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An expense policy is a set of guidelines and rules established by an organization to manage and control the expenses incurred by employees during the course of their work. While expense policies can vary from one company, they should communicate the following three key elements:
- Which employee expenses are eligible for reimbursement
- How to write expense reports
- How the reimbursement process works
Implementing an expense policy is important because it helps your company manage its spending. It does so by helping you stick to a set budget and minimize the chances of overspending and mismanagement of business funds by having a set budget for each expense. It's also essential for preventing expense report policy fraud.
In this article, we’ll explain how to go about writing an expense policy, some of the expense policy best practices to keep in mind, and explain how automation tools can help you along the way.
How do you write an expense policy?
When you decide to write an expense policy, there are 6 components you must include so that it serves its purpose. These include:
- Purpose and scope
- Expense categories
- Expense approval process
- Documentation requirements
- Non-reimbursable expenses
- Expense reimbursement
Components of an expense policy
Let's examine each of these components of an expense policy in detail and what you should cover.
Purpose and scope
This is a sort of introduction to the expense policy. It should outline the reasons for creating the expense management policy, and explain which team members and departments the policies apply to.
Expense categories
The expense categories section should include all of the types of expenses your business allows its employees to spend company funds on, and indicate spending limits for each. This section should be detailed to make sure there's no room for misinterpretation and vagueness. Your policy can break up this section under the following subcategories:
- Travel-related expenses (e.g. mileage reimbursement for business travel)
- Meals and entertainment expenses (e.g. meal per diem)
- Office supplies and equipment
- Software subscriptions
- Employee training and development (including trade organization memberships)
- Health and wellness expenses (e.g. medical expenses)
- Client-related expenses
Expense approval process
Once you've covered all the business expenses that your company will cater for, you must outline how these expenses, once filed, will be approved. Make sure you identify all of the individuals involved in the approval process (approval hierarchy), from the employee who incurred the expense moving up to higher levels of management.
It's also important to describe how employees should submit expense reimbursement requests to your accounting or finance team. For instance, you can specify the timeline for submitting expenses, the medium to use, such as email or expense management software, and how long approvals should take.
Documentation requirements
If your expense approval process requires evidence to accompany expense reports, you must outline the different types of documents employees must provide and the format. Most businesses require evidence of expenses in the form of receipts, invoices, payment notifications, etc. They may also include scanned copies, pictures of documents, or screenshots.
Non-reimbursable expenses
Your expense policy should also cover all the expenses your business will not reimburse your employees for. This section should have an exhaustive list so that there's no misunderstanding as to what’s allowable. If possible, ensure you clearly define each and provide examples. You can include things like:
- Personal expenses (make sure to provide a comprehensive list under this subcategory)
- Non-business meals
- Over-the-limit expenses
- Late submissions
- Expenses without receipts
- Personal penalties or fines
- Purchases from unauthorized suppliers or vendors
- Pending and unapproved expenses
Expense reimbursement
It's also important to include a reimbursement process section in your expense policy. Under this section, you should cover:
- How long the reimbursement will take
- The payment method for reimbursing employees
- Which financial period the reimbursements will be made
Expense policy best practices
Writing a good business expense policy isn't just about being comprehensive; it's also about ensuring it remains effective and helpful throughout your business's lifetime. Some best practices for writing and maintaining a good expense policy include:
- Making sure the expense policy is simple and clear. Avoid using a lot of technical jargon and use simple, easy-to-understand language.
- Keeping your expense policy up-to-date. As your business grows and evolves, so should your expense policy. What may have worked when you were starting definitely won't work five or ten years later.
- Making the policy easily accessible to all employees. You can use the company intranet, a printed handbook, or a dedicated expense management software platform.
FAQs
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