Expense policy best practices

Ramp details how to write an expense policy, shares some best practices to keep in mind, and explains how automation tools can help.

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An accountant working on receipt documentation using software.

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If you plan to let employees make purchases on behalf of your company, you need a process to manage and reimburse those expenses. That's where corporate expense policies come in.

Implementing an expense policy is important for several reasons:

  • It helps a company manage spending and stick to a budget.
  • It minimizes the risk of overspending and mismanagement of business funds.
  • It's essential for preventing expense fraud.

In this article, Ramp details how to write an expense policy, shares some best practices to keep in mind, and explains how automation tools can help.

What is an expense policy?

An expense policy is a document that outlines how a company handles business expenses incurred by employees. While expense policies can vary from one company to another, they should always communicate these three elements:

  1. Which employee expenses are eligible for reimbursement.
  2. How to write expense reports.
  3. How the reimbursement process works.

Expense policies are a critical piece of your company's overall expense management process. They help control costs, optimize cash flow, plan accurate budgets, and comply with industry and tax regulations.

How to write a corporate expense policy

Whether a business is starting from scratch or using an expense policy template, the policy should cover six key components:

  1. Purpose and scope
  2. Expense categories
  3. Expense reporting and approval
  4. Documentation requirements
  5. Non-reimbursable expenses
  6. Expense reimbursement

Here's a look at each of these expense policy components in detail.

1. ‍Purpose and scope

This is the introduction to the expense policy. It should outline the goals of the expense management policy and explain which team members and departments the policies apply to. 

2. Expense categories

The expense categories section should explicitly define which types of expenses the business allows employees to spend company funds on, along with spending limits for each. This section should be detailed enough that there's no room for misinterpretation.

Consider breaking up this section into subcategories, with specific guidelines and spending limits for each, including:

  • Travel expenses (e.g., airfare, incidentals, and 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

3. Expense reporting and approval

After covering all allowable business expenditures, outline the expense reporting and approval process. Make sure to identify all the individuals involved in the approval process as well as the approval hierarchy, from the employee who incurred the expense through higher levels of management and all the way up to the CFO.

It's also important to describe how employees should submit expense reimbursement requests to the accounting or finance team. For instance, the policy can specify the timeline for submitting expenses, the medium to use (such as email or expense management software), and how long approvals should take.

4. Documentation requirements

Documentation is a crucial part of the expense approval process. The expense policy should specify what kind of documentation will be accepted as proof of a legitimate business purchase. Most businesses require itemized receipts, but invoices or credit card statements might suffice in certain scenarios. If the plan is to writing off business expenses, it's especially important that the documentation policy reflects the most recent IRS requirements.

5. Non-reimbursable expenses

The expense policy should also cover all the expenses for which the business won't reimburse employees. This section should have an exhaustive list so that there's no room for misinterpretation. Clearly define each expense and provide examples wherever possible. Include things like:

  • Personal expenses (make sure to provide a comprehensive list under this subcategory)
  • Meals with no clear business purpose
  • Over-the-limit expenses
  • Late submissions
  • Expenses without supporting documentation
  • Personal penalties or fines
  • Purchases from unauthorized suppliers or vendors
  • Pending and unapproved expenses

6. Expense reimbursement

Lastly, outline the expense reimbursement process. This section should cover:‍

  • An estimated timeline for how long reimbursement will take
  • The payment method for reimbursing employees
  • In 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 as the business changes and matures. Here are some best practices for writing and maintaining a good expense policy:

  • Be clear: Make sure the expense policy is simple and clear. Avoid technical jargon and use language that's easy to understand.
  • Be current: Keep the expense policy up to date. As the business grows and evolves, so should the expense policy; what may have worked when the business was starting up definitely won't work five or 10 years later.
  • Be accessible: The policy should be easily discoverable and accessible, especially for employees who are traveling on business trips. Use the company intranet, a printed handbook, or dedicated expense management software.
  • Be helpful: Provide a dedicated contact who can address any staff questions regarding your expense policy

3 pillars of an effective expense policy

A fit-for-purpose expense policy empowers everyone in a business by granting them easy access to the tools they need to get the job done. In practice, that means setting parameters in advance while giving employees the autonomy to operate freely within these bounds. The best expense policies are centered on three foundational pillars:

  1. Before spending happens: Set approval policies that give line-of-business leaders the controls to approve work-related expenses in advance, allowing them to set priorities for their own team
  2. When spending happens: Policies monitor every transaction and block out-of-policy spending in real time so there are fewer mishaps
  3. After spending happens: Open a variety of communication channels so employees can easily submit any necessary accounting information

Setting clear roles for managing your expense policy

Generally speaking, employees should fall into three roles within your expense policy: cardholders, card managers, and admins.

Cardholders, who are all employees within the company, use virtual or physical corporate cards for company-related purchases and submit receipts for any expense over a predetermined threshold. This system empowers employees and reduces the need for extensive monitoring. 

Card managers, on the other hand, review their team's spending, ensure adherence to policy, approve spending, and track departmental budgets. They may also need to confirm itemized receipts and validate transaction memos. This approach allows managers to keep a close eye on expenses without centralizing the responsibility.

Admins play a pivotal role in clarifying expense policies, onboarding and training employees, and defining roles. While they make the final decisions on corporate policy, their primary function is to support the managers who oversee day-to-day employee spending. This delegation allows admins to focus more on strategic planning and budget analysis.

By spreading responsibilities across cardholders, card managers, and admins, the system becomes more efficient and provides better insight into daily spending patterns, facilitating easier budget management and analysis.

This story was produced by Ramp and reviewed and distributed by Stacker.






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