May 12, 2022

Why You Need a Company Expense Policy

by Arielle Kushner

expense policy

Having a well thought out and clear expense policy for your company is an essential tool to boost your bottom line. From sourcing from suppliers, to maintaining control of spending, an expense policy will save your business time and money – as well as make work easier for the AP team.

What Is An Expense Policy?

First, what is an expense? Anything a company spends money on is considered an expense. A company expense policy is a set of rules that outlines what is and is not an allowable expense. Employees should follow an expense policy when incurring work-related expenses. The policy should cover what types of expenses may be approved, how employees should document their expenses, and how expense reimbursement will work.

It further ensures that employees are only spending company money on approved items and that they are following the proper procedures for documentation and reimbursement.

Companies now have a more laissez-faire attitude towards their employees’ actions at work. From travel expenses all the way to business and medical expenses, it’s apparent that we have to spend money to make money. As a result, an expense policy must be clear and concise so that employees can spend the company’s money in an approved and suitable manner.

Let’s take a deeper dive into company expense policies, how you create them, the best practices associated with them, and some of the key benefits they provide.

How To Create an Effective Company Expense Policy?

Not sure where to begin? Effective expense management might sound like a complicated task, but we can break it down into a few simple steps:

Define which expenses are eligible for reimbursement

The first step is to determine which of your company’s items are eligible for expense reimbursement.

For example, will you reimburse for business travel, buying office supplies, or entertaining clients? Be as specific as possible in your company’s expense policy so that employees know exactly which work-related expenses they can and cannot reimburse. This will minimize any confusion or ambiguity down the road.

Your company expense policy should also include: 

  • A list of prohibited expenses
  • Guidelines for foreign travel and currency conversion, if applicable
  • How to handle expense advances
  • How to submit expenses for reimbursement

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Set spending limits

Once you’ve defined what types of expenses are eligible for reimbursement, the next step is to set spending limits. Having specific budgets and spend control policies will ensure that employees do not exceed the company expense accounts.

Spending limits can be set on a per-transaction, monthly, or yearly basis. For example, you could set a limit of $50 per transaction or $200 per month.

Enforce receipts

Another essential aspect of a high-quality expense policy is requiring employees to submit receipts for all expenses.

Having receipt requirements helps you keep track of spending and will also ensure that employees are only reimbursed for legitimate business expenses. Knowing what was bought and how much was spent can help identify any areas where expenses may need to be trimmed or in investigating possible fraud or misuse of company funds.

Receipts can be paper receipts, but in the modern age are more likely to be electronic. Whichever form they are in, it’s important that they are matched with transactions during the accounts payable process to identify against fraud.

Include methods of payment

It is important to make it clear how the company will reimburse its employees and how often reimbursements will be made (e.g., weekly, monthly).

The easiest way is to simply add it onto their payroll the next time they are paid directly. However, some companies prefer to pay by cheque or use reimbursement software in order to make the process more seamless.

Be explicit about the process

Create a step-by-step expense approval process for your employees so that it’s evidently clear what they have to do to reimburse themselves.

Work-related expenses usually require manager approval in order to avoid unnecessary costs.

Consider including an ethical statement

It has become a current practice to include ethical statements within a company’s expense policy, as sometimes you are unable to cater to every single possibility when dealing with expenses.

For example, there may come a situation where an expense may be ethically justifiable but does not fall under the set of rules as defined in the company’s expense management policy.

Hence, in these specific situations where an employee is unsure whether an expense is valid, it can be helpful to have a clear ethical statement to fall back on.

More often, this tends to be the case with larger companies — see Netflix’s expense policy: ‘Act in Netflix’s best interests.’ This might be a little too short for the rest of us! However, it can be an additional practical element to add to a smaller company when dealing with miscellaneous expenses that don’t fall under one single branch.

Use a reporting system

Finally, you’ll need to implement a system for employees to report their expenses. This could be as simple as an online form, but if you want to streamline the process, you might consider investing in expense management software.

These platforms can automate many of the tedious tasks involved in processing expenses, such as matching receipts to transactions and keeping track of spending limits. There are some great expense management tools out there which can all be used to achieve your company’s desired objectives.

Best Practices in Company Expense Policies

Though expense policies may vary per company, there are some best practices that all businesses should follow.

Keep it simple

Expense policies aren’t exactly the most riveting topic to talk to your employees about. They probably won’t be willing to pore over the intricacies of expense management for longer than a few minutes.

It’s vital to ensure your expense policy is easy to understand and follow. Keep the language clear and concise, and use bullet points where possible to make it easier to digest.

Ensure it is easily accessible

Employees may have emergency expenses, such as business, travel, or medical expenses that need to be taken care of. To make it easy for them to deal with certain expenses quickly, they must know the general rules associated with the expense policy. As a result, your company expense policy should be on the company’s intranet or easily reachable via other means.

Additionally, your company should communicate any changes made to the expense management process to every employee in the firm. It is also beneficial for the employee expense company policy to be adequately explained to new hires during their onboarding process.

Contingency, contingency, contingency

It’s always important to have contingencies when dealing with anything in the business world, especially when managing expenses.

A good expense management policy should have clear instructions to determine what happens in the event of a dispute. A simple way to ensure that a stress-free solution is found quickly is to have a detailed process that either employee or manager can follow.

The process should detail how parties can escalate to higher-ups should there be a dispute and the subsequent steps that follow, which could range from meetings all the way to the final decision made by a reputable third party.

Conduct a beta test before rolling it out

For something like an expense policy where the ramifications of a mistake can be severe, it’s important that the system works smoothly and without fault.

If you can, try and get a few employees to test out your expense policy before rolling it out company-wide. This will help you catch any potential issues and make sure that the policy is workable in practice.

Conduct some trials and gain approval from junior employees as they will be the ones doing most of the expensing. The process starts from the bottom-up, so it is important to get their opinions on how the system works and any potential drawbacks before rolling out the final product.

Get buy-in from key stakeholders

For an expense policy to succeed, senior management must be on board with it. They need to be aware of the rationale behind the policy and be able to support it when speaking to employees. If there is a lack of clarity or inconsistency in the policy, employees will be less likely to comply.

Have experts on hand to deal with any issues

Ensure that members of Human Resources are trained in dealing with the new expense management policy so they can answer any queries that staff might have. With something like an expense policy, the rules can be long and difficult to understand, so there must be people available that can simplify the process and answer whatever is required.

5 Key Benefits of an Expense Policy

Though it may seem like an unnecessary formality, implementing and following a company expense policy can have a number of key benefits for your business. Here are five of the most important ones:

1. It saves time by streamlining the expense reimbursement process

Regardless of size or industry, all businesses must purchase goods and services essential for their operation. However, employees may occasionally find it more convenient to pay for certain work-related expenses directly, such as when traveling. Expense reimbursement policies ensure employees get their money back if they pay out of pocket.

If you have a clear expense policy in place, it will streamline the expense reimbursement process by saving your employees time when it comes to filing for reimbursement. They will know precisely what is and is not covered by the policy, which expenses need receipts, and how to submit their expenses for approval.

This will cut down on the back-and-forth between employees and the finance team and make it significantly easier to get employees reimbursed in a timely manner.

2. It saves money by preventing employees from incurring unnecessary or unauthorized expenses

Even with the best of intentions, employees can sometimes incur unnecessary or unauthorized expenses, which can add up quickly. Without an expense policy in place, your company would be footing the bill for these costs. Having a well-defined expense policy can help prevent fraud and abuse of the expense management system.

For example, suppose you have a policy that requires employees to submit original receipts for all expenses over $50. In that case, you can be sure that employees will be less likely to file unnecessary expense reports. The policy acts as a deterrent to save your company money in the long run and helps maintain employee trust. 

3. It builds trust between employees and the finance team

Peace of mind is priceless, and having an expense policy to reimburse employees plays an essential part in achieving this.

Sometimes, employees may feel like the finance team is out to get them, especially if there are tight restrictions on expenditures. However, when employees know that a transparent and fair employee expense company policy is in place, it sets clear expectations and builds trust between them and the finance team.

Employees will feel confident that the company will reimburse their expenses properly, and the finance team will have more visibility into employee expenses. Not only does this put both parties at rest, but it ensures that they both focus purely on their work without worrying about any reimbursement troubles.

4. It helps the company take advantage of tax deductions

The most obvious benefit of having an expense management policy is that it saves money.

By outlining what expenses are allowable and requiring employees to submit receipts, you can rest assured that employees are mindful of their spending and your company is only paying for legitimate business expenditures. Additionally, an expense policy can help you avoid paying unnecessary taxes or penalties related to employee expenses.

This also allows you to take advantage of any tax deductions or rebates that may be available for company expenses. In the United States, for example, there is a deduction available for meals and entertainment expenses as long as they are related to the business. By having a policy in place, you can ensure that all of your employees’ expenses are accounted for and take advantage of these deductions.

5. It prevents fraud

Fraud is no laughing matter, and expense-related fraud is unfortunately quite common. Employees can take advantage of your lack of a substantive expense management policy and commit financial fraud by claiming expenses for personal services. They may even overclaim on office expenses by not showing a valid receipt and pocketing the surplus cash.

The reports out there are quite worrying, with one particular report stating up to 85% of employees have committed some form of expense-related fraud.

It’s clear to see the opportunities for employee fraud are vast. However, a successful and well-implemented expense policy brings this to a halt and acts as a preventative measure by matching receipts to transactions and verifying employee expense claims. 

The Bottom Line 

Company expense policies are crucial for ensuring a smooth expense management process. With employee fraud being rampant in past decades, having a good expense policy and following best practices are becoming ever more important.

Standard companies treat expense management as an unimportant area that exists for the sake of existing and use basic templates to get their policies in check. However, the best companies prioritize expense management as an essential part of business and create bespoke systems to manage their expenses as best as possible.

Consider the proven benefits and best practices of a sound expense management policy stated above to ensure your company has the best possible expense strategy.

Interested in implementing a spend management system that simplifies and streamlines your business’s existing process? Check out Approve.com and request a free demo today!

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