8 easy employee expense management strategies to improve cashflow
There’s no way around it: Effective employee expense management is absolutely essential.
Without a clear set of rules and an efficient process to manage employee expenses, there are bound to be problems for employees, the management team, and the bottom line.
For example, you could be paying for things that don’t benefit the business. Or employees could overestimate how much they’ve spent and demand reimbursement. Perhaps employees don’t feel empowered to spend where it could help the company grow.
Thankfully, whatever problems arise, you can solve them with an employee expense policy.
But what counts as an employee business expense, and how can you control employee expenses? In this article, you’ll find a brief employee expenses definition, a list of common expenses to consider offering, and eight effective management strategies.
Let’s dive in.
What are employee expenses?
What are employee business expenses? Whenever an employee spends their personal money to perform a task for the business, it can be considered an employee expense. And if the expense meets the criteria outlined in the company’s reimbursement policy, the company should repay the employee.
6 common employee expense examples
Whether employees are travelling for business, or purchasing a software-as-a-service (SaaS) product to improve a process, it’s often easier and more convenient for an employee to pay for something rather than the employer.
To cater to these situations, most companies create a list of allowable employee expenses they’re willing to reimburse. These expenses should be necessary and provide value to the company in some way.
Let’s quickly explore six common work-related expense examples.
(Bear in mind that, just like regular business expenses, employee expenses must meet the government’s tax requirements.)
Whenever an employee travels for work, they should be reimbursed for the transportation costs.
For example, employees may need to travel to meetings with clients or attend business events on behalf of the company. In these situations, they could incur reasonable costs such as train fares, airfares, or mileage and vehicle expenses.
It’s worth noting that commuting to and from work wouldn’t ordinarily count as an employee travel expense.
Another typical employee travel expense is accommodation. Whenever an employee needs to stay overnight somewhere to conduct business, the company will need to cover the hotel or Airbnb costs.
3. Meals and drinks
Similarly, there are times when employees will need to eat and drink for work-related reasons — aside from the usual lunch or dinner break. For example, perhaps an employee takes a client out to dinner to discuss business or is travelling for work and needs to eat on-the-go.
Some companies provide a ‘per diem,’ or daily rate, to cover these costs when necessary. Other companies prefer employees to claim every expense.
4. Professional development
Many companies reimburse professional development costs, like training workshops and courses. Doing this is likely to encourage employees to improve their skills and empower them to contribute more value to the business.
5. Business tools
Often it’s easier for employees to purchase business tools and resources from their own money and then claim it back later.
For example, employees may need to buy industry magazines or reports. Perhaps they use their personal phones for business calls and claim back the costs. Or maybe they thought to pick up some basic office supplies or pay to get their work laptop fixed.
Some countries allow entertainment costs to be counted as business expenses (and others don’t). For instance, the company could offer to pay for a team-building retreat or for employees to entertain important clients.
How to manage employee expenses: 8 effective strategies
Now that we’ve covered what employee expenses are and reviewed some common examples, how can you improve your employee expense management process?
The key is to take an active approach.
Many new businesses and startups don’t pay much attention to employee expense management initially — perhaps because the amounts seem small and one of the founders or key managers handles all the money anyway.
However, businesses inevitably need to streamline the process of providing employees access to funds. This way, employees can forget about the money and focus on doing their best work.
Here are eight things to consider when setting up or improving an employee expense control process.
1. Define acceptable (and unacceptable) employee expenses
First things first: You need to define which employee expenses are acceptable and which aren’t.
Are hotel costs covered under the company’s reimbursement policy? If so, which situations make the costs acceptable? What about food and drink?
Maybe hotel costs are only acceptable when the employee is more than two hours drive away from home or when a business engagement finishes late. Perhaps meals are covered, but alcohol isn’t.
Try to be specific.
Providing clear-cut rules can help avoid confusion and situations where employees feel like they’ve not been paid fairly. For example, you may want to create different employee expense policies for various positions in your company.
Fedex’s expense policy permits Vice Presidents and above to travel first class, while other employees must fly economy. However, all employees are allowed to fly business class on flights longer than six hours.
2. Set employee expense spending limits
Once you’ve defined which expenses are acceptable and which aren’t, it’s a good idea to set spending limits for each item.
For instance, perhaps hotels and meals are allowed in certain situations, but staying at the Four Seasons or eating at 5-star Michelin restaurants might not be necessary!
After you’ve defined reasonable spending limits, you could also set limits that require prior approval from management.
For example, if an employee wants to test out a new online marketing tool that costs £20 per month, they wouldn’t need to consult management. However, if they wanted to sign up for a SaaS product that costs £200 per month, they would need to gain management’s approval first.
3. Set budgets for employee expenses
Once you’ve set limits for each allowable employee expense, consider setting reasonable budgets — and for anything above the budget, employees must request prior approval.
There are a few ways to do this.
You could set a budget per employee — perhaps each employee is permitted to spend up to £250 per month on authorised expenses without prior approval.
You could also set a budget for each expense category — maybe employees are allowed to spend up to £50 on food, £100 on travel, and £100 on accommodation before needing to seek prior permission.
At this point, it’s important to try to keep things simple.
Although it’s possible to dig into the details, doing so will create a needlessly complicated employee expense policy that’s unlikely to be followed.
Remember, the more straightforward the rules are, the more likely they are to be used. So, aim to make the rules easy to remember — employees won’t want to consult a document every time they need to buy something.
4. Create an employee expense management process
Now that you’ve laid down the ground rules, it’s time to create a process to handle employee expenses.
This is perhaps the most important — and the most challenging — part of employee expense management. The Global Business Travel Association found that 19% of expense reports contain errors, and it takes an average of 18 minutes to correct each one.
In other words, if you don’t have an effective process in place, you’re going to waste time and money.
Here’s the golden rule: Make this process as quick and painless as possible.
For example, you could provide employees with expense forms and weekly prompts to help them stay up-to-date. Alternatively, you could have employees use an expense tracking app, such as:
These apps allow employees to track expenses, take photos of receipts, and submit expense claims on-the-go.
5. Provide an employee expense payment option
Although modern apps can help take the sting out of employee expense management, the process is nowhere near effortless. Employees still need to remember the rules, record their payments, and submit claims regularly.
To put it another way, plenty of things can go wrong.
Thankfully, there’s a better way. True efficiency lies in providing employees with a payment option, such as a company credit, debit, or prepaid card.
This method makes life far easier for employees and frees up time they can spend on their core responsibilities. Employees will also appreciate not having to dip into their personal funds and wait for reimbursement.
For example, with the Neat dashboard it allows managers to set spending limits for each card and track employee expenses in real-time. And employees can use the Neat App to upload photographs of receipts.
6. Develop a healthy spend culture
Although your company can’t afford to pay for needless expenses, employees also won’t appreciate being micromanaged or called out for every minor mistake.
So, consider morale and make sure that everyone’s on the same page.
Encourage communication and integrity by fostering an open dialogue about your employee expense policy. Ask employees for their suggestions and opinions, and address all concerns that come up.
Also, try to strike a balance between providing boundaries and empowering employees to make decisions that benefit the business. For a more extreme example of this, take Netflix, who’s employee expense policy consists of just five words: “Act in Netflix’s best interests.”
After some time, review your employee expense policy with the team and look for ways to prevent common errors.
7. Mitigate employee expense fraud
Fraud isn’t exactly a fun topic, but it is worth mentioning — especially as one report found that a whopping 85% of employees admit to lying on expense claims.
Still, it’s worth pointing out that not all of those lies were malicious attempts to steal money from the company. Sometimes employees will make up realistic details because they’ve forgotten the exact information needed.
Still, fraud should be a consideration.
No doubt, the simplest and most effective way to reduce fraud is to forget expense reports and use company cards that can be tracked in real-time.
8. Pull everything together in an employee expense policy
Once you’ve defined your expenses, limits, budgets, processes, payment options, and culture, take the time to compile everything in a single employee expense policy.
Again, the key is to make sure it’s easy to understand by everyone in the company, not just the Chief Financial Officer (CFO).
Two-thirds of employees don’t read their company’s expense policy. So, here are some tips to make sure yours is understood:
- Make it straightforward and concise
- Don’t write a legal document — use everyday language
- Include simple real-life examples to illustrate the rules
- Create guidelines that point the way, not detailed lists of rules
- Clearly explain the process for managing employee expenses
Employee expense policy templates can help — for example, Workable has a free template that you can use.
Start managing employee expenses effectively
Your company’s capital and your employees are perhaps your most important assets. So, manage employee expenses carefully to safeguard your funds and empower employees to spend money where it counts.
To summarise, start by defining acceptable purchases and setting reasonable limits and budgets. Then, create an efficient employee expense management process — consider using employee expense software or centrally managed company cards.
Pay close attention to your company’s spend culture. Aim to foster trust, integrity, and open lines of communication. Consult your team regularly and ensure that everyone’s on the same page.
Remember, fraud is always a possibility, so take measures to safeguard your business from abuse. Finally, take the time to pull everything together into a clear employee expense policy that’s straightforward and easy to understand.
With an effective strategy and planning, you can take the pain out of expenses and liberate your employees to do their best work.