How to Create Your First Company Expense Policy
This article is part 2 of a 5-part series on managing employee expenses. We covered the IRS rules for expense reporting in Part 1 here. You can also download the full guide to managing expenses here. In part 2, here, we cover how to create your expense policy.
As a company starts to grow, it becomes more important to have business policies in place. Not because you don’t trust your employees – just the opposite actually. Policies help employees understand what is expected of them and leaves them feeling at ease. A written policy will make life easier for everyone.
Your company’s expense policy is no different. A good expense policy understands how employee expenses occur and how your business is run. It outlines your expense reimbursement process, keeps your business compliant with federal and state laws, and answers questions that employees will have.
This article walks through a few things to consider and include when building your first company expense policy.
Ready to create your own? Our expense policy generator builds a custom policy for your business after asking just 8 questions.
What To Include In Your Expense Policy
Your policy should clearly outline rules, policies, and expectations. It should also highlight the intent of your policy; whether it’s to always ask questions before expensing or to spend as little as possible, the intent will help set the overall tone.
Rules and Requirements
Include limits for categories, per diems, and receipt requirements. Clearly list what can and cannot be submitted, especially for common expenses and categories. Be explicit about any timeframes for submitting an expense, as well as anything else that may be specific to the company.
Exceptions and Discretionary Circumstances
Cover rules for tips and gratuities, and what to do if an employee needs to do something that falls outside of the policy.
Expectations for Submissions and Reimbursements
Set expectations for how expenses should be submitted (whether you use expense management software or a specific form) and when and how employees should expect reimbursements.
Process to Follow
Outline the process for submitting expenses, whether directly to finance or to a manager. Also outline what employees can do if they still have questions: how and whom to ask.
Sample Expense Policy Rules
The more specific your rules are, the less confusion there will be. However, the more rules you have to follow, the more complicated employees will find your policy — increasing their risk of error. Find a balance of what is most important to note and what should be held in the intent of the policy.
- Reimbursable expenses over $X should always have a receipt.
- Client meals should not exceed $X.
- Any expense must have a note.
- Billable expenses should have a client associated with them.
- Expenses must be submitted within 60 days of the transaction date.
- All expenses should have a category.
- Any expense must have a note.
- Reimbursable expenses do not include: mini-bar, spa usage, in-room entertainment, and other hotel amenities.
Building Your Expense Policy: What to Consider
Know the Law
First and foremost, make sure that you understand the laws and rules around business expenses. Get up to speed on the IRS and state laws that may impact your expense policy. Be sure to understand what financial and expense records you need to keep and for how long.
Additionally, pay close attention to regulations around per diem rates – laws differ by state for what is considered an acceptable per diem rate.
Expense Per Diems
If you decide to use per diems in your expense policy, there is a full breakdown by state on per diems for federal employees available at gsa.gov that you can reference. Per diems can include expenses for meals, lodging, internet, and incidentals.
There are pros and cons to using per diems versus actual expenses that you should take into consideration when developing your policy. Per diems can help set expectations about spending and encourage taking cost into consideration during the buying process. However, per diems can also become unrealistic depending on location and may require constant exceptions to the rule.
Ask for Input
You know the laws and you know what business expenses look like historically, but predicting the future can be harder. Getting a sense of what’s coming will help you build an expense policy that is realistic.
Be sure to ask for input from your senior management team. What are their budget plans? Do they foresee any travel changes or new expenditures for their team?
Another great time to ask for input is once you’ve written a draft of the policy – ask a few employees for feedback to make sure it’s easy to understand. Turn to the teams that historically submit the most expenses and/or the teams closest to your company’s financials.
Be Clear and Use Simple Language
Communication is a two way street – it’s only as good as how well the receiver understands the intended message.
Try to communicate your expense policy’s rules in as few words as possible. The same goes for the expense reimbursement process and expectations that every involved party should have. Cover what needs to be submitted, the timeframe it should be submitted in, and how long it will take to be reimbursed. The more straightforward you are, the less lingering questions there will be.
Be sure to use language in your policy and expense management process that anyone can understand. Specifically, use easy-to-interpret categories that map to your chart of accounts, especially if you use accounting jargon or naming conventions. Making them easy for someone outside of finance to understand will result in less “guess work” on behalf of the employee.
Make Your Expense Policy Accessible
If employees don’t have access to your expense policy, they can’t follow it. They also won’t look very hard to find it.
Use an internal website or an expense management solution to make sure that everyone has quick and easy access to the policy. It will improve policy compliance if employees can access the policy before or as they are incurring an expense. Make sure that employees also have easy access to any software or forms necessary to submit expenses.
Call Out Exceptions and Discretionary Circumstances
No matter how hard you try, something will happen that requires a judgement call by either the employee or their manager. It’s inevitable; there will be times when the expenses won’t fit into the expense policy box.
By addressing what to do in these situations, you’ll be able to avoid mishaps and mistakes. Clearly define what should be done for common exceptions, special requests, and one-off circumstances. Address as many as possible ahead of time in your policy. Some to consider include:
- Delayed or canceled flights
- Client requests
- High travel prices during conferences or peak times
- Expenses in different currencies
Automate Your Expense Management
Work expenses don’t always happen at a desk in the office. They often occur in a taxi, at the airport, or at a restaurant. Using expense management software that has a mobile app will help employees submit their expenses faster and more accurately. You’ll also be able to automate the workflow with your expense policy built in, which will ease the administrative burden of managing employee expenses.
Put in Checks and Balances
If you decide to use expense reporting software to manage your expense policy, find one that integrates with your accounting software. Your systems should be in sync in order to consistently provide you with reliable, accurate data.
If you integrate expense reporting software that syncs in real time and pulls real time expense reports, you’ll also be able to monitor company spend and cash flow in real time.
Fun Facts About Expense Management
As you build your expense policy, turn to these resources and fun facts about managing employee expenses.
- The IRS requires that you keep business expense records for 3 years (assuming everything was filed correctly), however, most independent tax firms recommend you keep them for 7 years.
- The GSA provides a great resource of per diem rates per state.
- The IRS only requires you collect receipts for expenses over $75, so if it’s not important to you, you don’t need to require them for reimbursement.
- You are not required to reimburse employees for mileage, they can deduct it on their own taxes instead. However, that means you won’t be able to deduct the expense.
Read to build your company’s custom expense policy? Head to our our policy generator.