Expense Claims | Definition & Keys to Improving Business Spending

What are employee expense claims?

Expense claims are used by employees to receive reimbursement for company costs paid out of pocket. Typically associated with business travel, this lets staff spend on behalf of the company even without a company credit card.

This process is necessary in companies where employees don't have access to corporate funds. The employee incurs a cost on their personal credit card or through cash, and then submits an expense claim form. Here's the process in detail.

How expense reports work

The typical expense claim process is as follows:

An employee needs to spend and doesn't have access to funds. (They don't have a company credit card, and haven't been issued a per diem or expense advance for travel.)
The employee makes a legitimate business purchase using their own money.
They save their receipt and make a note of the reason for spending. (Often this step is missed.)
Later - often at the end of the month - the employee completes an expense claim form. This should include the date, time, location, reason for spending, and the receipt or sales invoice.
Their manager receives the expense report and approves (or denies) the transaction.
The finance team reviews the employee expense claim, ensures that all necessary information and approvals are listed, and schedules a reimbursement.
The claimant is eventually reimbursed, often during the next payroll run.

This process is so common and widespread that most businesses assume it to be the only way. We've listed more modern approaches to employee claims below, but here are some of the issues with maintaining this method.

Typical challenges with the expense claim process

Even though relied upon by companies worldwide, the expense claim process almost always has the same issues.

Prone to error

Every finance team knows the pain of working through stacks of expense claims, spotting errors and inconsistencies in each one.

The best solution is to use digital tools which spot errors and prevent incomplete expense reports from being submitted. As we'll see, these walk employees through the process and highlight any issues before they reach the finance team.

Time consuming

It's a relatively straightforward process - in theory - but finance teams can still spend days each month getting claims squared away. Some of this is because of the errors mentioned above, but most of it comes from the level of back and forth communication required.

Even with clear instructions and simple claims, most employees don't really understand what's required. So finance teams have to field questions, answer emails, and chase team members for missing receipts.

No clear expense policy

A company expense policy sets out the conditions under which employees can spend at work. And like most internal company policies, it often goes unnoticed or unfollowed.

Your expense policy needs to be clear, concise, and easy to find. Employees shouldn't have to ask dozens of questions to seek reimbursement, and they should always know what's allowed and not.

The best expense policies are actually built into systems. Choose an expense management tool that keeps teams within the limits by default. This eliminates the endless back and forth suffered by most finance teams.

Rife with fraud

This can be a touchy topic for business owners. Most leaders trust their teams to make smart, ethical choices. But studies show that 85% of employees admit to having lied on expense reports.

And since claims so often contain errors, even well-meaning employees may submit fraudulent forms.

Lack of real-time visibility

This issue stems from the very nature of expense claims: they're always submitted long after the fact. You have no visibility over what's being spent by teams, and limited ability to prevent inappropriate spending.

At the very least, the company doesn't know its true cash position until reimbursements leave the bank account. Which makes real-time forecasting and dynamic decision making impossible.

For more, here are 17 ways the expense report process harms growing businesses.

Modern expense management tools

As a response to the above issues, new spend management systems have emerged. With a combination of safe payment methods and smart software, they give employees access to funds in a controlled environment.

Your chosen expense report software should let you:

Submit digital claims. Paper processes and data entry should be a thing of the past.
Capture receipts instantly. Employees should be able to take a quick snap of receipts with their mobile phone, before they're lost of damaged.
Create your own spending rules. Staff can request permission before spending. This could be via a purchase order or procurement form, or with a simple electronic request. And the platform should set out the spending rules clearly for every employee.
Integrate with payment methods. Ideally every employee would have their own company credit card. Spend management systems should centralize spend data, regardless of the payment method.
Incorporate expense accounts. When employees claim expenses, you want to know which expense account or budget to match spending against. It's always easiest to do this at the pre-accounting stage, so ensure that it's built into your tool.

Expense claim FAQs

Can personal purchases be claimed as business expenses?

The rule here is pretty simple: to claim reimbursement (and tax relief from HMRC or the IRS), purchases must be incurred as part of doing business.

Meals and other travel costs can certainly be business expenses, if they were incurred during necessary work travel. Going to a movie to kill time between client meetings are not.

Why do we need to keep receipts?

In most countries, business expenses do not incur tax. But in order to claim tax relief, HMRC or the IRS may require proofs of purchase. So companies need employees to save and submit receipts from business trips and other related expenses.

Receipts also let the company ensure that all claimed expenses are in fact valid.