Everybody hates expense reports and administrative work that doesn’t add value to the business. It will be ideal to simplify administration and focus on what we do best - growing our business. But failing to organize expenses with accountants might result in paying a bigger price than you think.
Most of the people we talk to on a daily basis don’t understand the reason why your accountants chase you so fiercely to collect your receipts and invoices. People usually postpone this task for as long as they can or simply not do it at all thinking that the accountants will pull out some trick to fix things. It’s important to understand the impact on the business and risk you bare if failing to organize your expenses properly.
Paying more taxes
Usually, your accountant will put expenses without supporting documentation (invoices or receipts) as either representative, expenses without documents, expenses not related to the core business or some other category depending on the nature of the expense and the tax regulations of your country. What you should know is that such expenses are typically not recognized for tax purposes. How this impacts you — well you simply pay more taxes, the total cost for your company will be equal to the total expenses without documentation multiplied by your effective tax rate. Let’s say you are running a business in Germany where the corporate tax rate is 15%, and you have failed to submit a document for an expense worth €100. In the end of the year, your business will pay €15 more taxes because of this single missing document. Uh…
Risk of tax investigations
What’s more important is that if the pool of expenses without documentation increases dramatically, there is a high risk that your local tax authorities will open an investigation to see if you are making hidden profit distributions (allocating resources from one entity to another in order to avoid taxes). Tax authorities take this very seriously and hidden profit distribution penalties can be significant. The tax audits and penalties depend on the local legislation, but this is definitely a situation every business should try to avoid.
Skewing the numbers
Not putting expense in the right categories (marketing, IT, etc.) or matching with the period for which they relate to cause misrepresentations in your financial statements and the KPIs you track. Imagine that your marketing or hosting expenses are not booked in the correct category or the correct period. This can have a material impact on your customer acquisition cost and lifetime value calculations and other KPIs that you use to run your business. You will be reporting incorrect financial data to your investors (current and potential) and business partners.
If you want to run your business better and more efficiently, you should get a handle on the expenses in your organization. There are many vendors that make it hard to collect your end of the month invoices, but doing so will have a significant impact on the way you manage your business.