Is Your Expense Policy Keeping Up with Changing Business Reality

In business, literally every penny counts. However, what many entrepreneurs don’t realize is that unused subscriptions, inflated reimbursement claims, and unauthorized expenses can all eat into your financial foundation, leaving you with much less money for growth plans than you anticipated. To avoid this, having a strong, workable, realistic, and up-to-date expense policy is vital.

Rethinking Expense Policy to Match Today’s Business Reality

The purpose of a well-defined internal expense policy is not to restrict your employees from spending, but to educate them about how their spending can boost or handicap business prospects, and how every dollar you earn can be put to good use for growth.

That being said, it is also important to first ensure that your expense policy is in sync not just with your business needs, but also with today’s business reality. Unrealistic expense limits or overly complex claim procedures can be detrimental to your business. If problems such as constant overspending, delayed payments to vendors, ballooning expenses against stagnant revenue, or unjustified business purchases have become common, it’s probably time to rethink your expense policy.

How to Make an Effective Expense Policy

Your employees can only follow the expense rules when they know what they are. But you cannot expect them to memorize the policy. A good, effective expense policy must be accessible, understandable, and actionable. Firstly, making policy accessible to where the transaction is taking place is crucial to ensuring implementation. Secondly, drafting it in clear, easy-to-understand language is important. And thirdly, it should be actionable and practical, with simple procedures covering different expense situations. Keeping these three key traits in mind, you can design and enforce an effective expense policy.

Define Parameters to Categorize Something as a Business Expense

What exactly constitutes a business expense? Does a meal with a client or an upgraded air ticket on a business trip count as one? Your expense policy must clearly answer such questions, leaving no loopholes or room for confusion.

A good way to avoid any confusion is to create broad categories for the usual expenses, such as utilities, stationery, and entertainment. You can narrow down to department-specific categories, such as printing costs for the advertising department, or fuel and logistics costs for the inventory manager.

Next, set rules for each category’s expense limit based on a practical and realistic parameter. For instance, how much is the advertising department allowed to spend separately on print ads, digital ads, banners, and social media boosts? Furthermore, what should be done if the expense is expected to exceed these limits? All these points must be covered in the policy.

The policy should also specify which expenses will not be covered. For instance, upgrading flight tickets priced beyond the specified ticket fare limit will not be allowed, and subscribing to an OTT platform for personal entertainment at the workplace is not acceptable.

Design the Spending and Approval Process

The next step is to design procedures employees are expected to follow before and after spending to prevent overspending or hidden, unauthorized spending in businesses. The policy can determine which expenses can be paid with corporate cards, which can be paid with cash, and which are eligible for reimbursement. It should also detail the procedure for claiming reimbursement and submitting acceptable bills for cash and card spending.

It goes even deeper: if an amount exceeding the stipulated spend limit is to be paid to a vendor, who will be responsible for approving it? Will the right to approval rest with one person or multiple people for high-risk or international payments?

Apart from these questions, the policy must also define how an employee is to record or report each transaction, the timelines for submitting reimbursement claims, and the number of days required to settle each claim. A smooth flow of expenses will reduce delayed vendor payments and unclaimed reimbursements.

Enforcing Expense Policy

Many businesses often struggle with expense management despite having well-defined policies in place because the policies are not properly enforced. Even if employees have the policy document, they cannot check a 100-page PDF in real time before initiating every expense. It is inefficient and prone to confusion and misinterpretation.

• Expense Management Software: You can enforce the expense policy by embedding it into the expense management software employees use to record and approve expenses. Such software is easy to use and makes real-time recording and storing receipts and bills much easier. For instance, when a corporate card is swiped, employees receive a notification to take a clear photo of the receipt (unclear photos may be rejected). The app reads and extracts all necessary details from the document, including the purchase date and time, vendor name, and bill number. It automatically categorizes the expense in predefined categories based on the tax code and general ledger, and creates a backup in cloud storage. Expenses below a certain threshold may be automatically approved, while those above the limit may require approval from a senior. This ensures each expense is monitored and overspending is tracked immediately. Any expenses with missing bills might be flagged.
• Corporate Cards: You can issue employees corporate cards with predefined spending limits, which can be further customized with embedded rules such as auto-expiring periods or specific spend categories, such as “software subscriptions only”. You can also add another layer of security to these cards by enabling them to send you an alert if someone tries to use the card for payments exceeding the approved limit.
• Cash Transactions: You can set up a cash system. A “custodian” hands out petty cash to employees and records the amounts given to each employee for what purpose in a digital register. The employee then submits documentary proof of the transaction, i.e., the receipt or bill for the cash transaction, to the custodian, who then uploads it to the app for record purposes. This helps reduce false and unreported cash expenses. Reimbursement claims can also be digitized to speed up approval and claim processing.
• Set up Notifications for Contract Renewals: Contract renewals are a good time to renegotiate the terms and get a better deal. However, you are rarely prepared to negotiate and simply renew in haste. The same is true of software subscriptions. Setting up notifications for renewals and adding notes can help you align renewals to business reality.

Integrating Expense Management and Accounting Software

Once your expense management software is set up, you can scale it across departments and branches, centralizing all expenses in a single system. A centralized expense management system helps you enforce expense policy, implement changes, and ensure company-wide compliance. You can integrate it with an accounting system and populate all expenses in the general ledger.  

Clarity in policy drafting and real-time enforcement of the policy using expense management software can provide deep insights into the quality of your expenses and how they are helping your business grow. Using your expense policy as a tool for strategic financial planning rather than a cost-cutting exercise might be the leverage your business has been looking for.

Contact DNTW Toronto LLP in North York to Help You with the Business Expense Policy

Policy-level decisions and systems need a 360-degree view of business and accounting to ensure expense policies are aligned with business goals and the market environment. At DNTW Toronto LLP, our business advisory team can help you rethink your expense policy or make one from scratch, set up expense management software, and prepare expense reports. To learn more about how DNTW Toronto LLP can provide you with the best accounting and business consulting services, reach out to us here.