11 top ways to set up and maintain effective expense policies

An expense policy is a set of guidelines and rules that govern how employees can spend company money. In this article, we'll explore some of the best practices for setting up and maintaining an effective expense policy for your business.

1. Determine the purpose of the expense policy

Before you create an expense policy, it's essential to determine its purpose. Are you looking to reduce expenses, improve compliance, or guide employees on how to spend company money? Once you've identified the goal, you can tailor the policy to meet those needs. For example, if you're trying to reduce expenses, you might implement stricter rules on what expenses are allowed, introduce rules around daily limits, and require pre-approval for all spending.

2. Define eligible expenses

One of the most important aspects of an expense policy is defining what expenses are eligible for reimbursement. These expenses can vary depending on the type of business you're in. For example, a salesperson might be able to claim travel, meals, and entertainment expenses. At the same time, an office worker might only be able to claim expenses for office supplies and training. Defining eligible expenses clearly and providing examples to avoid confusion is essential.

3. Provide examples of non-reimbursable expenses

Give examples of expenses that aren't eligible and explain the reasoning. Providing examples of non-reimbursable expenses is essential for any company's expense policy. It helps employees understand what expenses are not allowed and reduces confusion and misinterpretation.

4. Set spending limits

Another important aspect of an effective expense policy is setting spending limits to help control costs and prevent employees from overspending. You can create limits on specific categories of expenses or set a total spending limit for each employee. It's also important to consider the employee's location, as expenses can vary greatly depending on the site. For example, the cost of a meal in New York City, US, will be significantly higher than in Sofia, Bulgaria.

5. Establish approval processes

Establishing approval processes to ensure compliance with the expense policy is essential. Establishing these processes could require pre-approval for certain expenses, such as travel or large purchases. You can also specify a hierarchy of approval, with different levels of management needed to approve different types of expenses. This approval process can help ensure that all expenses are necessary and within budget.

6. Require receipts and documentation

The correct receipts and documentation are vital to ensure that expenses are legitimate. These documents include receipts for meals, travel, and other expenses, as well as information on the purpose of the expense that can link back to a project, goal, or initiative. This can help prevent fraudulent costs and ensure compliance with tax regulations.

Collecting and categorizing receipts and expenses is a breeze for businesses using Payhawk as their expense management software provider. There are no lengthy expense reports, and companies don't have piles of paper receipts but rather upload a photo of the receipt/invoice.

Collecting receipts is not only crucial for beating fraud – but it's also an essential cost-saving lever as it can impact future VAT reclaims. Companies can reclaim their VAT more effectively and avoid missed reclaim opportunities by properly collecting, digitizing, and categorizing receipts.

Take the German automotive company ATU, for example. Before digitizing spend management with Payhawk, their branch managers would buy parts using cash and categorize the business spend as 'other.' And as a result, ATU couldn't recover 19% of the purchase amount as a VAT reclaim. After moving to Payhawk, they saved +€2million in one year alone, thanks to the proper collection and categorization of receipts to support business spend.

7. Provide clear guidelines

It's important to provide clear guidelines to ensure employees understand the expense policy. These guidelines can include providing examples of eligible expenses, explaining the approval process, and outlining consequences for non-compliance. You can also train employees to ensure they understand the policy and their responsibilities.

Ideally, however, you would use a solution that lets you build the policy into the tool your employees use to make expenses. With Payhawk, if your employees use corporate cards connected to the app, for example, spend limits, approvals, per diems, etc., are already woven into the tool, with the specific parameters custom-set by your business.

8. Check regulation compliance

In today's global business environment, it's more important than ever for companies to ensure that their expense policies comply with local regulations. Failure to comply can result in legal penalties, reputational damage, and increased risk exposure, which can all significantly impact the business's success.

9. Use your employees' language

Ensure your expense policy is written in a way your employees will understand it. Add a glossary of all the terms and abbreviations you are using. Employees who understand the procedure are more likely to follow it correctly and avoid making mistakes.

10. Monitor and enforce the policy

Finally, it's essential to monitor and enforce the expense policy. This can include regular audits of expense reports and monitoring of employee spending. It's also essential to implement consequences for non-compliance, including disciplinary action, an automated freeze on spend, or rejection for reimbursement of expenses.

11. Use an expense management solution

An expense management program is vital for any firm looking to establish and maintain a strong expense policy. It can help ensure compliance with corporate policy and local legislation, promote wise spending practices, and provide insightful information about spending patterns.
At Payhawk, we offer a complete spend management solution, including in-built policies, limits, blocks, approvals workflows, and more. Read more about controlling spend with policies and customizable controls.

Key takeaways

An effective expense policy is essential for any business looking to control costs, improve compliance, and properly use company money. By defining eligible expenses, setting spending limits, establishing approval processes, requiring receipts and documentation, providing clear guidelines, and monitoring and enforcing the policy, you can create a policy that meets the specific needs of your business.

Remember that an expense policy is not set in stone, and you should review it regularly to ensure it remains relevant and effective. With a well-crafted expense policy, your business can save money and operate more efficiently. Learn how Payhawk's spend management platform can help.