Does this scenario sound familiar? You hand over your company card to an employee and tell them to keep their spend reasonable, only to find out when they submit their receipts that your definition of “reasonable” and your employee’s are not the same.
Giving feedback is tough enough, and giving feedback about money is even tougher. But situations like this are why it’s so important for small business owners to have tough conversations with their employees about managing expenses.
Whether your business currently reimburses employees, offers corporate cards, or passes around a shared card, putting some expense management policies in place can be a lifesaver. Every dollar counts to a small business, and putting some clear guidelines in place around spending can keep unnecessary purchases from snowballing.
Like it or not, the time to have this tough conversation is now. Here’s how to get started.
Why Expense Management Matters
Before you sit down with your team, make sure that you understand what’s at stake when managing your company’s expenses. Knowing the stakes will help ensure that you build an expense management policy that protects you from risk.
The biggest—and most compelling—reason to create a strong expense management policy is the IRS. When you pay taxes on your business income, the IRS expects you to keep proof of all your expenses, usually for at least three years. Having an air-tight expense management process means that your books will be accurate, your tax payments will be correct, and there will be no missing receipts.
Should the IRS decide to audit you, you’ll be asked to hand over a lot of documentation. So keeping accurate records of expenses is a good practice to get into—just in case.
While taxes are paid periodically, company spending will have an immediate impact on your company’s bottom line. If you’ve created a budget and set goals for the months ahead, keeping a close eye on expenses will help you make sure you’re on target to meet them. It can also help you curb overspending before it becomes a major issue.
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Step 1: Make an Expense Policy
If you’ve been functioning without a clear expense management policy, it’s never too late to start one. While policies like this might sound stuffy and corporate, your employees will appreciate the transparency and clear-cut expectations. As you start to draft up a policy, be sure you can answer these questions.
- Do you want to reimburse expenses or provide corporate cards? In other words, how will your team spend money? If they make purchases on their own cards and request reimbursements, you give up some control and the ability to monitor spending in real time.
- What should an employee do after making a purchase? Make sure your employees know how long they have to submit a purchase and what they should do with the physical receipt.
- Are there spending thresholds? If some employees have many small expenses, will you require a receipt for every one, or will you only require receipts for purchases above a certain threshold?
- How should they categorize spending? Work with your accountant to identify common spending categories, as well as common classification mistakes, and ask your team to provide enough context and detail to correctly classify every transaction.
- What about petty cash? If you have petty cash in the office, make sure your team knows what it can be used for and what information you need to track those spends, too.
Step 2: Make It Easy to Stick to the Policy
Your employees already use several financial technology solutions in their everyday life. They “Venmo” money to friends for picking up lunch. They check their bank balances on their phones using a fingerprint ID. They look over their total spending with apps like Mint.
Don’t make your 21st-century employees submit 20th-century expense reports.
Find a solution that allows your team to quickly snap a photo of their receipts and move on. The longer an employee has to hold on to receipts (especially while traveling), the more likely they are to get lost. And after they turn in the receipts they do have, you have to find a place to keep them all.
Going digital not only means a smaller filing cabinet for you, it also means that you’ll be able to keep track of spending when it actually happens—not when the month is over.
Step 3: Follow Up in Real Time
The real-time nature of a digital solution also means that you can curb overspending when it’s occurring. If you see that an employee is on track to hit their budgeted spending limit, you can talk with them about it and come up with a plan to either adjust the limit or slow their spending. Feedback is always easier and more useful when given right away, as opposed to in a post-mortem meeting well after the fact.
Aside from face-to-face feedback, digital expense management tools also make it easy for your employees to see their spending in relation to their limits. In other words, they can stop themselves from going over budget.
Sometimes these features can come from the card issuer itself, as opposed to a third-party expense management platform.The ScaleFactor Corporate Card, for example, allows businesses to issue physical and virtual cards with unique spending limits that can be adjusted (or turned off) at will—and employees can see exactly where they stand in relation to that spending limit, right from their phones.
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Don’t Forget: Keep Your Records
There are many benefits to a well-run expense management system: more control over your costs, the ability to pivot quickly, and security in the case of an IRS audit. As you build out your own expense management system, bear in mind that while audits are relatively rare, your business is legally required to keep receipts and other financial documents for years.
So make sure to set up a system for storing these documents that is fire-proof, theft-proof, and mistake-proof. In other words, make sure that you store as much as you can in the cloud or you have a strong backup system.
Check out our blog post on which documents the IRS requires that you hang on to and for how long.
Talking about expense management can be a tough conversation, especially if it’s sparked by past mistakes. But the benefits of consistent processes far outweigh the slight discomfort you might feel in the moment, and your team will thank you, too.
To learn more about the ScaleFactor Card and how it can help you track and manage employee spending, read more here. Ready to talk to a representative about ScaleFactor? Request a personalized demo today.