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Top 10 best practices for crafting effective expense policies
Expense report submission deadlines are usually the most stressful and tiresome days of an employee. While it is important for the company's administration, HR, and finance teams to identify, track, and reconcile employee expenses, employees often find it cumbersome to create and submit their expense reports. A greater hassle is auditing, verifying, and approving these submitted reports.
While employees must individually put together their expense reports for submission, finance teams are often stuck with verifying and approving multiple expense reports at once, usually closer to the communicated deadline than preferred. A well-drafted expense policy helps guide employees in incurring compliant expenses, maintaining budgets, following approval workflows and company rules, and submitting audit-ready expense reports.
What is an expense policy?
An expense policy is a guideline, often communicated in writing to the employees, conveying rules, limits, and exceptions regarding expenses incurred on behalf of the company by employees. It is a document that helps employees make expense decisions based on allowances, budgets, and other constraints put forth by the company to control business spend.
Importance of expense policies
Expense policies help regulate employee expenses and guide employees to make compliant expense decisions, but those are not the only reasons for crafting an expense policy. Here's why every company requires an expense policy.
Business travel and accommodation
All business travel encompasses spend incurred by employees on behalf of the company. Expense policies help employees understand their options to book and spend on travel, accommodation, mileage, meals, and other incidental expenses, whether they are traveling for meetings, events, conferences, exhibitions, team trips, or more.
Clarity and transparency
Expense policies define clear guidelines of allowances, constraints, and rules to give clarity to employees for making informed expense decisions while giving the company the transparency to check for fraud and misappropriations.
Cost control and accountability
With clear guidelines and transparency, expense policies not only help businesses ensure accountability within the vast amount of transactions incurred in the business, but they also help control costs by setting up expense limits across categories, hierarchies, departments, and more.
Employee satisfaction
With set rules and guidelines, employees find comfort in the fact that they are compensated fairly, and the business assures the comfort and safety of the employees within limits. Policy adherence also helps employees process their reimbursement requests swiftly, ensuring satisfaction.
Legal compliance
With local tax laws, tax reclaim options, per diem regulations, mileage rate advisories, and more, businesses can ease the process of legal compliance by configuring policies based on these government rules.
Analytics
Make informed decisions by tracking a streamlined set of expenses bound by an efficient expense policy and analyzing the data to build and aid further business strategies.
10 best practices to follow when crafting the right expense policy
Best practice #1: Clearly define allowances
Define permissible expense categories and merchants along with expense limitations for all employees across regions, hierarchies, departments, and more.
For example, you can identify and prevent expenses with uncertified and potentially fraudulent vendors by communicating a list of prohibited merchants for employee expense reimbursements.
Best practice #2: Establish clear requirements
Specify the necessary documents and details required when submitting expenses.
For example, depending on your country's regulatory requirement, employees may need to submit both digital and paper receipts. Ensure the expense policy includes these requirements to be checked before expenses are approved.
Best practice #3: Be explicit
Ensure every expense policy guideline is explicitly communicated to all employees. The policy must also be easily available for employees to peruse when required.
Companies can notify employees of the policy rules and limits by sending them the updated rule document via email, chat, or notification through their expense management software before every trip.
Best practice #4: Set reasonable limits
Set reasonable expense limits based on categories, budgets, and intents to ensure employees can perform their business activities without any challenges.
Analyze historic expense data across travel expense categories such as lodging, cab fares, and more for frequently visited regions to set limits and allowances that reflect the prices in the region. Gather employee feedback to improve and adjust these limits so employees can stay, commute, and execute their work comfortably without worrying about expenses.
Best practice #5: Outline a clear approval process
Whether it is a hierarchical approval process or an ad hoc one, ensure the whole workflow is communicated in the expense policy along with exceptions.
Not only managerial approval, but also include complicated approval workflows in the policy. Take an example of an operations executive who is traveling for a client implementation that is also headed by a project manager. In this case, the policy must ensure that both the manager and the project head who act as approvers are mentioned.
Best practice #6: Highlight exceptions
Expense policies must cover all exceptional scenarios to ensure employees have a clear idea about the procedures when handling these situations.
While employees will follow an approval flow laid down for their regular expenses, exceptions that occur infrequently must also be included. For example, configuring additional approval levels for expenses above $1,000 for business trips with a duration of less than three days.
Best practice #7: Cover all sources of expenses
Ensure expense policies explicitly cover guidelines for every source from which employees incur expenses, such as petty cash, cash, credit cards, bank accounts, or more.
Companies can streamline expenses by mandating the use of company credit cards for employee expenses or even setting limits on invoice totals for expenses incurred from the petty cash fund.
Best practice #8: Indicate the consequences of non-compliance
Expense policies, apart from highlighting the rules, limits, and mandates, must also indicate the clear consequences of non-compliance to encourage employees to stay within the rules and also keep the process fair.
For example, bills submitted past eight months of the expense can be denied reimbursements or subsequent budgets reduced for overspending to ensure employees stick to the policies.
Best practice #9: Digitize and automate expense management
Digitize expense policy enforcement with the help of an end-to-end expense management software, such as Zoho Expense, that helps ensure compliance, transparency, accountability, and employee satisfaction.
For example, Zoho Expense highlights and notifies the users of any violations throughout the expense creation, submission, and reimbursement process to make sure that warnings and blocking disallow any out-of-policy expenses.
Best practice #10: Review and update the policy
Review and update expense policies periodically to ensure limits and rules that prevail do not cause hindrances for employees, such as per diem allowances, mileage rates, and more can be updated based on market conditions and costs.
For sales employees travelling to expensive cities such as San Francisco, Tokyo, or New York, compute per diem and meal allowances based on the average in the region. Update these at frequent intervals to stay up to date with changing prices.
Conclusion
Follow these best practices to build an expense policy for your company that is clear, fair, and effective in managing business spend. Benchmark allowances and limits based on industry standards and government regulations to stay updated and compliant. Ease policy enforcement with the help of an expense management software like Zoho Expense.