Managing your business requires you to monitor dozens of company activities. To manage your organization efficiently, you need to put systems in place, and one process that is often overlooked is a written expense reimbursement policy.
If you don’t create and monitor a formal policy, you may incur unnecessary expenses, hurt business profitability and waste time handling one-off situations. Use these tips to manage reimbursable expenses.
Why You Need a Process for Reimbursable Expenses
If you have to perform the same task twice, it needs to be documented in a procedures manual. This is especially true of your expense reimbursement policy. There are several reasons why maintaining a detailed procedures manual is important for your business:
- Training: When you need to train an employee on a certain task, you can refer to the procedures manual. If a worker leaves your company, you can quickly train a new worker using the manual.
- Avoiding confusion: If several employees perform that same task, the procedures manual clears up any confusion about how a particular task should be performed. The manual helps your staff to operate efficiently.
- Automation: Once your processes are documented, you can start to automate the parts that are better done by a computer. This includes outright automation as well as reminders and optimizations.
- Your secret sauce: One of your firm’s competitive advantages may be the daily tasks you perform to operate the business. How you do what you do has tremendous value. It may take a company years to figure out how to operate efficiently, and you need to document that valuable information in a procedures manual.
Make the effort to create a written procedures manual, and update the manual every few months.
A Reimbursement Policy Makes It Easy to Budget and Forecast
To explain how a reimbursement policy is created, assume that Julie owns Mountain Peak sporting goods, a firm that generates $15 million in annual sales. Mountain Peak produces hiking, biking and camping gear, and the company sells its products through sporting goods stores.
Julie has five salespeople who call on sporting goods stores around the country. The home office books each salesperson’s travel so that airfare, hotel and car rental expenses are paid directly through the accounting department. Salespeople are reimbursed for meals, client entertainment and other miscellaneous expenses that are incurred on the road.
The managers at Mountain Peak have decided to create a written policy for expense reimbursement as the current process isn’t working. Because the sales force does not have a clearly stated policy on expenses, some salespeople spend far more than management feels is reasonable. The excessive spending makes it difficult for Mountain Peak to budget for sales expenses. In addition, expense reports and receipts are submitted months after the spending occurs. To get control of the process, Julie and her managers decide put the policy in writing.
The Tax Impact of Business Expenses
The IRS has three requirements that an expense reimbursement policy must include:
- The expenses reimbursed must be incurred while the individual is performing services as an employee.
- The worker must adequately account for expenses within a reasonable period of time.
- If an employee is paid a reimbursement in excess of their actual expenses, that worker must return any excess payment to the company in a reasonable period of time.
It’s important for a company to follow a formal reimbursement policy, so that all out-of-pocket expenses can be reimbursed to the salespeople.