The 5 critical elements of a highly effective expense policy


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Why is an expense policy important?

Controlling spending without an expense policy is like navigating an unfamiliar city without a map. Chances are you’ll spend most of your time arguing about the route, instead of moving towards your destination.

A written expense policy saves everyone time, because it sets clear expectations around what kinds of spending are (and aren’t) acceptable. More importantly, it ensures your staff are treated fairly and kept accountable for how they use company money.

But how do you make sure your expense policy actually works, instead of being just another document collecting dust on a shelf?

In this post, we’ll walk you through the five key elements every expense policy needs to have to be successful.

What is an expense policy?

An expense policy is a set of rules that govern how employees use company money. It sets out:

  • What your staff can spend company money on (and what they can’t)
  • How they get their money back if they pay for allowed expenses with their own money
  • What happens if there’s a disagreement, for example because a staff member is unhappy you’ve rejected their reimbursement claim

The single biggest benefit of a good expense policy is that it leaves no room for doubt. Your staff will know your spending rules in advance. Similarly, if a manager — or somebody on the finance team — isn’t sure whether they should approve a particular expense, they just need to check the policy.

A good expense policy also has two other key benefits.

First, it strengthens your relationship with your staff by making sure they’re not out of pocket when they buy goods or services that help the business.

And, second, it makes it easier to control spending. This is because staff are less likely to submit false or exaggerated claims if they’re compensated fairly and if they know they probably wouldn’t be able to get away with it.

To quote Netflix’s former Chief Talent Officer Patty McCord: ‘if you create a clear expectation of responsible behaviour, most employees will comply.’

So what separates a ‘good’ expense policy from one that’s ineffective or bad?

Let’s take a closer look.

1. A good expense policy is clear

The whole point of having an expense policy is to create certainty. In other words, anyone on staff who looks at the text of your policy should be able to tell immediately whether they can or can’t claim a particular expense.

With this in mind, your expense policy should include:

A breakdown of allowable expenses

HMRC’s guidance says employees can claim any expense they’ve made ‘wholly and exclusively’ for work. This means expenses which your staff have incurred as part of their duties or because of their job.

If the delivery van is low on petrol and the delivery person fills up out of their own pocket, for instance, that would be an expense made ‘wholly and exclusively’ for work.

Similarly, if someone on your marketing team buys paper for the office printer, it’s also ‘wholly and exclusively’ for work.

That said, while HMRC’s rules are a great starting point, you may decide not to reimburse certain expenses. Or, on the other hand, to reimburse expenses that don’t necessarily fit within the ‘wholly and exclusively’ rule.

Case in point, many businesses pay for gym memberships, health insurance, and other perks that aren’t strictly work-related but keep employees happy and loyal.

The key is to be explicit.

Set broad categories — for example, Travel, Conferences and Events, Office Supplies — and make a list of the specific expenses you’ll reimburse under each heading.

You should also specify the circumstances in which you’ll allow a particular expense. If you’ll only reimburse fuel when your staff drive at least 5 miles away from the office, for instance, spell this out.  This way, there are no surprises.

Specific budgets and limits

How much you’ll pay is just as important as what you’ll pay.

40% of employees would be more careful if the company they worked for had tighter spending controls.

More to the point, if your policy sets limits, you won’t have to get into arguments about why a £1,000 restaurant bill isn’t acceptable, after Simon from sales has filed his claim.

Here again, HMRC has guideline reimbursement rates. These include:

Using these rates means you won’t have to justify expense payment amounts to HMRC come tax time. But nothing stops you from offering your staff more or less generous allowances.

As we explained a few paragraphs earlier, the key is to spell things out.

Alongside what and how much you’ll reimburse, you should also give staff step by step instructions for reimbursement.

What’s the procedure? And what documents will they need to provide?

The clearer you are about this upfront, the less likely you are to have to go back to the employee for clarifications or additional information. And the less frustration all round.

2. A good expense policy is fair

Nothing destroys trust quicker than giving the impression some employees are more equal than others.

When we surveyed 2,500 employees for our report on expense fraud, one of the main justifications given for making false or exaggerated claims was that other people were getting away with it.

Favouritism also makes employees less engaged and 23% more likely to burn out — terrible news for productivity and morale.

Of course, this doesn’t mean you should give an intern or a temp the same level of access and privileges as a long-standing full-time employee or senior manager.

That said, the rules in your expense policy should apply consistently. If you’ve rejected Sandra’s claim because it was over the limit, don’t close an eye when Amy does the same thing.

Another — though, admittedly, trickier — aspect of fairness is to strike a balance between what the company can afford and what is reasonably adequate.

On the one hand, travelling employees can’t expect to be put up in the presidential suite at the Hilton and eat caviar every day (unless you can afford that, in which case, go right ahead).

But nor can you expect them to stay in a cockroach-infested hostel in a dodgy part of town, or to foot the entire bill for their travel expenses, especially if travel is a big part of their job.

Your budgets and allowances need to be realistic.

 

3. A good expense policy is easy to understand

It sounds obvious, but one of the most powerful — and simplest — things you can do to encourage compliance is to make it easy for staff to comply.

There are three things you can do to make your expense policy as user-friendly as possible.

First, keep it concise.

While a policy like Netflix’s — which is famously just five words long — is unlikely to work for most businesses, your staff shouldn’t have to wade through 60 pages of fine print to find out if they can expense a business lunch.

Second, make it scannable.

Add a clickable, descriptive contents page at the beginning of your policy, so your staff can quickly home in on the section they need. And use numbered or bulleted lists wherever you can.

Third, make it accessible.

Everyone on staff should have at least a basic working knowledge of your expense policy. And anyone should be able to take a look at it without having to go down a multi-folder rabbit hole on your internal server or, worse, spend half a day going through a dusty filing cabinet in your office basement.

4. A good expense policy is regularly reviewed and updated

So you already have a clear, fair, easy-to-understand expense policy in place.

But is it still relevant? Or does it cover expenses your staff haven’t needed to pay for since 2002?

It goes without saying, but if your expense policy doesn’t reflect current practice in your business, it’s like not having an expense policy at all. There’s no point having spending limits on floppy disks (remember those?), but nothing on working from home.

If your policy is outdated, your spending limits may also no longer be realistic. Consider this: at the end of December 2021, you needed £350 to buy something that would have cost £300 in 2011.

For this reason, you should treat your expense policy as a living document, not as a once-and-done deal.

Review the policy regularly — at least every one to two years — to make sure it’s still current.

This will also give you an opportunity to fix any issues you come across while operating the policy. If you often have disputes because your travel expense policy is too open to interpretation, for example, you can tighten the wording.

5. A good expense policy embraces automation

We’ve said it above, but it bears repeating. The easier it is for your staff to comply with your expense policy, the more likely they’ll be to do so.

Automation can help by reducing paperwork and removing the need to continually check the expense policy, so the process is more straightforward and less time consuming for everyone.

If you issue staff members with prepaid cards connected to a central dashboard, for instance, you can preload each card with the amount they’re allowed to spend in terms of the policy.

Because it’s company money, there are no reimbursements to process. Nobody needs to pay for anything out of their own pocket.

Better still, you can set limits for specific categories, as well as daily, weekly, and monthly limits. And you can also disallow spending on specific categories or in certain locations.

In essence, automation enables you to bake in your expense policy’s rules. And this means you can guarantee compliance without your staff ever having to think about whether an expense is allowed. You can disable specific merchant categories so transactions are declined automatically or get alerts so you can review and approve or decline a specific purchase.

Everyone wins when expectations are clear

While no relationship can work without trust, setting expectations is crucial.

With a clear, fair, easy-to-understand expense policy in place staff can’t accidentally rack up huge bills only to find out they’re not getting their money back.

By the same token, managers and finance staff won’t have to spend endless hours combing through transactions and arguing about whether they should be reimbursed or not.

We’re not going to say an expense policy could make the spend management process more fun. But it’ll definitely make it less time-consuming and less stressful for everyone.

In our books, that’s undoubtedly a win.

Want to take the pain out of the expense management process?

Let’s show you how Soldo can help

Why is it important to have an expense policy?

Tracking expenses is key to keeping your business’ finances healthy, and a solid expense policy can help with that. If you have an established expense policy that covers the breadth of your business spending and is understood by managers and employees, then this should limit overspending. Otherwise, employees may make purchases that aren’t allowable, or there can be misunderstandings around monthly budgets.

However, a good expense policy on its own isn’t enough to combat overspending, as limits can still be breached and there’s always room for human error. But with a technological backing, like Soldo’s expense management software, your policy can be bolstered by physical limits.

Our smart prepaid system allows you to assign cards, set budgets, and establish spend rules and categories. This way, you always know how much money is being spent and what it will be spent on.

What should an expense policy include?

A good expense policy should cover as many transaction scenarios as possible. For example, if your employees have to travel often, it should include guidelines regarding meals out, accommodation, and fuel.

However, whilst covering a lot of ground, any policy should also be accessible and easy to understand. If employees have to sift through reams of rules before they can pay for something, there’s a good chance they might not bother.

So what’s the best way to combine detail with brevity? A technological boost could be the answer. Soldo’s prepaid cards, for example, come with customisable rules that let you dictate how much can be spent and what it can be spent on. You can do this for every card and for as many cards as you like.

Switch to smarter spending with Soldo and enjoy financial peace of mind.

How can I improve my T&E policy?

You may need to make changes to your travel and expense policy as your business grows. These changes should reflect the shifting needs of your employees and the ways in which your business spending has evolved.

With a platform like Soldo, you can make these decisions based on detailed data. Our expense management software allows for automated spend tracking and granular analysis of expenditure. This means you can see where your company is spending the most, and alter your policy to limit these costs.

A watertight expense policy combined with a smart system like Soldo will give you financial peace of mind.

What is an expense reimbursement policy?

Aside from a standard expense policy, some businesses may also utilise a reimbursement system, wherein employees pay out of pocket for company expenses with the promise of future reimbursement. A reimbursement policy will stipulate the terms of this arrangement.

However, a system like this is rife with issues. Reimbursements can take time to process, leaving employees in the dark and potentially in financial difficulty. So instead of tedious reimbursements, why not upgrade to prepaid cards?

Soldo’s prepaid system lets you assign cards to as many people as you deem necessary, and each card can be allocated a particular budget and particular spending rules. This means that you still stay in control of company cash, but employees can spend more freely without dipping into their personal funds.

Do I need receipts for business expenses?

The short answer is yes. Many expenses are allowable, meaning you can deduct them from your business’ earnings before tax. However, HMRC may ask to check that your allowable expenses are correct, and to do this they require receipts to be kept for six years from the end of the financial year it relates to.

That may sound like a lot of paperwork, but luckily, it doesn’t need to be physical. With expense management software like Soldo, receipts can be captured and stored digitally. All an employee needs to do is snap a photo of their receipt at the point of purchase and Soldo creates reports from there.

With a system like this, you never have to worry about losing receipts again, and you’ll always know who’s spending what.

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