We've built a guide outlining everything you need to know about business expenses. If you'd like to download it for free, you can do so here.
One of the more annoying aspects of running a business is all necessary paperwork. One type of paperwork that needs to be created from the second you hire your first employee is an expense policy. Once employees are potentially spending company money for any reason, you need to have a policy in place that lays out all the rules.
Creating an expense policy will avoid miscommunications on money spent or intentional overspending. It will clarify exactly what is allowed to be purchased (dinner, cabs to the airport) and what isn't (a wild night out).
Creating Your Expenses Policy
First, conduct research on what you'd like your policy to cover.
A policy written in crystal clear language will prevent complications down the road.
Break down the type of employee expenses your company would reimburse. Identify what price levels are allowed for each. Perhaps you’re okay with employees flying business class, for instance, but you also don’t want them to dining at a top steak house each night for dinner.
Here are some of the sections your policy should include:
- Expectations for employees to follow the policy
- Travel expenses and any expenses that are directly related to travel.
- Accommodations. What hotels are acceptable? Do you have an agreement with a hotel chain?
- Food and entertainment. What’s the maximum amount you’ll accept in meals each day? What if a client is joining your employees?
- Other miscellaneous expenses. Travel, accommodations, and food/entertainment are most common on expense reports. But anything is possible.
Putting your policy in writing is the next step. The biggest requirement is that it makes sense. Now is the time to be straightforward and concise. Ambiguity in an expense policy is never a good thing. Be crystal clear and your employees will follow the policy.
Be prepared and well researched for questions outside of the policy you've built. Whether expense reimbursements are taxable income, for instance, is a commonly asked question.
Different Policies for Different People?
If you ever watch Mad Men, you’ll see that the top executives go out to have oysters and martinis for lunch on the company dollar. But good luck seeing the entry-level employees joining them for this lunch. Or, better yet, good luck seeing the entry-level employees hosting their own expensed lunch.
Some companies believe that different departments and different employees deserve to have different policies. Their opinion is that a manager should be able to, for example, stay in a suite whereas the employee needs to stay in a regular hotel room.
There are different attitudes about this and you, as the business owner, will have to decide what you feel most comfortable with. However, the more horizontal you make the policy, the less ambiguous it gets and the more fair it gets. There’s no need to create resentment.
Pay Back Quickly
I can remember the first time I went on a company trip. I was broke and had forgotten my credit card at home. Therefore, I was stuck using my debit card to pay for the hotel and all of my meals. Naturally, this was all going to be paid back to me, but my company had a policy of paying back every two weeks.
So suddenly my “I’m just out of college” bank account was drained for company purposes and then I was left waiting for two weeks before I got paid back. The faster you can give your employees back their money, the better. And it’s important to express understanding and gratitude that they're fronting the bill for business expenses. So the faster you can pay it back, the less inconvenient it’ll be for them.
However, a good way around this is to just get company credit cards. While not everyone will get one, if you have people who travel pretty regularly, it’ll ensure that they don’t have to front the bill.
One of the features of Justworks' software is the ability to easily and quickly reimburse employees from an expense report. There’s no reason to wait more than a day.
Enforce Your Policy
Once you've built the policy, it is important that you actually enforce it. The easiest way to see a policy get destroyed is to be selective with your enforcement.
Therefore, empower your managers to make decisions about expenses. More importantly, encourage them to identify spend that might not be covered by the expense policy. If an employee bought a brand new suit while out on business, that’s probably not going to be covered. Rather than just giving a blanket payment, have the managers check out the expenses and approve what is, in fact, covered.
In fact, expense reports must be thorough and detailed. Educate your managers on how employees should properly substantiate their business expenses.
The more work the managers do to keep an eye on expenses, the less out-of-policy expenses there will be. This will reduce your spend, which is definitely important.
The final point to remember is that an expense policy needs to be continually update. Here’s an example: you mention hotels in your company policy. What if someone wants to use an Airbnb to stay in that city? Is that allowed? If your policy was written before that company launched, the employee wouldn’t be sure if it was allowed. Now they can be sure. Can employees use Uber instead of taxis or car services?
To ensure these rules get updated, make one of your employees (probably someone in HR) the primary stakeholder on the expense policy. Their job is to identify new trends and make recommendations on updating the policy.
In the end …
The most important thing to remember is that ambiguity is bad for an expense policy. You’re talking about your employee’s money that they are fronting for business expenses. Don’t leave them wondering whether they’ll get paid back. The more crystal clear you are, the more likely the policy is going to be a success.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.