As your company grows, you will need to hire employees, which can bring about its own set of challenges with respect to managing your company’s finances. Not only do you have to make sure they are paid accurately and on time, but you’ll need to set up some processes and controls to guide them as they go about incurring expenses related to doing their jobs. In this article, we will explore some things to consider when developing your internal employee expense and purchasing policies.
First, let’s get some definitions out of the way. What is the difference between employee expenses and purchasing?
- Employee Expenses - these are expenses that the employee has incurred using their own funds and for which the company needs to reimburse them.
- Employee Purchasing - these are expenses that the employee has incurred using company funds or the promise of a payment from the company to a vendor.
We will explore these further by looking at the following factors: types of expense for each category, spend limits, role, internal approval flows, payment method
Here are some things to consider when designing your employee expense policy:
- Expense Types - Expenses related to travel, mileage, lodging, meals, or client entertainment. Non-regular expenses (i.e. not recurring software charges) related to the performance of their job. Miscellaneous small expenses incurred because of the employee’s job. Generally, miscellaneous purchases will be small in nature and infrequent.
- Spend Limits - This will vary depending on the size of the company, but I generally would not expect to see expense reports for more than a couple thousand dollars at a time for most employees of a small or medium sized business. The exception is employees who travel frequently and use their own card. If that is the case, then you might consider moving travel expenses related to flights, car rentals and lodging under the control of someone in the company who is responsible for managing that budget.
- Role - Anyone in the company could generate an expense report, but it is most often people who travel for company business, such as salespeople or field technicians.
- Internal Approval - Before incurring expenses it is a good idea to get the reason you will incur expenses pre-approved by your manager. For instance, if you are travelling to see a client, speaking with your manager about the trip in advance is advised. This prevents surprise expense reports, which no one likes. One incurred, the actual expenses will need to be submitted on an expense report and submitted to that same person before heading to accounting for final approval and payment.
- Payment Method - For the company, we are not concerned with the method the employee uses to pay these expenses as long as they can validate they incurred them through receipts properly documented with the reason for incurring the expense. The company can choose to reimburse by check, ACH or other means once the expense report has been approved for reimbursement by the employee’s manager and the accounting department.
Here are some things to consider when designing your employee purchasing policy:
- Expense Types - These expenses are related to goods or services the company or employee needs to operate. Common expenses include software, computer asset purchases, vendor services, conference sponsorships. These purchases can be regular or irregular in nature, but are often not related to one specific employee being able to perform their job.
- Spend Limits - The limits on this type of spend are heavily dependent on the size of the company and the employee’s department. For instance, the IT department might incur many thousands of dollars in equipment expenses that needs to be capitalized as an asset, but a department such as clerical would probably not have that kind of budget. It is a good idea to analyze previous spend patterns and future growth expectations of the company when coming up with reasonable limits (budgets) for expenditures of each department, and then further segmenting by sub-department or role as necessary.
- Role - Minor expenses can theoretically be incurred by anyone so long as they have the appropriate authority. See above comments for defining “minor” in your company. Major expenses should be requisitioned by a department lead or director as they will have a higher level understanding of how it fits into the budget for that department and how to get executive buy-in if necessary.
- Internal Approval - It is advisable to have at least the person’s direct supervisor sign off on expenses before they are incurred. With a formal “Purchase Order (PO)” process, the expense gets requisitioned and approved by the parties on a formal document with a unique ID that also includes signatures from the appropriate internal parties. Usually any kind of contract related to the transaction will also be attached to the PO for review. With a company credit card (P-Card or Purchasing Card), the employee has direct access to use the company’s credit line. This should be limited as it potentially exposes the company to direct liabilities being incurred by employees without prior approval for the specific expense in question. Either way, having multiple steps in the approval process for company purchases is always advised.
- Payment Method - The main methods of payment are company credit cards (P-Cards or Purchasing Cards), through a formal PO process that ends with the company issuing an ACH or check from the accounting department, or on vendor a provided credit line or financing option.
There are many ways to set up employee expense and purchasing policies in your company, and they will vary based on our organizational structure, industry and the size of the company. Make sure to include all of the stakeholders in the design process so you can identify gaps in controls or areas where the policy will unreasonably impede operations.
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