Have you ever had a leak in your house?
Do you spend $5/day on coffee?
Small expenses add up, which is why it's important you have an expense policy for employees.
But we'll also talk about the fallacy in the $5/day coffee meme.
Keep reading and I'll share 6 traits every expense policy should have.
But first, our sponsor.
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Small Leaks Sink Great Ships (Creating an Expense Policy)
Every personal finance influencer wants to tell you to quit drinking your coffee. Their reasoning is the $5/day in coffee is $54,750 over 30 years, but $330,222 if you account for the investment returns (at 10%). Just invest that money they’ll say! LOUDLY!
And yes, I exaggerated about every personal finance influencer. Yes some push back and they're equally as loud.
But what is the truth? Does it matter or doesn’t it?
Both are right in their own ways. But both are wrong as well.
That $5/day in coffee is really $330,222… but would you really invest it all? It goes back to priorities. You could say that about every expense. If you just lived in a tent, you could save that monthly mortgage instead.
So, maybe nit-picking over $5/day coffee isn’t the answer, but expenses do really add up.
Have you ever had a small faucet drip or water leak? That drip adds up to real money.
The leak, undetected, can ruin furniture, create mold, which can lead to health issues… before you know it you’ve got thousands of dollars out the door.
The same goes for energy leaks. For almost a year during a house renovation, we didn’t have insulation in our attic. During a snow, all the snow melted off our roof before any of the neighbors. We were literally heating our roof… it was on that day that I realized I needed to prioritize getting that insulation in. 🤣
But that’s the thing: we often forget about these things and then months, or even years, down the road we go “o yeah, I should address that.” During the summer months, I didn’t notice the lack of insulation… there was no visible sign. And that lack of addressing the problem cost us hundreds, if not more, in additional heating and air conditioning bills.
In your business, that number could be a lot larger.
As a business grows, it’s natural that other employees get spending authority, which opens up the opportunity for “leaks” of money leaving the business.
With no policy in hand, employees will ask more questions (costing you time), spend more money, and you’ll have less a peace of mind.
So how do most solve this? They Google “Expense Policy Template” and pick something random. The problem is, most of these are really bad.
Sure, that bad policy will help reduce spend, but a bad can be as bad as no policy at all. Bad policies have most of the same downsides of no policy, costing you time, money, and trust.
When employees aren’t sure they can trust the policy, they’re like that squirrel that got into the attic. He tore holes, creating bigger leaks, which leaves a mess for you to clean up.
In contrast, good expense management policies allow you to give authority to others in the business to spend money, while still keeping an eye on the spend.
A good policy creates a standardized set of rules, helps your employees understand what the expectations are, and prevents fraud and abuse.
A good policy is like a good insulation job. Leaks still happen, but they are controlled, and overall spending is controlled.
So you must be thinking: how do I create a good policy, though?
The good news is it doesn’t have to be complicated.
So let’s talk about 6 traits every expense policy should have.
Clear & Concise
Most policies are filled with jargon which confuses and frustrates.
Make your policy clear.
This means:
- Simple language
- A clear structure
- Lots of examples
Simple language
Keep it short, direct, and easy to read.
Treat your employees like adults:
- Create guidelines, not the IRS Tax Code.
- Define overspending or unnecessary expenses so employees can see the guardrails.
This creates an expectation without going overboard.
A clear structure
Policies should instruct spenders:
- what will be reimbursed
- what won’t be reimbursed
- the process for approval & submittal
Good expense policies address all the common spend employees might have and what’s allowed/not allowed:
- Hotels
- Travel
- Entertainment
- Mileage Reimb
- Food & drink (and specific rules around alcohol)
- Education Expenses
Think of all the areas your employees could spend and make sure to address it. If outside those categories, give them rules to follow and a way to get clarification.
Then, create a clear process for submittal and approval.
Software like NetSuite makes this easier, as you can create approval flows so that the right people get the right expenses and can approve them with ease.
Thanks NetSuite for sponsoring this issue.
NetSuite is the #1 Cloud ERP that gives you complete visibility and control over your business operations, including financials, inventory, HR, CRM and more. Over 37,000 organizations have turned to NetSuite to help grow their top and bottom lines.
Click here to learn what top CFOs complete every day to become more strategic and efficient.
Examples
Using real examples of allowed versus unallowed expenses helps make the policy “real” for your employees.
For each category you allow spend in, give one to two examples of something that is allowed and something that is not.
Consistent Applications
Policies need to be consistent and applied consistently.
That one-time exception you make is ultimately going to create 10 more exceptions that they don’t ask you about.
When a policy isn’t applied as written, it gives employees a reason to break it.
Sit down with all who will spend and all who will do the enforcing (approvers and accounting) and make sure the language is clear before they’re allowed to spend. You can’t truly just give the policy to a new employee and expect everything to be interpreted correctly.
Address the policy in onboarding and make it clear employees are to go to supervisors and approvers with questions. Get the supervisors and approvers onboard, as well, so they’ll “coach” employees on their spend.
Messaging needs to be the same from top to bottom.
Up-to-date
Out-of-date policies create confusion and leave employees frustrated.
Don’t be that business owner who says “we wrote it 10 years ago and what worked then works now.”
The reality is businesses change. When they change, you add more people and more variables into the mix. This will require rewriting of policies.
As you grow, new departments or groups of employees may require special rules. Those rules shouldn’t be communicated verbally but through an update in the policy.
What seems simple to you may not be simple to someone new without all the cultural history of the business.
“Common sense” is always based on context and personal history, which means that someone else’s common sense is another’s black box.
Adaptability
One of my biggest pet peeves with accounting departments is when they try and “run” things. Accounting is a cost center that should serve the business.
A CEO is much the same. While not as much a cost center, the CEO shouldn’t be doing the work but serving those who do the work.
This means writing policies in a way that they’re adaptable and then having accounting, HR, and the CEO worry about the intent of the rule over the letter of the rule.
Am I contradicting myself a bit here? Absolutely. But any “adaption” that is being done should be temporary.
A good policy can simultaneously “hold the line” and allow for some flex to follow intent.
An enforcement mechanism
Policies with no teeth are good for no one.
They create tension between departments and lower company morale.
Be clear about what happens when expenses or receipts aren’t turned in, but also use the enforcement mechanisms within reason (multiple offenses).
An expense policy should identify:
- how to correct a mistaken spend
- what happens for a first offense
- what happens for repeat offenses
- who decides the punishment
You never want a policy to state with certainty a specific punishment, but instead, you want the policy to provide guidelines for potential punishment.
This creates consistency in punishment, which should be enforced by HR, but allows for leniency in situations that require them. Make sure HR documents offenses and the punishment so there is a paper trail companywide.
This transparency of punishment, along with employees seeing enforcement of it, creates a seriousness about spending in the business.
—
I’m not going to provide you with a template. I could (and may in the future), but the format needs to match your current documentation.
When you look at your policy, make sure it answers the questions as phrased above and give it to an outside party and ask to identify the same. It will always make sense to you since you created it. The outside check makes sure you’re not using confusing or insider language.
If you want to send a policy to me, feel free. I’d be happy to review it!
So remember: keep it simple and clear. Doing this will put you ahead of the majority of businesses.
Thanks for reading–see you next week,
