Top Expense Policy Strategies for Modern Businesses

An expense policy outlines how employees can spend company funds and/or be reimbursed for purchases made on behalf of the company. Businesses that don’t have an expense policy run the risk of overspending, fraud, disputes, or violating regulatory and/or compliance issues.

Let’s look at an example of how spending disputes could impact sales-driven organizations. Account managers might take a prospective client to lunch. Ordering ten margaritas apiece is probably not reasonable. But what happens if an account rep tells you that many drinks were needed to close the deal?

Now, on to fraud. Let’s suppose you’re in the logistics industry. You send an employee to pick up ten iPads for your warehouse inventory team. They slip an extra one in there for themselves, take it home, and forget to tell you. 

What about overspending? In the education industry, teachers typically need to buy classroom supplies on short notice. Educational institutions must set clear parameters around what will be reimbursed—otherwise, every Friday will be pizza day.

Financial institutions are not the only businesses impacted by regulatory and compliance parameters. Restaurant owners: Let’s say one of your restaurant managers asked the wait staff to “chip in” for shirts with the restaurant logo. This is probably illegal, according to the Fair Labor Standards Act.

Thankfully, crafting an expense policy is an easy way to avoid disputes, fraud, overspending, and ensure compliance.

What is an Expense Policy? 

As mentioned, the overarching task of an expense policy is to define the limits around employee purchases on behalf of the business. Its key components can be boiled down to 3 areas:

• Defined expense categories
• Processes for claiming expenses
• Dispute procedures

Every business, regardless of size, needs an expense policy. Large corporations would lose millions or even billions of dollars if they didn’t define spending limits. Small businesses (SMBs) could be blindsided out of business. Even sole proprietorships need expense policies for tax and accounting purposes.

Defined Your Approved Expenses

First off, you must define your list of approved types of expenses. For some businesses, this might be as simple as stating that employees will not be asked to purchase anything, nor will they be reimbursed for anything. This is actually a typical large business expense policy. Large corporations typically purchase everything their workforce needs for productivity, from computers to uniforms. 

Other businesses need more flexible employee expense policies. This is particularly true of businesses with a significant mobility component, such as B2B and B2C contractors. They will need a travel expense policy. Will employees receive a company credit card to purchase gas? A daily budget for meals?

Submission Process

Secondly, you need a workflow for submitting expenses. This is particularly true when employees pay out of pocket for incidentals and are then reimbursed. However, you may also want an expense approval process before spending occurs, even if they use a company card. 

Dispute Process

Thirdly, you need to prepare for the worst. There must be a process for handling disputes. Even giants like Amazon and Wells Fargo can get entangled in issues of employee reimbursement to the tune of billions of dollars. Speak with a lawyer about setting up dispute procedures and locking new employees into agreement about how disputes are resolved.

The Importance of an Effective Expense Policy  

Let’s dive deeper into some benefits of an expense policy.

The most obvious benefit is that it protects your cash flow. Unauthorized or unaccounted spending can wreck anybody’s personal finances. In fact, it’s one of the oldest comic tropes about married couples. A business is no different. Even worse, instead of a spouse making a “stupid” purchase (babe, I need these playoff tickets), you could have dozens or even hundreds of employees draining the bank.

Effective expense policies can also save you money on another front, and that is from the penalties for violating state and federal laws about fair labor standards or bribery and corruption (amongst other things). Fines in these areas can run up to hundreds of thousands of dollars.

It can also keep your accounting system robust and transparent for tax purposes. You could also be losing significant amounts of money by over-representing your net income because of unreported expenses (and paying more taxes).

Robust reporting tools will also make you and your employees happy. They’ll be happy about the clarity and ease of the expense reporting process. They’ll appreciate the rapidity of reimbursements that automated tools can facilitate versus waiting days or weeks for a check. And your business will see some improved operational efficiency with faster approvals and automated integration with other software suites like accounting.

Key Components of a Modern Expense Policy 

Let’s take a deeper dive into modern expense management. We briefly outlined the idea of business expense tracking above, but now, let’s look at some expense policy best practices.

Clarity

Clear definitions of approved expenses will vary from business to business. A corporate expense policy will outline a different set of purchases (and spending limits) than an expense policy for startups.

Exclusions

Make sure to exclude what is not covered. Sometimes, this can get very nuanced. Are traveling employees allowed to fly first class? How often can managers treat their team to lunch or snacks? What types of software are remote workers permitted to purchase immediately, as needed?

Submission and Approval Process

The expense submission and approval process must be defined with a timeline, approved workflows, and hierarchies. Do employees email their managers about expenses? Or do they submit a particular form to human resources? Does spending need to be pre-approved? Do reimbursement requests have a statute of limitations? Some of these questions will be answered by company policy, while others must adhere to state and federal laws.

Spending Limits

Spending limits must create a moat around your cash flow. With the acceleration of remote work arrangements, it’s harder for companies to track expenses or review and approve purchases. Does a remote worker really need a $4,000 PC to fill out spreadsheets, or are they hoping to slip in a little World of Warcraft? Spending limits will prevent pushing the envelope.

Compliance and Documentation

Compliance and documentation are also important for covering your…you know what. What records will employees need to save and submit? Invoices? Receipts? Some industries have strict limits on how much you can spend on potential clients. Anything beyond that falls into the category of bribery and corruption. You never know when the IRS will start looking to fill vacancies at your local white-collar prison.

Automation Tools

Automation tools like expense tracking software are also part of a robust and efficient expense strategy. Automating expense management will eliminate clerical errors and come close to eliminating fraudulent reporting.

Ideally, expense policy tools should also streamline the approval process by defining what’s available as requests are made. For instance, you could input a list of pre-approved vendors an employee can choose from or even pre-approved restaurants and hotels for travel and business meetings. It’s time for some Applebee’s margaritas!

Best Practices for Creating an Expense Policy for Large Enterprises  

Large enterprises must scale their expense policies to a much greater degree than small businesses. A larger business may even need an entire department just to manage business expenses. If a company has hundreds, thousands, or tens of thousands of employees, all aspects of its expense policy need greater standardization and automation.

Some businesses transcend international boundaries. These businesses must factor in global expense compliance issues and currency exchange rates. In the fintech space, there is much optimism that cryptocurrency can bridge some of the gaps and bypass problems that have traditionally plagued international transactions. Robust expense policies might factor in the advent of crypto payments.

Expense tracking and reporting must also be automated. Mid-level managers will be too busy to field emails about employee expenses and then pass those on to their superiors. Many expenses and reimbursements will fall through the cracks, leading to accounting and regulatory issues. There must be a cloud-based reporting and expense management system that employees can access from anywhere. 

Expense management solutions must also be proactive. Internal audits should be conducted regularly. Why did this sales rep purchase 20 margaritas at Applebees? Employee spending policies should be printed in a handbook and/or available online. Employees should receive training about using corporate credit cards or submitting expense reports.

How Startups Can Develop a Scalable Expense Policy 

Startups also need a robust expense policy. Startups are also more likely to need a flexible expense policy. They often go through trial and error phases, in contrast to established businesses that have established processes. Startup employees might need to make purchases on the fly to immediately deal with unexpected problems.

For startups, the best approach is probably a simple approach with fewer parameters but more direct (e.g., less automated) oversight. Startups are small enough to create a workflow with more oversight from the C-suite level. It’s unlikely that a startup will have the experience to create lengthy spending policies in the company handbook.

A directive to meet with the CPO or CFO before a business trip (to discuss spending limits) might be sufficient, for example. Or an email exchange before hiring a contractor on Upwork. Or a text message before taking the sales team to Applebees for Margaritas. 

Startup spending policies must be realistic. Startups often struggle with premature scaling, overhiring, and overspending. Even if particular categories of spending are nebulous, financial limits must be set, or a startup could find itself in hot water. Part of these limits involve encouraging employee frugality and transparency.

Startups often have ambitious employees in their core crew as they go through their initial growth phases. Sometimes, you will have to reign in project managers who go overboard in their zealousness. Tact and negotiating skills may play a bigger role than they would for the accounting department at a large, faceless corporation.

Industry-Specific Expense Policy Considerations 

Now, let’s look at some industry-specific company spending challenges. Today, tech companies may contain a sizable remote workforce. Many project managers feel they need to hire a third-party independent contractor like a programmer, tester, or marketer to complete a product. How much can they spend on this outside talent?

Professional Services

Professional services often involve traveling and meeting clients. As mentioned, there are strict limits on spending on meals and entertainment with clients. A tight process needs to be established for submitting client-related expenses so they can be audited to meet regulatory standards.

Hospitality

In the hospitality sector (restaurants, hotels, casinos), managers are often put in the place of making decisions in the trenches. Owners and/or C-level execs are not there to order produce, book a band, or select a contractor to fix an immediate problem. 

Healthcare

In the healthcare field, healthcare providers may need to make a split-second decision about paying for procedures, equipment, medicine, or transport. In these cases, the organization’s financial health must be balanced against rendering the best care possible for the patient.

Construction

The construction industry is infamous for projects coming in late and over budget. Any real estate developer can tell you that failing to set parameters around spending can jeopardize a project’s profitability. They’ll also tell you that constant oversight is necessary. Contractors should be given a clear set of policies and procedures around spending.

These are just a few examples of specific industry challenges. In every industry, employees may need or request additional training and certification. The cost of these programs and certificates may be something your business could benefit from, or it may not.

Additionally, the different accreditation options may have different pricing. Does an employee really need to attend a week-long seminar in Florida, or will a simple 5-hour online class suffice?

In all these cases, expense policies can help create smooth sailing.

The Role of Automation in Modern Expense Policies 

Let’s return to the importance of automating expense reporting. A uniform cloud-based platform that’s programmed with company policies will reduce confusing email chains and paper trails. It can also accelerate employee reimbursement with ACH deposits or payroll additions instead of checks, which will certainly improve employee sentiment.

Addressing Gaps in Corporate Card Reporting

Companies that issue corporate cards still need reporting tools, as credit card statements may not tell the full story. For instance, a $200 charge at a gas station may include gas and lunch for a work crew. How much of that spending was beyond the daily approved incidentals budget?

Let’s run with that example. Suppose your employees fill out some sort of reporting tool. They input how much they will spend on lunch. If the reporting tool is not integrated with your other systems, an auditor will still need to align that reporting with the credit card statements.

Is it likely that a crew of three spent $50 on food at WaWa, leaving $150 for gas—a grand total that aligns with the $200 on the credit card statement? Or did they spend $50 on gas and $150 on those incredible WaWa subs for each of their families?

A robust and preemptive expense strategy might mandate that a separate card be used for gas or that transactions be made at the pump to separate gas from in-store purchases so that both can be more closely tracked. These details have to be ironed out.

Integration as the Key to Efficiency

Once the policies are ironed out, expense reporting should be automated and integrated with other systems, such as inventory, accounting, and human resources management. 

Otherwise, your business will need to spend a lot more time and/or money on auditing and accounting for all the employee-related purchasing that occurs. Our example might seem petty but replicated dozens, hundreds, or thousands of times; it’s a huge problem. In fact, employee theft is one of the biggest unplanned (but avoidable) expenses in most industries.

Common Mistakes to Avoid When Implementing an Expense Policy 

Here are some common mistakes to avoid when implementing an expense policy:

Scale the details of your policy to fit the size of your organization. A corporation may need its own handbook just to outline employee expenses and reimbursement procedures. A startup or family-owned business does not…perhaps just a page.

Avoid making it confusing for employees as well. Most employees don’t willingly delve into the small print legalese of policies and procedures. Developing training modules to inform them of expense reporting will go a lot further.

Don’t avoid updating your policies as your company grows. For instance, a small startup may ask its 5-10 employees to personally discuss upcoming purchases with the CEO or CFO. This won’t work if the company hires 90 more people. But if they also fail to replace their earlier policy with one that fits their new scale, a lot of surprise spending could fall through the cracks.

Do not fail to monitor and enforce the policy–unless you’re fine with the consequences. Hey Sal, the boss let me buy my entire crew drinks on Friday after the last shift… I’m sure he won’t mind if you do too. That’sThat type of conversation can unfold with your managers if they know you’re willing to let things slide.

On the other hand, you may feel that a degree of flexibility is important for the good of the company. This is the kind of intuitive decision that can’t be taught. However, you should also make sure you listen to employees and their opinions. If they feel that spending parameters are too tight or that the reimbursement procedures are too complicated, don’t be afraid to listen and make changes accordingly (as you can). 

Conclusion  

Expenses incurred are an inevitable part of running a business. If your employees or “team members” are authorized to make purchases, you need a clear process for submitting receipts and obtaining expense data. Without an expense policy, you run the risk of lost revenue, fraud, disputes, and violating legal regulations.

The exact nature of your expense reporting procedures and tools will depend on your industry and the size of your business. Policies for a small family business will differ from those for a startup or a corporate expense policy.

Whatever the case, your expense-related tools should be cloud-based, automated solutions that integrate with other business-related software. One such software might be your accounts receivable tools for payment processing and merchant services.

At ECS Payments, we specialize in providing streamlined payment processing solutions that simplify your operations and help your business run efficiently—because managing expenses is easier when you have the right partner.

Frequently Asked Questions About Expense Policies