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How to Manage Employee Expenses

By Michael Hourigan on August 8, 2017

If you’re serious about growing your business, you can’t get away with a half-assed system for managing employee expenses.

Having a proper expense reporting system in place will help you keep your finances in order and your bookkeeping workload under control. You’ll find it easier to track (and claim) deductible business expenses. And—most importantly—you’ll find that it builds and maintains trust with your team.

Here’s proof: A 2015 study showed that 39 percent of businesses that streamlined their expense reporting systems saw a quantifiable increase in job satisfaction among employees.

Whether your current expense reporting system isn’t working, or you need to set one up from scratch, here are five things you should do to make expense reporting work for you and your team.

1. Adopt paperless recordkeeping

Want to perform a compliant internal audit of your company? You’ll need copies of all submitted expense receipts. If you’re missing these business records and the IRS decides to audit your business, you could be fined for filing an unqualified deduction.

The best way to make sure you never lose paperwork is to go paperless. Keeping a digital archive of receipts not only lets you store them for later retrieval and easier searching; digital copies of receipts have been accepted by the IRS since 1997.

Ask your employees to digitize their receipts with a mobile scanning app, or else assign the job of collecting and scanning all paper receipts to an office admin.

If you must stick with paper-based recordkeeping (which we don’t recommend for a host of reasons), make sure you have a filing system that is easy to use, secure, and stored in a fireproof cabinet.

And remember, a “worst-case scenario” mentality should guide recordkeeping in all parts of your business; your expense reporting system is no exception. It’s always better to have a document and not need it than to need it and not have it.

It’s always better to have a document and not need it, than to need it and not have it.

2. Define expense policies and categories

It’s your business. You know the ins and outs of everything, right down to the accounting categories you use. Your employees, on the other hand, may not.

When creating expense categories for your business, keep it simple. Don’t make this confusing or your team might find their own workarounds, like lumping multiple different expenses into one category. This can clog the funnel and create additional back-and-forth for you.

Being clear about your expectations from the beginning sets up much smoother expense reimbursement process. Put simply, employees want transparency about what is and isn’t going to be reimbursed.

However, you also don’t have time to define every little “What if?,” so avoid burdening your expense reporting flow with complicated fine print unless you have a clear reason to untangle a thorny scenario. Most small businesses can get away with using a variant of the IRS’s 13 standard expense categories. Don’t feel like you need to reinvent the wheel.

Type up a single page of reimbursement policies and per diem spending limits for employees to reference, and share it with your entire team. Larger teams may benefit from a kick-off or orientation meeting to get everybody on the same page.

If you’re a Bench customer, your bookkeeper can track which expenses were incurred by employees, so you know which expenses to reimburse. You’ll also be able to see the total amount of expenses you’ve reimbursed over time.

Heads up: Nonprofits typically end up with more categories than LLCs and C-corporations because of special regulations and the complexity of their tax situations. If you’re a nonprofit, be careful not to oversimplify your expense reporting. Consult with a tax advisor or CPA to get help setting up categories.

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3. Connect employees and expense approvers

Employees cite processing time on reimbursements as the single biggest pain point in the reimbursement process, and for good reason.

Usually, reimbursements are delayed by the back-and-forth between employees and expense approvers working to categorize and confirm claims. When there’s a lot of back-and-forth between employees and expense approvers—whether that’s you, or someone you’ve appointed to the role—it delays reimbursements.

Add to that the typical lag time from Automated Clearing House (ACH) networks as funds get transferred, and basic expense reporting can add up to a lot of wasted time.

You can speed up communication times by making it clear to your team exactly how expenses should be handled.

Define which channel expenses should be claimed through, and through which communication should take place. An example would be to designate only email, or only expense reporting software, as legitimate channels.

Then, set a turnaround time for reimbursements that expense approvers can use as a goal.

Finally, emphasize precise, to-the-point communication. Give employees examples, if necessary.

For instance:

Bad: “Hi John, can you take a look at your hotel expenses from the conference in March?”

Good: “Hi John, was that additional hotel expense from your trip to Orlando from a client meeting at the hotel restaurant? If so, please categorize it as Client Meals and Entertainment and resubmit.”

4. Run periodic expenditure reports

Running periodic reports on your team’s expenditure will help you monitor cash flow, build cash flow projections, manage business metrics, and address any glaring inaccuracies. Here’s what you can (and should) look out for when you run a periodic check on your expense reports.

Monitor your business’s financial health

Knowing how expenses affect your bottom line is crucial for understanding the financial health of your business.

Some companies, especially those with large travel expenditures, might spend as much as 31% of their annual operating expenses on travel alone. That’s almost one-third of a company’s spending that depends on employee expense tracking.

Having these measurements on hand will give you the ability to monitor and rein in expenses that might be coming off the rails.

Make projections and spot spending spikes

Looking at historical expense report data will reveal if your business has any peaks or dips in spending, and help you plan accordingly.

For example, say your company relies on trade shows for lead generation and sales. You could budget for the trade show season using expense report figures from the previous year as a guide.

Catch errors

Honest inaccuracies on expense reports can also be sniffed out quickly with routine employee and department reporting summaries. We’re busy,  we’re human, and sometimes we put a decimal point in the wrong place or mix up a number when submitting an expense report.

That’s fixable if it’s caught quickly. Less so if it’s months-old.

Watch out for fraud

Inaccuracies are also an early warning sign of expense fraud. Fraud may not be a pleasant topic, but when it comes to employee expense reports, it’s a real problem—even for close-knit teams in small businesses.

Giving yourself the ability to compare spending with per diem limits and historic averages among your team is the easiest way to spot fraudulent expenses.

Doing a quarterly “sanity check” of expenses should highlight anything suspicious.

Employees want transparency about what is and isn’t going to be reimbursed.

5. Automate as much as possible

While the guidelines we’ve touched on can be tackled with your own home brewed expense reporting system, you can also save yourself time and money with an automated expense reporting solution.

Services like Fetch, Zoho and Tallie offer a range of features, such as:

  • Mobile capture and auto-processing of receipts
  • Email receipt forwarding
  • In-app communication tools
  • Automatic payment
  • Duplicate expense notifications and amount matching

The choice of whether or not to pay for a tool boils down to what your time, and your employee’s time, are worth.

In a 2015 travel and expense management report, companies who handled expense reports internally spent an average of $26.60 on resources per report, compared to $6.85 for companies with automated travel and expense management systems.

The $20 differential might seem very high, but it becomes easier to comprehend when you consider the time/wage trade-off that happens when employees manually process their expense reports.

What about corporate credit cards?

Ultimately, it depends on the size of your team.

For companies with fewer than 20 employees, where employees are working closely with senior management, corporate cards are usually unnecessary.

Fewer employees mean easier oversight on spending, and employees enjoy getting to keep the points, miles and cash-back rewards from using their own cards. Team members can also use one company card that they borrow from the CEO.

Corporate cards start to make more sense when a team grows beyond 20 employees and matrix-style management rules the day. In addition to increased oversight on spending since the company can access credit card statements, there are also ways to set spending limits.

A downside to corporate cards is that onboarding can be lengthy, and it puts the company in a tight spot if an employee abruptly leaves the company.

Bottom line, you should choose an expense reporting solution that works best for your team. You could have a perfectly organized system in place, but if your team doesn’t bother using it, it’s worthless.

Setting up an expense reporting system is just one step you can take to save yourself time and energy. If you’d like to learn how to streamline other parts of your business, check out our guide on How to Automate Your Small Business. 

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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