By Sean Moylan, Head of Financial Reporting, Pleo
Expense policies are a massively overlooked area of a business. In fact, 53% of UK businesses either don’t even have one or feel theirs isn’t fit for purpose. Whether it’s because they feel it isn’t a valuable use of time, that the idea of updating an old expense policy is a daunting task, or even that they have a great culture of trust, businesses are ignoring this vital practice.
This needs to change as not having a clear expense policy can be a risky game. Citibank’s recent legal trouble serves as a stark reminder of that. Taken to court by a disgruntled ex-employee over unfair dismissal, the financial institution had to prove that their expense policy had been misused. Had it not been for Citibank’s clear guidelines on what’s acceptable to expense, this could have proven a tricky task.
There’s a key takeaway from the Citibank case: companies benefit from putting a clear expense policy in place that sets expectations for employees and employers. But how can this be achieved? Below are several steps recommended to follow for an effective expense policy.
Clearly define what’s acceptable to expense
While organisations might set a limit for how much can be expensed, and define whether it extends to non-employees, too many policies remain vague over the small print.
This is evidenced by the fact that 25% of employees spend outside of their company policies, in part due to the fact that there are no clear guidelines. This means that a large number of organisations are leaving themselves open to legal trouble and a lack of visibility over spend.
When writing an expense policy, businesses should therefore strive to leave no room for misinterpretation. Whether that’s setting an allowance per expense type or exact items that can and can’t be purchased. Clear communication over what is acceptable and what happens if the expense falls outside of what can be approved, is key to a successful expense policy.
Keep employees front of mind
For an expense policy to be followed, it needs to work for employees of all levels. A C-suite executive may not mind being £50 out of pocket, but that’s not the case for all employees and organisations can’t afford to make these assumptions, especially as the cost of living continues to prove challenging for so many.
To consider everyone, businesses should think through a variety of different scenarios. For example, how employees will be expected to record expenses, the reimbursement procedure and if there are any expenses the company will pay upfront for. If the company is going through cost measures and amounts or types of expenses need to be restricted, it’s important to keep employees updated.
There is also a tendency to think month-end is the be-all and end-all of finance teams, but in today’s environment there is very little argument to stick to this way of working, and instead, expenses should be made real-time through digitisation. A strong expense policy should be frictionless and keeping employees front of mind is a great way to do so.
Understand local and national regulations
Understanding tax regulations is a must for any business and what counts as a business expense will change from country to country. Businesses should ensure they read up on local tax regulations to understand the expenses the business can claim tax relief on.
This will have a huge impact on setting an expense policy. Employees need to understand what sort of expenses are non-taxable, and they won’t be able to do that if the company doesn’t tell them.
Additionally, local tax regulations are important when expanding to international locations. As different countries will have different regulations, organisations will need to change their policy for each new location.
Understanding the regulatory environment doesn’t need to be done alone. Businesses can collaborate with their CFOs or seek external help to grasp the tax landscape. Working as a team in these ways will keep businesses from significant financial repercussions later down the line.
Keep it simple
Having clear expectations of what constitutes an acceptable expense is redundant if employees can’t make sense of the policy. The human attention span is only 8.25 seconds long, meaning that if an expense policy is page after page of jargon, it’ll be ignored.
Expense policies need to get to the point, and fast. Organisations should strive to have the key information presented to employees in a quick, easy-to-read and digestible format that leaves no room for error.
To do this, redrafting is key. After finalising a first draft that clearly defines an expense policy, organisations should work on a second draft that uses simple language and shorter sections. AI can even be used to simplify and personalise strategy and messaging documents – so long as your finance team is proofing it afterwards.
Invest in modern technology
Technology can be your greatest ally in maintaining an effective expense policy. The business case for fintech is getting stronger by the day. Businesses lose 5% of revenue a year to fraud with almost 15% of that being expense fraud. Spending on technology to aid with your expense policy can prevent significant amounts of revenues from being lost.
Digitalisation doesn’t need to be a daunting task either, especially when it comes to implementing an automated expense management system. Dedicated business expense cards ensure that employees stick to the company’s policy without ever having to read it, and also save finance departments time setting up company credit cards or even sifting through manual receipts.
The ongoing value of a clear expense policy
A robust expense policy can make a difference to a business. Not just in avoiding situations similar to Citibank, but in gaining comprehensive oversight of spend. And once an expense policy is written, it doesn’t mean it has to stay that way forever – in fact, it’s better that it doesn’t.
Once yours is written, give it a trial period and regularly check-in with how your finance team, and wider company, are managing. Opening up the policy to feedback and suggestions gives business finance a much-needed dose of transparency and helps you pivot in an increasingly challenging financial landscape.
No organisation can expect to nail it the first time, but a good way forward is to work with your employees on it – not against them. That way, an expense policy can even be welcomed and not something they feel is there to catch them out. Ensuring that, whatever the policy contains, it doesn’t come at their, or your business’, expense.