Expense policy 101: understanding the basics
Published on March 25, 2024
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As an entrepreneur just starting out, drafting and implementing an expense policy is probably not high on your list of priorities. Even though you’re probably more interested in growing your team or acquiring new users, it’s important to spend some time thinking about the future, too.
But the moment your team starts to grow, you'll be wishing you had clear spending rules in place. If you aren't ready to take this step, you should at least keep track of all transactions so they can be approved by a manager.
In any case, we think it’s time for a crash course on expense policies. In this article, you’ll learn why you need one, what it means to have one, and the steps you need to follow to set one up.
Further reading
What is an expense policy?
An expense policy is a set of rules that define what the employees of a company can do with their employer’s money. They’re often laid out in a document which workers are asked to comply with when they sign their contract.
This document should clearly outline how your business deals with company-related expenses, and offer a detailed explanation on how employees are able to get reimbursed.
While expense policies vary between companies, most include the following key elements:
A clearly defined list of all expense categories that can be claimed
A step-by-step guide on how to claim expenses
What happens in the event of a dispute concerning expenses
There are lots of factors that influence the exact wording of your policy. For example, if you recently raised capital, it makes sense to be a bit more flexible, while a bootstrapped company might like to have a tighter budget.
Now, let’s take a look at the basics.
Why do you need an employee spending policy?
It’s easy to avoid an expense policy in the early days of a company, but every growing enterprise should think about setting one up.
When you have multiple employees buying things for business purposes, the money spent on these expenses can quickly spiral out of control. If the rules are unclear (or don’t exist at all), people could end up spending too much money or buying unnecessary items, causing an unnecessary drain on company funds.
Even worse, they might commit fraud by making private or unauthorised purchases with their employer’s money. Whether intentional or accidental, expense report fraud is a huge problem.
But even when you already have rules about employee spending, it can be worth it to formalise them by creating an expense policy. Writing everything down in an official document ensures that everyone is on the same page, which helps to simplify and speed up the reimbursement process.
How to create an expense policy
It might sound like a daunting task, but creating your first expense policy doesn’t have to be hard. Get started with these six tips:
1. Define expenses, budgets, & categories
Because we’re developing a financial policy, it should be based on your company's financial situation. In order to set appropriate budgets, it’s a good idea to talk to your CFO — if you don’t have one yet, consider getting professional advice.
The same goes for setting the various expense categories you allow employees to claim. Consider what they need to excel at their job, but also think about what they shouldn’t be able to buy.
The Accountancy Partnership suggests the following as common employee expenses:
Transport costs, such as plane or train tickets
Mileage claims when using their own car for work
Business hospitality and entertainment (aka networking and schmoozing)
Sustenance, or ‘food and drink’
Training courses and materials
Hotel costs
Credit card fees
2. Be fair
When enforcing your new policy, it’s vital to be fair to your team. Treat employees equally and avoid making exceptions — this helps make everyone feel more valued.
Also, keep a close eye on the time it takes to process employee reimbursements. You wouldn't ask your friends or family for an interest-free six-week loan, so you probably shouldn't ask your staff either.
The result of showing this respect to team members is a highly functioning workplace. From Findmyshift:
"Such a message can easily pay for itself in an improved workplace environment or greater employee efficiency. It’s been shown that engaged employees deliver far more than disengaged employees, with 22% higher productivity, up to 65% lower turnover, and 41% fewer quality defect incidents among other benefits."
3. Keep it simple
A great expense policy should be easy on the eyes. Pay attention to the language you’re using — is it clear enough for anyone to understand? Don’t go into too much detail when it’s not needed — you don’t want to end up with a 40-page document that no one will read.
While you're at it, your expense report processes should be user-friendly too. Take a look at our free expense report template, and see what you think.
4. Keep updating
The team at TravelBank writes that "one in four businesses haven’t updated their expense policy in two years or more. An outdated policy might not cover increasingly common business travel practices, such as sharing economy transport and lodging. It also might not reflect any changes in your overall organizational budget."
Treat your expense policy like you treat the business as a whole. The state of your company is changing all the time, and the rules should reflect that.
For example, the rules and allowances you set in year one probably won't still be applicable by year five. Your team will have grown, and your expense policy should reflect this growth.
5. Comply with local regulations
If you haven’t done so already, read up on all local laws that affect your policy. Be sure you know which kind of documents to keep, and for how long — you want to avoid any surprises on that front.
Once again, be sure to get professional advice where necessary. The consequences of getting these steps wrong are too significant to just wing it on your own.
6. Incorporate technology
Lastly, consider the ways technology can be used to innovate your expense management workflow. Integration between expense management tools and accounting software allows for many previously time-consuming tasks to be streamlined and simplified, saving your finance team from manually processing expense information.
Real Business suggests you specifically look for real-time notifications. "The problem in the past has been that an expense policy has typically been a static document, one that’s liable to be quickly glanced at and then quickly fade from an employee’s mind.
"With digital expense management set-up, a policy can become an active part of employees’ daily workflow."
Not only can this save you and your team time and effort, but it can also help improve the accuracy and consistency of your records, leaving you better placed to cope with the possibility of audit.
Automate your expense policy
On top of these six tips, be sure to think about how the range of expense management tools could help you automate your processes. After all, the easier your expense policy is to follow, the more likely your team will want to follow it.
If possible, you should look for ways to avoid having employees submit manual expense reports. After all, filing expense reports is not only hated by employees, but also wastes a lot of valuable time between your finance team and managers. Over time, this can become a significant cost.
Most importantly, try to make your expense policy as easy to follow as possible. By automating the process, software will guide employees along the way. They don't have to think - sticking to policy is just a natural result.
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