How to Create an Effective Expense Policy for Your Business?

Every business, whether big or small, has to deal with at least some expenses. These are recurring expenses that include utility bills, building rent, salaries, etc. and also miscellaneous expenses for recreation, travel, and more. However, it’s important to keep track of these to maintain your grasp on the cash flow.

Expense management is also important to prevent misuse of company’s funds and fraudulent activities. It brings us to the concept of expense policy.

What is an Expense Policy?

An expense policy is a well-thought-out document comprising of rules and regulations that govern the business-related expenses incurred by you, your employees and vendors, and everyone else involved.

Why do You Need One?

Organization and discipline can make a huge difference in the way a company works. Without rules, mistakes are bound to happen more frequently. Plus, the employees may find it easier to take unfair advantage of their company in the absence of a well-regulated procedure that deals with the business expenses.

So, you need a smart expense policy for:

  • Ensuring transparency in the incurred business expenses
  • Keeping unnecessary expenses under check and bringing down the operational costs
  • Preventing frauds

How to Create One that Works?

To create an effective expense policy, it’s important to keep the following points in mind:

Keeping it Simple

“Make it simple. Make it memorable. Make it inviting to look at. Make it fun to read” – Leo Burnett, Founder, Leo Burnett Worldwide

Keep the expense policy simple, and your employees will easily get it and follow it without a problem. However, overcomplicate it, and you are bound to lose them. You can also expect more disputes to be being raised in the latter.

An effective expense policy is:

  • Devoid of unnecessary jargon and corporate-talk
  • No longer than it’s supposed to be
  • Created with a tone that’s both friendly and assertive

Keeping it Fair

When you are creating an expense policy, the last thing you want is to turn your employees against you, or have them slip into a “rebel mode”. This is because it’s likely they won’t appreciate the move. It’s likely they are used to handling expenses the old-way, the way that offered them a high level of flexibility. So, change is necessary, but you don’t want to coerce it either.

Not only your expense policy has to be fair to your employees, it has to look that way too. Although, the former can be largely accomplished with the point discussed above.

As for the latter, it’s important to think from your employees’ point of view when you create the policy draft. For each point, ask yourself:

“Would I want this if I were the employee?”

If the answer is no, then maybe you need to make some changes in the same.

An excellent way to go about creating an expense policy is to hear what your employees have to say about the way how the company expenses should be managed. It will definitely help to hear them out and note their responses.

The “Bulk” of it

Your expense policy should clarify the following:

  • List of expenses that are to be paid directly by the company, and…
  • List of expenses that are to be paid by the employees for which they will be reimbursed.
  • List of travel expenses covered by the company along with their limits.
  • Guidelines on how the employees can minimize company expenses.
  • List of expenses that are not covered by the company.
  • Procedure for getting refunds for the work-related expenses.

Although you are free to add more to your expense policy, the points given above should cover the fundamentals.

Lastly, it’s important to remember that there is no such thing as a “timeless” expense policy. You have to update your policy from time to time as your company grows and the way it works changes, etc.

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