As a small business owner, you know more than anyone how important it is to stay on top of your business finances. In a competitive business landscape, you have to keep a tight eye on profit and loss, which is particularly stressful when it’s your money on the line.
Which is why terms like “expense reimbursement policy” can make some small business owners cringe. More people having the ability to spend the company’s money? That sounds like more work, and more potential for misspent money.
However, it’s really a good problem to have. If you’re feeling the need for an expense reimbursement policy, it means your company is growing, and if you manage it correctly, a good policy can actually reduce your workload (and stress levels). Here’s a step-by-step guide to setting up a expense reimbursement policy that will actually benefit your small business.
6 Steps to Creating an Expense Reimbursement Policy
1. Set Clearly Defined Budgets and Categories
This is rule number one for a reason. An expense policy has two main functions: providing clarity on expenses and avoiding unnecessary company spending. In other words, how much are you spending and how are you spending it?
The categories will differ, however some standard ones are food (or per diem), supplies, and travel-related expenses. Travel expenses tend to be the largest, and can be broken up into flights, hotel stays, mileage, rental cars, and tolls.
Flights are going to be a large expense for every company, however avoid the temptation to chase what are known as “false savings.” Does that layover save you $50 on the flight? Sure, but it also cost you three hours in lost productivity for your employee—is that really saving money? Not to mention it might make for some grumpy and tired employees.
Per diem amounts are a bit more standard, as their prices don’t fluctuate based on time. However they do vary by region based on cost of living, and if you need a good barometer, the U.S. General Services Administration has a table with suggested per diems by city and state.
2. Implement a Clear, Consistent, and Fair Process
If the first step stresses the importance of having defined boundaries, the second step is about making sure those boundaries are clear. This means simple language, specific use cases, nominal limits, and exhaustive scenarios. No employee wants to be caught in a time-sensitive situation where they don’t know if a client’s lunch is covered or whether a last-minute presentation at a conference supply exceeds their spend limit.
A big part of this is creating a good system of discretionary spending. Although every employer worries about having their corporate account abused, if you make a policy too restrictive, you’re almost guaranteed to run into problems. Set hard limits, soft limits, and be fair and trusting when it comes to allowing your employees wiggle room when it’s necessary.
3. Know the Laws
This is a big one—you don’t want to get in trouble with the IRS.
The main ways to avoid this are by keeping thorough records for at least three years and being careful to understand what’s a business expense versus something that could be categorized as employee compensation. Maximizing tax deductions is 101 for any business, but to get savings, you have to make sure you’re not accidentally pulling a fast one on the IRS.
4. Find Automation Software
Receipt capture, purchase categorization, reimbursements. Manually sifting through expense reimbursement reports is time consuming, and frankly, a bad use of your finance team’s time (or yours). There are many applications that have seamless integration, and provide features like cell phone camera capture for receipts, and organized auditing of expenses. Not only does this make reports easier for yourself and your employee, but reduces the chance you’ll miss meeting your tax regulations and filing requirements.
5. Educate Your Employees
This in some ways is the most important rule. If your employees don’t know the policy, they won’t be good at following it. Which means the onus of education is on you.
For many companies, this means requiring new hires read and sign an expense reimbursement policy before they join. For larger companies, this can mean in-person group training sessions. For a small business, you might be fine with a PDF or whatever document or program you choose, but always remember to be proactive in sending it to employees and making sure they read it. It’s no secret that reading accounting literature is no one’s favorite way to spend their time, so be diligent in making the policy known.
6. Ask for Input, and Update
If there’s one big difference between a small business expense reimbursement policy and that of a large corporation, is the need to update the expense reimbursement policy. A small business is growing, hopefully, and as such, its expense needs, employee count, and budget will be constantly evolving. Your expense policy should reflect this, and not be a “set it and forget it solution.”
An important part of this work is checking your books and auditing expense reports. If you feel too much is being spent on travel or supplies, that’s something to look into. You should also look into revenue and not be afraid to expand budget limits as your company’s cash flow grows.
However it’s important to also remember to ask your employees for input, and keep their needs in mind. If the policy parameters are too tight, it could actually lead to inefficiency as employees are unable to spend fluidly or wasting time chasing false savings. Listen to their needs and make sure your policy is a solution for everyone.
If you still feel worried about setting up an expense policy, don’t fret. The good thing about money issues is that everyone has them, so there are many examples to follow. There are many existing expense reimbursement policy templates, and account management platforms frequently provide tailored help as well. In other words, you’re not alone.
So if you ask around, and keep in mind the six guidelines above, we’re pretty confident your first expense reimbursement policy won’t be a sinkhole for your money. Go grow your business with confidence!