Here’s why even small teams need good expense policies—along with 5 best practices to help you create a policy that meets your company’s needs.
One of the great things about being part of a small company is getting to work in an environment free of the bureaucracy found in larger organizations. At a small firm, where every employee is scrambling to do multiple jobs at once, who has time to create regulations? And when it comes to controlling the way employees spend the company’s money, what guardrails are really needed when a sense of camaraderie unites everyone on the team?
As it turns out, rules do help. In most areas of operation, small businesses can get away with playing it fast and loose. But when it comes to expense management, a little bit of structure goes a long way.
The Risks Of Expense Management
At large organizations, not having an expense policy is not an option. Even when companies publicize loose, feel-good expense policies—think of the famous “Act in Netflix’s best interests”—you can be sure that behind the scenes, a finance team is controlling who spends company money, and where.
The reason is simple: expense management is risky. Few other processes, if any, rely on correct behavior from so many people, spending money from so many diverse sources, in order to function. Most travel and entertainment (T&E) spend occurs far away from the office, which makes it difficult for reviewers to ascertain how “ordinary and necessary” a business expense really is. Corporate card holders are entrusted to make purchases that the finance team can only approve after the company’s money has been spent.
Failing to monitor for incorrect behavior has consequences. In addition to the prospect of being unprepared for an audit, T&E fraud causes companies a median loss of of $40,000 per year. But the risk inherent to expense management is not just an artifact of organizational scale. At small companies, there’s usually less oversight of each expense. When employees are simply assumed to be spending money in the proper way, with little oversight, chances are someone will make a mistake or take advantage of that freedom. In other words, it can be precisely the collegiality of a small team that hides problematic activity.
Creating A Great Expense Policy
Luckily for small teams, controlling expenses is easy and affordable. It all starts with creating an expense policy.
An expense policy doesn’t need to be long, or exhaustive, or even necessarily strict. It just needs to show employees that the company is being thoughtful about how its money is spent and that it monitors what is often its second-largest area of spend. Here are the five characteristics to aim for as you create your own expense policy.
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The primary goal of an expense policy is to be followed. That requires making a clear set of rules that employees can understand immediately.
It’s fine to tell employees general rules like “Don’t spend more than you think is necessary.” But as an expense policy, statements like that aren’t intelligible or consistent. People have vastly different ideas of what “necessary” means and the person controlling the corporate card probably has one of their own. To avoid confusion, define dollar amounts for important or common use cases. “Travel meals should total less than $50 per day,” for example.
Speaking of travel, part of having a clear expense policy is making it available at the moment money is actually being spent. To do that, make sure that your expense policy is accessible to employees while they’re on the road or working remotely.
In the event of an audit, the first thing the authorities will likely look will be your employee expenses. For good reason, too, since entertainment expenses in particular are typically prone to fraud and abuse.
To guard against this, make sure your expense policy gathers enough information that you feel confident you understand the context of each individual expense. You can achieve this by creating simple guidelines about writing a note for certain kinds of expenses, or including a receipt for expenses over $75 (which is an IRS rule for deductible expenses).
At the same time, you don’t want to require so much detail that employees are deterred from submitting expenses in a timely manner. That’s why your policy needs to balance the need for information with your need for employees to not put off their expense submissions.
Achieving this balance is one of the primary benefits of expense management automation. Using software, usually on a mobile phone, employees are only asked to submit a minimal level of detail; the rest is filled in by location tracking, past expensing behavior, credit card feeds and other data sources. It lets employees submit expenses without going through inconvenient steps, while still recording all the detail you need to get the full context of expenses.
Finally, make sure your expense policy is flexible enough to apply to many different use cases. Formulate a baseline set of rules or guidelines and then create specific ones for only the instances you care about particularly.
In general, the fewer rules you have, the better. At a minimum, make sure you’re IRS-compliant. That entails having receipts and notes for every expense over $75—with more documentation required for certain types of expenses—submitting deductible expenses within 60 days of the expense, and more. (You can see further info here.) Beyond that, your own preferences will dictate whether you create a policy that prioritizes employees being able to submit expenses easily, gathering detail on the expenses by requiring more information and so on. As long as you have a core group of rules that establish a baseline of an expense policy, you’ll be well set up to start evolving your employee expense management from there.
Automation Offers A Light Touch
Often at small businesses, it’s awkward for someone monitoring employee expenses to be too direct with employees about what they can and cannot spend. If an expense is questionable, some managers are likely to let it slide rather than making a scene about it. Avoiding confrontation alone is a big reason why many small teams don’t have an expense policy.
Automation solves that problem. With expense management software, all you have to do is set up the system, input your rules and let the system enforce your policy. It also offers a level of comfort for busy, multitasking teams: you can set it and forget it, simply checking in on your expenses on your own schedule.
However you set it up, it’s essential to create an expense policy for your small business. Your employees will appreciate the clarity, you’ll appreciate the peace of mind and your business will be able to scale much more powerfully.
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