6 Expense Management Best Practices: The Complete Guide for CFOs and Experts

After employee payroll and benefits, travel and entertainment (T&E) is the second-largest controllable expense for companies. That makes following expense management best practices—the process and technologies involved in reimbursing workers for travel, hotels, meals, entertainment and other out-of-pocket expenses—a big deal.

Automated expense management can simplify the report submission process, minimize lost documentation, reduce errors and reimburse employees faster. Still, tech needs to be underpinned by policy. When establishing procedures governing expense reports, companies of all sizes should follow industry best practices. The IRS and auditors expect nothing less.

Advantages of Effectively Tracking and Managing Employee Expenses

You likely have some guidelines in place for expense reporting, but have they kept pace with changing business realities? If not, it’s time for a refresh. When making the case for such an initiative, CFOs should point out that organizations that effectively track and manage  employee expenses can:

• Take full advantage of tax deductions. By maintaining the right documentation for the right period of time, and ensuring that all deductions are valid, companies can be confident they can take all the deductions allowable and have the correct level of reporting for the IRS.
• Develop more accurate budgeting and forecasting. T&E expenses make up a large portion of the average company’s operating budget. When these expenses aren’t properly tracked and processed, that can interfere with a CFO’s ability to accurately budget and forecast for the future.
• Manage expenditures. Not knowing how much people are spending while they’re out on the road (or at home) working makes it hard to manage cash flow effectively. With improved oversight in this area, you’ll not only know who is spending what, you’ll also have more control of these expenses, making it easier to prevent employees from abusing the system.
• Minimize business expense fraud. Occupational fraud includes overstating business expenses, submitting fraudulent records and other abuses that can be curtailed through good oversight, policies and controls.

6 Expense Management Best Practices

Maybe you already have an expense management plan in place and need an upgraded approach to this critical business process. Or, maybe you’ve operated for years without a well-thought-out plan and are now ready to develop one from the ground-up. Regardless of which end of the spectrum your company is on, these best practices will help you develop an effective expense management approach.

1. Expense Policy

One of the best ways to control employee spend is by implementing an expense management policy that everyone in the organization must follow. Your policy should outline exactly what is and isn’t an approvable expense based on up-to-date IRS regulations governing reimbursements and your company’s culture and budget reality.

A companywide expense policy also helps the accounting department and/or approvers quickly decide—and build automated rules governing—whether an expense is reimbursable or not. Be sure to establish budgets for each category; for example, any flight that exceeds a certain cost threshold requires prior approval from a supervisor.

The policy should also include information about when employees can expect to be reimbursed for their expenses, typically 30 days or less, depending on the company, and what recourse they have in the event an expense is rejected or questioned. That way, your policy will serve as a standard for making final decisions on whether to reimburse the costs (or not).

What makes a good expense policy?

In a few words, fairness, transparency, comprehensiveness and clarity.

We already mentioned having everyone in the company subject to policy. In addition, review state and federal laws governing expense reporting and reimbursement and develop a policy that complies with these laws. Ask your employees and senior managers for input: What technology would make the process easier for them? What rules need to be more clearly stated? Use this input to create a program that meets everyone’s needs.

2. Expense Reporting

Rule No. 1: If you want prompt, complete reporting, give employees an easy way to submit their expenses. The more Excel spreadsheets, forms, clunky interfaces and documentation people have to wrestle with, the more they’ll delay, the higher the frustration level will be and the more errors you’ll have to fix.

With traditional expense management, companies use a paper- and spreadsheet-based system of processing, paying and auditing their employees’ expenses. This typically covers travel, accommodations, meals and other expenses incurred while an employee is conducting “official business.”

In other words, while they’re on the road. Why not let them photograph and submit receipts from an app rather than keeping  track of paper?

3. Collecting Critical Expense Information

While working offsite, your employees will be collecting receipts in different formats to substantiate their expenses and to be reimbursed for them. E-receipts are accepted by the IRS; by following suit, you simplify the process of accumulating, submitting and reviewing supporting documentation.

To control operating costs and minimize red tape, you’ll need an automated way to gather invoices, receipts and supporting documentation from employees. Clearly outline this process in your business expense management policy, which associates can refer to when submitting their documentation for approval.

4. Establishing Accountability

Established processes are only as good as the people who rely on them and refer to them on a regular basis. To ensure that your business expense plan and the related policy are prioritized, you’ll have to hold associates accountable. To start, managers and supervisors must be made aware of the organization’s expense policies and, in turn, hold their teams responsible for following them.

To ensure high levels of accountability in this area, give managers an easy way to access, review and provide feedback on their employees’ expense reports. Using expense management software that can be accessed via a mobile device, for example, puts more power into your managers’ hands and helps them guide their team members toward good business expense management processes.

5. Timeliness

No one wants to pay $1,000 in travel costs out-of-pocket for a business trip and then wait around for months while those expenses are reviewed, approved and reimbursed.

Unfortunately, this is exactly what happens in the absence of solid business expense management policies and processes.

To avoid this problem, and the unhappy employees that come with it, create service-level timeframes that work for both the company and employees. For example, make clear that associates must submit their expense reports by “X” day of the month, with complete required documentation, to receive reimbursement by “Y” day. If they miss these deadlines, clearly spell out how much additional time it will take to process their reports and reimbursements.

Make sure managers and senior leaders also understand the importance of approving reported expenses promptly. When everyone understands their individual obligations in making the system run smoothly, the reporting, authorization and reimbursement process will take place in a timelier manner.

6. Regular Audits of Process for Fraud

Conducting regular audits of your expense management processes and doing regular reviews for potential fraud are two best practices that all CFOs should follow. Expense management audits can identify areas of potential improvement while also pinpointing variances that may be substantially increasing operating costs.

The audit process also helps uncover expense fraud. Of the internal fraud schemes reported by small businesses, those with fewer than 100 employees, and larger organizations, the Association of Certified Fraud Examiners’ (ACFE) says 20% of small businesses and 13% of larger firms have reported fraudulent expense reimbursements.

ACFE says the top fraudulent expense reimbursement activities are: 

• Mischaracterized expenses
• Overstated expenses
• Fictitious expenses
• Multiple reimbursements for the same expense

An automated system can flag anomalies, such as double filing, and thus help companies spot and crack down on fraudulent claims.

7 Key Strategies for Expense Management

To recap, here are the top expense management strategies that all organizations can start using today to improve their existing processes—or, develop new ones:  

1. Write a solid expense policy that reflects the needs of your company, its managers and leaders and its employees.
2. Be fair, transparent and comprehensive with your policy.
3. Provide an easy way for employees to submit their expense reports.
4. Gather and retain critical expense information as required by law.
5. Keep everyone, from managers to employees to finance staff, accountable throughout the entire process.
6. Be timely with employee reimbursements so they’re not carrying balances.
7. Conduct regular audits of your process, and pay attention to flagged anomalies that could signal abuses and fraud.

Make the Process Easy (with Expense Management Software)

With 43% of companies still using manual processes to manage their expense reports—and 46% of organizations not tracking the associated costs—implementing automated expense management software is one more best practice for companies to consider.

According to the 82% of companies that either have invested in or are planning to invest in technology to facilitate improved expense management, simplifying the reporting process for employees and managers is a key motivator.

In particular, a simplified receipt collection, retention and submission process eliminates the pain of expense reporting and makes it easier for associates to submit their expense reports. Stored in a central location, those reports can then be accessed by all approvers and reviewers, speeding up the approval process, enabling regular audits and supporting good compliance.