No business owner wants to waste money. That's where expense management comes in.
Your CFO or accountants aren't the only ones paying the bills. Your employees may make financial decisions for your company.
They may or may not be making major ones, but even the little ones can add up. Every time they take a client out to dinner or go on a business trip, you can hear somebody else's cash register ringing.
Do they order the most expensive item on the menu (cha-ching!) or go for something more reasonable?
If you're paying for mileage, they're choosing how much gas your business will pay, depending on what routes they take (cha-ching!).
You get the idea.
Many of your employees may be acting as mini-CFOs. So if you feel you as though your expense management could use some improvement, you may want to take these steps.
1. Understand why you need expense management.
When your company is raking in revenue, it's easy to fall into the trap of thinking that expense management really doesn't matter.
While it may or may not hurt your bottom line much, expense management errors can get you in trouble with the Internal Revenue Service, according to Thomas Williams, a tax accountant and the co-founder of Deducting the Right Way, an online resource for small business do-it-yourselfers. (He also operates Your Small Biz Accountant, a virtual boutique accounting practice in Celebration, Florida.)
“I had a client who insisted on reimbursing gas expenses by handing over $50 to employees every week from petty cash," Williams says. “When I came on board, I immediately pointed out the issue."
The issue? The IRS sees that $50 as part of the employee's salary—money that the employee isn't paying taxes on, Williams explains.
When it comes down to employee expenses, we believe the first thing to do is to have a fair policy written down that outlines the ins and outs of how expenses for employees work.
—Craig Murphy, owner, ALT Agency
“Most small-business owners do not realize that cutting corners results in their employees paying tax on the reimbursement. It's what the IRS refers to as a non-accountable plan," he says.
Instead of giving the employee $50 every week from petty cash, Williams says that the client had two choices: add it to the paycheck as taxable wages or follow reimbursement protocols to facilitate a non-taxable transaction to the employee.
The protocols aren't all that hard, according to Williams. Employees need to share receipts, invoices or notes to accountants about what was spent—some sort of written documentation that can explain what the money was used for and can be added to a signed reimbursement form. (If your CFO or accountant doesn't have them, those forms can often be downloaded off the internet.)
2. Create processes and rules for expense management.
Sure, that sounds obvious—but only if you're already doing that.
“My best advice [for better expense management] is to implement protocols you're willing to live by," Williams says.
Williams suggests doing things like closing out the prior month's accounting activity the same week each month, placing a deadline on employees to submit their reimbursement forms and denying employees' requests for compensation when critical documents are missing.
"Critical documents" could mean a signed reimbursement form, receipts, invoices or notes, Williams adds.
3. Change how you track expenses.
“We just signed up for an expense tracking software program," Ross says. (If you're curious, the software program that Ross uses is called Expensify.)
“Previously, I was doing all the expenses by hand. It was an absolute nightmare to say the least. Not only was it inefficient, but my employees continually messed things up."
What would go wrong?
“They would lose receipts, exceed the allowable limit and in some cases attempt to defraud the company. Yes, in one particular instance, I had an employee who routinely over-inflated expenses," Ross says. “Needless to say, that employee is no longer with us."
But many workers simply made innocent errors that nevertheless made it hard to do expense management well.
“Employees consistently forgot the context around a particular expense," Ross says. “In other words, I would ask them how I should split the costs up or what project the meal should be assigned to and they would forget. That happened quite a bit."
“We're still getting used to the new software program," he continues, "but so far it's streamlined certain processes. Employees can now immediately snap a photo of the receipt and upload it. This has helped with lost receipts already."
4. Discuss the rules involving purchases with your employees.
Not having these rules and conversations in place is often the core issue for many companies that have trouble with expense management.
“When it comes down to employee expenses, we believe the first thing to do is to have a fair policy written down that outlines the ins and outs of how expenses for employees work," says Craig Murphy, owner of ALT Agency, a web design firm in Birmingham, England.
After all, you can't expect your employees to know the rules or follow best practices if they don't know what they are.
“Our policy is very fair, but it's also pretty firm, leaving nothing to interpretation," Murphy says. He also makes sure employee expenses are scrutinized if they're, say, marked “entertainment."
“This could really be anything and against company policy or even illegal," Murphy says.
According to Murphy, having things like expense management software doesn't just help the company's executives keep track of purchases, it makes it easier for the employees, too.
“We use an online cloud system that allows individuals to put in their expenses and also leave receipts with the office admin," he explains. "This allows us to see at the click of a button who has claimed what expenses, how much and for what and also match it up with the receipts we have. Using this cloud software we also are able to see not only individual transactions but the company as a whole, giving us the fuller picture on expenses."
And that's what every business owner and stakeholder wants, isn't it? A fuller picture of the company. Expense management is like the focus button on a camera or your smartphone. You can still take photos without it, but if you want to avoid fuzzy and unclear outcomes, why would you?
Read more articles on managing money.
Photo: Getty Images