How to create an expense policy for your business

Creating an effective expense policy is a cornerstone of sound financial management for any business. It sets clear boundaries and expectations for employee spending, ensuring that every penny spent is aligned with company goals and values — and as a small business owner, what’s not to love about that? 

An expense policy outlines permissible expenditures and establishes a framework for compliance and transparency. But where do you start? Below, we’ll clear up any confusion and break down the six steps to creating an expense management policy for your business. Let’s dive in! 

1. Define acceptable expenses

The foundation of any expense policy is a clear definition of what constitutes an acceptable expense. Think about what your employees might need to be able to do their jobs to the best of their ability. 

Generally, acceptable expenses are necessary, reasonable, and directly related to the business's operations or goals. These often include:

• Travel: Necessary airfare, accommodation, and transportation for business purposes.

• Meals: Reasonable food expenses during business trips or client meetings, avoiding excessive spending.

• Office supplies: Essential items required for daily operations and productivity.

• Professional development: Investment in employee skills through training, courses, and conferences that benefit the business.

Remember to specify non-allowable expenses

On the other hand, non-allowable expenses are those that don't directly contribute to business objectives, are extravagant, or violate company policies. It’s important to be just as clear upfront about what isn’t reimbursable to prevent misuse of funds and maintain ethical standards. Common non-allowable expenses include:

• Personal expenses: Any costs unrelated to business activities, like personal entertainment or family travel.

• Excessive expenditures: Lavish spending that exceeds a reasonable standard or doesn't align with the company's financial practices.

• Policy violations: Expenses that contravene company policies, legal requirements, or ethical norms, such as gifts that could be construed as bribes.

2. Set spending limits

The next step is establishing spending limits. Setting limits helps you manage the company’s budget and prevent overspending. When setting these limits, consider the nature of your business and the typical costs in your industry. Examples of spending limits include:

• Daily meal allowances: Setting a reasonable cap on the amount that can be spent on meals per day.

• Hotel rate ceilings: Defining the maximum rate for accommodation per night, based on travel locations.

• Conference budgets: Allocating a specific amount for conference attendance, including registration fees, travel, and accommodations.

It's important to strike a balance between being too restrictive, which could hinder employee effectiveness, and too lenient, which could lead to unnecessary expenditures. Tools like Expensify can help you find the sweet spot, as they allow for real-time tracking and management of expenses — plus, with the Expensify Card, you can set smart limits to make sure your employees don’t overspend on the go.

3. Develop a procedure for submitting expenses

A well-defined procedure for submitting expenses is vital for an effective expense policy. This procedure should be straightforward, ensuring employees can easily report their expenses without confusion. Key elements of this process should include:

• Receipt submission: Clearly state the requirement for submitting receipts or other proof of expenditure.

• Expense report timelines: Set deadlines for reporting expenses, such as within a week of incurring the expense.

• Digital submission: Encourage the use of digital tools to submit expenses and create expense reports. This streamlines the process and creates a digital record for easier tracking and auditing — simplifying the preaccounting process from start to finish.

While manual methods can work here, expense management software significantly streamlines the entire expense submission process. These tools allow for quick uploading of receipts, automatic categorization of expenses, and easy tracking of submissions, making the entire process more efficient and less prone to errors.

4. Implement an approval process

An effective company expense policy must include a clear and transparent approval process. This ensures that all expenses are reviewed and authorized before reimbursement and held to the same standard across the board. Key aspects to consider include:

• Designating approvers: Identify who in the organization can approve expenses. This could be direct managers, department heads, or finance team members.

• Approval criteria: Set clear criteria for approval, such as alignment with the expense policy and adherence to spending limits.

• Timely response: Establish a timeframe for approval to ensure prompt processing. This helps maintain efficiency and employee satisfaction

5. Educate your employees

An expense policy is only effective if your employees understand and adhere to it, so education is key. Consider the following steps to ensure your team is well-informed:

• Policy distribution: Make sure every employee has access to the expense policy, ideally in a digital format that’s easily accessible.

• Training sessions: Conduct training sessions to review the policy, emphasizing key points and answering any questions.

• Regular reminders: Send periodic reminders or updates about the expense policy, especially when there are changes.

Employees must understand the 'how' and the 'why' behind the policy. This fosters a sense of responsibility and alignment with the company's financial goals and ethical standards.

6. Review and update your policy regularly

An expense policy should never be static; it must evolve with your growing business. Regular reviews and updates are essential to ensure it remains relevant and effective. Consider the following:

• Annual reviews: Schedule a yearly review of your expense policy to assess its effectiveness and make necessary adjustments.

• Feedback loop: Encourage feedback from employees about the policy. This can provide valuable insights into what's working and might need tweaking.

• Market changes: Stay informed about changes in the market and industry standards, as these might necessitate adjustments in your policy.

A dynamic business expense policy that adapts to changing business needs and external factors will serve your company much better than a rigid, outdated one.

Why do you need an employee spending policy?

A well-defined employee spending policy is not just a financial tool; it's a cornerstone of business integrity and efficiency. The primary reasons for having such a policy include:

• Financial control: It helps manage and forecast company expenses more accurately.

• Policy compliance: Ensures employee spending adheres to legal and tax compliance standards.

• Employee clarity: Provides clear guidelines to employees, reducing confusion and potential misuse of funds.

• Fraud prevention: A clear policy helps identify and prevent fraudulent expense claims.

An employee spending policy is fundamental to creating a transparent, accountable, and financially sound business environment.

Make employee reimbursements easier than ever

Establishing a comprehensive and clear expense policy is crucial in streamlining your business's financial operations. But the journey doesn’t end there — implementing the right tools to enforce and facilitate this policy is equally important. 

That’s where Expensify comes into play. Expensify simplifies the submission, approval, and reimbursement processes, making them more efficient and less error-prone. From setting your expense policy to reimbursing your employees, Expensify ensures that every step is smooth, transparent, and aligned with your business objectives. 

Ready to get started? Sign up for Expensify today.