to create an expense management policy for your business? Not sure? Good. Either way, you've come to the right place.
We're certain that having a formal, written down expense policy is vital for any business. So in this post, we're going to explain why, and show you what needs to be included in a great expense policy.
The goal is to help you craft a policy that works for everyone in the business, and doesn't take weeks of work. Should be easy.
We're going to do this in a hurry. So if you want more detail, we've put together a charming little guide to help. You can download that right here, for free:
It looks at the many of the same concepts as we're about to, but in more depth. Basically, it's an upgrade on this here post.
Now, let's look at a few of the big ideas covered in the guide.
What is a company expense policy?
It's often overlooked, but having a formal expense policy for your business is essential. For starters, it helps the senior leadership team figure out how team members should spend company money.
Rather than coming up with guidelines on an ad hoc basis - "I don't know, let's ask the boss" - you set out the rules before anyone has even thought about spending.
It'll also give clear guidance to staff whenever they need it. And they won't have to bother the CEO or finance team every time they need to make a payment.
As the experts at Abacus explain, "policies are the best way to set expectations and eliminate grey areas for employees. The most common cause of employee expense policy violations is due to lack of understanding of the policy, mixed with a low tolerance for searching out the answer to questions."
As with most office processes, it's always best to have this written down. But what makes a good policy?
Keys to a successful expense policy
Your expense policy will be yours, and naturally it'll be custom-fit to your business. Even so, there are certain things you'll always need to include:
- Create clear categories and budgets. Employees need to know how much is allowed, and which expense categories they can spend under.
- Be fair. Consistency is key. You shouldn't plan to treat different employees differently, and your policy needs to be applied company-wide.
- Keep it simple. Almost nobody is passionate about expenses (except Spendesk!), and your team isn't going to read a novel. You want them to be able to answer their own questions, so keep it short and sweet.
- Update often. This should be the same for most company processes. Make sure it's somebody's responsibility to see whether team members are using it, and how it can be improved.
- Check the regulations! Obviously, the most important thing is to keep compliant with the local laws. You probably thought of this first, but here's your friendly reminder.
Those are just a few helpful guidelines. But what should your expense management policy actually contain?
What to include in an expenses policy
Let's get into the nitty gritty. What does an expense policy need to have in it?
Budgets for each expense category
To begin with, you need to explain who sets the budgets for each team or type of expense, and who manages them. Employees need to know who to turn to when they're unsure.
Even better, your policy should aim to include the specific budgets for each type of spending - travel, office supplies, marketing and advertising, and so on.
Because budgets fluctuate with the seasons and as needs arise, this may not be possible. Instead, try to include general rules and guidelines for budgets.
But your policy should be a living document, and keeping it up to date should be a matter of course. So if you can, include the real budgets within the policy itself.
A plan for reimbursements
Two things to remember when thinking about reimbursements:
- Employees need to be reimbursed. This is both a legal requirement and the right thing to do.
- Employees have better things to do than file expense reports. Most will put it off or completely forget to do it. Even though it's their money!
You need to be explicit about what they need to do to claim expenses. What's the process, who is responsible, and is there a time limit?
These factors should all be clearly laid out in the policy, and employees need to know to take them seriously.
Suitable payment methods
How team members pay for things is also important. Within your business, there are usually a variety of ways that expenses can be paid.
Your expense policy needs to give clear procedures for:
- Payments with the company card(s): Who's in control of the company card? And how do employees record a new payment? Shared cards can get unwieldy, with users from all over the organization making payments both in-store and online. It's vital that the process is clearly defined.
- Online payments: Consider the number of running subscription payments your business has. Every new marketing, sales, and administrative tool has its own lifecycle and payment due date. Again, team members need to know what's required as they make these payments.
- Employee expense advances. Occasionally businesses will give employees an advance to cover upcoming costs. This can be necessary where the amount is too high to expect an employee to cover it on their own. Because this is more rare, your policy should explain exactly how it works.
- Payments from an employee's own pocket. We've already talked about reimbursements. Your policy should also explain when and why employees might need to use their own money for work expenses.
Remember, every workplace has its own way of handling spending. So even experienced staff may not have done things your way before.
Make sure your policy helps them spend easily while staying compliant with your way of operating.
Expense policy templates
If you're looking for a good template or example to use, the team at Example.com have put together more than 20 ready-to-use expense policies to choose from.
Headaches: classic expense policy problems to avoid
Hopefully your spending policy is already pretty well defined - it's just a matter of writing it down.
Even so, there are a red flags typical to most businesses. Since you're taking the time to formalise your policy, it's the perfect chance to make sure you're not making one of these classic errors.
The petty cash box
If you've been using petty cash for some time (like most offices), you probably figure what's the harm? Jordan guards the key, and it's only small amounts at a time anyway. Even if we don't know exactly where that money goes, that's why it's petty cash.
This is just not how company money should be spent. Every penny needs to be accounted for. And taking a few notes out from time to time is just asking for abuse.
Plus, it's not actually efficient. Cards are accepted all over these days, and are more trackable and harder to abuse. Plus, an expense card lets you pay for things online, which is still beyond the powers of petty cash.
Paper expense claims
Offices are going paperless, even when they still use old-fashioned processes like expense reports. If you're going to ask employees to pay upfront and then request reimbursement, the least you can do is automate this.
What's more, paper expense reports are just easier to get wrong. First, they can become lost - just like paper receipts. It's also harder to set parameters like you would with a digital form. So you'll have to manually check every calculation.
Plus, too many businesses take these paper forms and then manually enter the data into spreadsheets or accounting tools. Why not skip this and have employees enter that data from the start?
If you're looking for good tools to help you automate this process, here are our favorites.
Corporate expense fraud
Fraud is a scary word. But not every case involves the Wolf of Wall Street or Bernie Madoff.
A lax or loose expense policy leaves the door open for employees to take advantage. And while you probably trust everyone in your organization, it's always possible for people to claim slightly more than they spent, or to seek reimbursement for non-work-related costs.
Reports have found that expense fraud impacts up to 15% of companies. And since you don't want yours to be one of them, there are some simple steps you can take to problems.
Even worse: 85% of employees admit to lying on claims. Which is one of the most worrying statistics you'll read this week!
This is a problem that most businesses simply overlook. Filing expense reports and tracking spending just aren't fun for anyone.
The employee has to keep receipts and painstakingly record every transaction, often weeks or months after making them.
And the finance team spends days every month just reconciling these reports and making sure that everyone gets reimbursed.
These are issues that executives don't often think about (or choose to ignore). But if you have everyday processes in the business that everyone hates, this can cause major problems for productivity.
Expense policy best practices
On top of everything we've just covered, here are a few keys to crafting a great expense policy.
Travelbank - Build approvals into the process
Most employees will need a manager's approval before travelling. If this isn't formalized, it can easily be forgotten about. And even if there is a clear process, manually tracking approvals is at best an imperfect approach.
The answer: use technology that builds approvals in.
"We see many different policy options as far as approvals are concerned, but at the end of the day have found that companies that implement technology-enabled managed travel with built-in approvals have the highest compliance rates, fewer frustrated travelers, and tend to beat their budgets."
Corporate Traveller - Write with employees in mind
One ever-present issue with expense policies is the gap between the people who write them and the people who use them. It's typically operations, HR, and finance teams who set the rules, but these aren't often the team members traveling.
So when you're writing, consider the reader first and foremost. Will they actually bother reading the whole document? What do you truly need them to know?
"Travel expenses can be complicated, but your process for managing them does not need to be. Implement the process, make sure your travel expense policy is readily available and ensure it’s part of the onboarding process for any new employees who will be required to travel."
Kissflow - Consult travelers while writing
Another common issue is the top-down expense policy. Someone in a position of authority writes the rules the way they want them, and then issues this credo to the rest of the team.
If you want your policy to be followed, you're far better off involving other teams in the process.
"An expense policy that’s not fair to employees is no good. It’s better to consult the frequent travelers while updating the policy. This can give you a new perspective, helping you have better and more efficient ideas to implement a fool-proof policy."
G2 - Common sense comes first
This last point should probably go without saying. But as with a lot of corporate documentation, authors can get caught up in trying to make it perfect, and ignore the most obvious requirement: it needs to actually work.
The best way to achieve this is to keep rules relatively broad, and let employees use their own best judgement.
"If your expense management policy uses common sense in setting standards for different business obligations based on their unique circumstances, chances are your employees will be happier in knowing that you’re ensuring they can have the necessary funds for their business activity."
Detail-oriented vs broad principles
Touching on the last best practice, it's worth noting that different schools of thought exist. Some would argue that the more detailed your expense policy, the better. After all, this leaves no doubt in the minds of your team members.
Which is a good thing.
But equally, the more rules you include - and the greater the depth you go to - the less likely that your teams will actually read and understand them all.
Some companies choose to go in another direction. Rather than writing down every single rule, it's better to set broad principles and trust that employees will make the right decisions.
The most famous example of this approach is Netflix. Its company expense policy is just five words: "act in Netflix's best interests."
For most companies, this is pretty terrifying. And just because it works for them, doesn't mean it'll work anywhere else.
In truth, your expense policy should suit the company you've built. If you hire trustworthy, sensible employees, perhaps you don't need a comprehensive policy.
At Spendesk, our policy is built on principles, not rules. We have a great team full of conscientious individuals who all want what's best for the company.
But we also have the luxury of using our own product. This builds in the more precise rules and limits we're expected to follow, so there's no point in writing them all down in a document that nobody will read.
In our view, this is the perfect outcome.
Bonus: Expenses as taxable income
This is a special note for our friends in the United States. According to Workful.com, "if you don’t want your employees to have to declare their expense reimbursements as taxable income, then the IRS requires you to have a documented expense policy, too. Your employees will thank you come tax season."
Think about it: it's clearly unfair for your employees to pay tax on company expenses, no matter how they were incurred. So do the right thing, and write the thing!
Time to get to work
Creating an expense policy isn't the most exciting task in the world. But it's necessary, and will certainly help you avoid major issues in the future.
Plus, it's not actually too tricky. You just need to know what to include, and think a little about the specific challenges facing your business.
The good news is that we can help. Download this free guide to make sure that your expense management policy is everything it should be: