3 Steps to Create a Solid Expense Account Policy
Expense accounts are financial allowances offered to particular employees to cover business expenses. Employees with expense accounts pay for business-related goods and services with the understanding that they’ll be reimbursed. It makes things easier for staff members who travel, entertain clients, or otherwise need to spend money in order to bring sales and profits to your business. But they’re also a common place to “leak” cash, and if you’re not careful, they could be costing you.
The more profit you can get out of your business the better, and to do that, you’ll need to address the places that you’re leaking money. Some of the most common include not negotiating the best deal with suppliers, overpaying for credit card processing, and lavish expense reports.
In this article, we’re going to tackle that last one. While losing money on employee expenses is one of the most common, it’s also one of the easiest to manage. Taking the time to create a solid expense policy can help stop wasteful spending.
- Decide What’s Allowed in Your Expense Policy
- Write Your Expense Policy
- Follow an Expense Report Process
- Review Your Expense Policy Periodically
Decide What’s Allowed in Your Expense Policy
We’ve all seen the comedies where someone is going to “put it on the expense account.” They never consider the employer who ends up paying that bill. As that employer, it’s vital to get a good expense policy in place, share it with your employees, and build a process to control expenses.
Whether you’re creating a brand new expense policy or updating an existing one, start with a blank slate. Get together with the other senior people in your business and decide exactly what is and isn’t allowed in your expense policy.
Explore the following areas:
- Accommodation — What is considered proper hotel (or other) accommodation when your employees are in the road? Do you have a cap on hotel room rates?
- Travel — How do you expect employees to get around? Provide guidance on the type of travel you’ll pay for and how much. This could include driving, flying, public transport, taxis, and Uber.
- Mileage Reimbursement – For business driving purposes, will you offer a mileage reimbursement? How much? Many businesses choose to follow the IRS federal mileage reimbursement guidelines.
- Food and Alcohol — What are the limits on the cost of food and alcohol? Provide guidance on what’s considered acceptable.
- Entertainment — If an employee is entertaining a client, what do you consider to be reasonable expenses? How much can that employee spend?
- Business Purchases — If you don’t have a formal purchasing function in your business, do you allow employees to buy something necessary to the business and charge it? What authority do they need to do that? What are the limits?
- Other Areas — Think about subscriptions, donations, computer hardware and software, equipment and anything else your employees could spend money on. Look back through old expense claims and reports to make sure you cover all the possibilities.
Write Your Expense Policy
Next you’ll need to write down and share your expense policy. Here are some tips:
- Write the expense policy in clear, understandable language.
- Avoid business jargon; focus on policy and practice.
- Divide the policy into sections for quick reference.
- Be very clear about what is and isn’t allowed.
- Include details of every area covered including: expected rates, limits on what can be claimed, and when employees need preauthorization or receipts.
- Use examples as needed to add context.
Once you’ve written your policy, make sure that employees and management are aware of it and know their responsibilities. Make time for questions, and let staff provide feedback. Additionally, ensure that the policy is accessible to employees even if they aren’t in the office. You can keep a copy securely online or anywhere that employees can access remotely.
It’s up to you if you share how you’ll deal with people that don’t follow the policy. It’s worth working with your HR team to determine what steps you’ll take, and include that information with the policy.
Follow an Expense Report Process
Another key part of reducing expense leakage is through getting a good expense report process in place. A strong expense process might look like this:
- An employee reviews the expense policy to see what is and isn’t allowed.
- They carry out a business activity that incurs an expense.
- They provide an expense report (details of the expense) along with a business justification and any necessary receipts or evidence to their manager.
- The manager reviews the expense and supporting evidence, checks it against the policy and rejects it or signs off on it.
- Once it’s signed off, the expense is credited to the employee in their next payment.
There are two key factors you’ll need to include in the expense report policy:
- When are receipts needed? Is it for all purchases, or only purchases over a certain amount?
- When is pre-authorization needed? If it’s only over a specific amount, let people know what that amount is.
Once you know your expense report process, document it and share it along with the expense policy itself.
You can also create an expense report template that employees can tailor to their specific reporting needs. What information you’ll need is up to you. Most expense reports require a minimum of the date of the purchase, a category (like “dinner,” “airfare,” etc.), and the amount. You can choose to get more detailed if you wish, requiring things like a description of the purchase, where it was made, who authorized it (if pre-approval was required), or any other details that will assist you in determining if purchases were valid and adhere to the policy.
You can even create separate expense report templates, such as for different departments or purposes. A mileage reimbursement template may be shorter and require less detail than a travel expense template, for example.
Review Your Expense Policy Periodically
Once you’ve implemented the policy keep a close eye on how it’s working. Review the expenses that are coming through and compare them with expenses you’ve paid out to employees previously. Find out if there are any gaps in the policy and close them.
Thinking about, writing, and sharing a good expense policy and process is one of the more effective ways to control discretionary cost. Make sure all your employees and managers know how to use the policy and continually review and refine it until you get your expenses under control. That way employees will be less tempted to just “put it on the expense account.”
Paul Maplesden is a writer specializing in business, finance, and technology. He finds research and writing about money deeply interesting.