Travel and Expense Policies
Employee travel and expenses form the second largest controllable expense for any company. At this scale, every business needs to setup certain guidelines and criteria to manage and process business expenses. This guide will help you understand everything about these travel and expense policies and help you build, automate and optimise the expense management process in your organisation.
Table of contents
What are travel and expense policies?
Travel and expense policy defines how an organisation will reimburse employees for all expenses necessary, reasonable and actually incurred when traveling on company business or executing business transactions. Travel and expense policies sit at the core of enterprise expense management to directly impact
- How employees spend money on business functions and travel; and,
- How organisation adjusts and accounts for business expenses.
How do business currently implement reimbursement policies?
The Global Business Travel Association (GBTA) published a survey result conducted on business travellers in 2016. The results show that fewer than half of respondents (44%) had to follow a policy, while a further 21% of travellers stated that they don’t have any restrictions on their policies.
This state of expense management is cheerful for the business traveller - they can choose the hotels and flights of their own preference and make unchecked spends that the company will bear cost of. For an employer, however, this is a precursor to a disastrous bottomline. With no check in place,
- Your employees have no benchmark against which to measure their own spend. Will your employees be frugal? Or will they splurge? The statistical average answer lies somewhere in between. Being the 2nd largest controllable expense for businesses, this gives a huge room for intentional and unintentional leakage and overspending that hurts the business bottomline.
- You can’t funnel spend to one vendor. One of the top methods for controlling business expenses is choosing a preferred business vendor to negotiate volume discounts, but with no policies or guidelines in place, business lose out on any premise for implementing cost control measures.
- Poor predictability into net bottomline. Being able to predict revenue and spends is a top target for finance functions. However, with no control on spends, predictability goes down the drain.
An attempt to understand why a business would not implement policies brings us to a few possible answers,
- First is that they simply haven’t got around to writing a travel expense policy. This usually happens in absence of a person or function responsible for creating and implementing these policies. For anyone else, this might seem a daunting task and hence the ignorance.
- Second is that enforcing policies is difficult. This is specially true for companies that are still using manual (pen-paper or spreadsheet) based systems to manage expenses. Even for companies with some sort of automation in place, enforcing policies on a mammoth volume of receipts is difficult.
- Some companies also ignore policies on premise of ‘employee satisfaction’ - They believe that employees will stay frugal and not perform fraudulent tasks. They argue that they trust their employees and don’t see the need for measures. This is (statistically speaking) not a good idea, and has often led to huge frauds historically.
Objective of employee expenses and travel policies
A clear, unambiguous expense policy helps prevent frustration, mistakes, and even the risk of expenses fiddling or fraud. The key objectives of policies (at a very broad level) are,
- Define an expense reimbursement process for both employees and non-employees. The process includes how to report expense, what to include and how employees are reimbursed for expenses.
- Ensure that employees understand the legal requirements from government tax and audit authorities regarding expenses, for example, the need for business reason in every claim. Companies which explain the need for policies have a better compliance rate as compared to companies which just implement policies without first explaining the need.
- Ensure that employees and their managers understand their duties and responsibilities regarding expenses.
Benefits of enforcing travel and expense policies
- Setting employee expectations: Policies help employees understand how much and where they can spend, and how will the company process their expense. It sets expectations as to what kind of travel, lodging and other preferences would be aligned with the company’s budgeting, and what the timelines and workflows for reimbursements would be.
- Audit-readiness: A major incentive to setting expense policy is to align with the tax and compliance guidelines laid down by governing authorities and stay compliant, audit-ready.
- Defined roles and responsibilities for functions: A part of setting expense policies is to identify key stakeholders around them - Who is responsible for what? Typical stakeholder templates include:
- Role of the finance, accounts and audit functions
- Role of the Human Resources function
- Role of managers and approvers in the reimbursement workflow
- Role and responsibility of the employee in spending and reporting expenses.
- Spend Control and Insights: Setting policies allows organisations control their bottomline and bring preventive measure to check overspending. Policies also allow for benchmarks spends in certain categories and on specific vendors, opening a plethora of ideas to optimise spending caps, decide changes to spending limits, decide on volume negotiations.
- Prevent fraud: As the scale of employee expenses goes up, the chances of fraud follow (owing to the increase in complexity of the trust equation between employee and employer). Policies, specially automatically enforced, ensure that common unintentional events like duplicate receipts are checked along with an intentional fraud event.
Components of a comprehensive travel and expense policy
A typical travel and expense policy spans -
- The process for making expenses and claiming reimbursements - Permissions and people involved.
- What expenses are considered as business expenses and what are not?
- What constitutes a business trip and which components of it are reimbursed and which are not?
Let’s take a while to dive deeper into these three aspects of a typical policy.
Expense reporting and reimbursement process
The first step to creating policies around expenses is defining the process. From how and expense is reported to how the reimbursement will be processed, this is typically referred to as the expense reporting/accounting workflow. In it’s most simple state, this is what a workflow should look like -
Let’s break this process down by stages and understand what will define a healthy process -
- Making an expense
- Pre-Authorisation - Before an employee can make a business expense, it’s necessary for them to know if they need any explicit (documented) permission from a stakeholder to make that expense. If an expense needs permissions, they should be handled by a requisition workflow wherein they can seek permission from the designated authority.
- Mode of payment - The employee needs to be informed about any preferred mode of payment for business transactions. This is specially important if the company has a corporate card program in place and requires employees to utilise the same for all expenses business.
- Reporting an expense
- Mandatory proof needed for claims - What documentation (forms, receipts) does the company need in order to reimburse the traveler? This requirements is usually guided by company’s internal processes and also by government mandated policies.
- Timeframe to report an expense - Employees must be made aware of a cut-off period from the date of expense till which they’re allowed to claim reimbursement.
- Approving an expense
- Policy compliance - There must be a way for approving authorities to accept and approve expenses reported to them, and the reimbursement process should be able to handle approvals as well as rejections and ensure information is passed to all stakeholders.
- Pre-Accounting - Based on whether an expense is approved or not, the process should account for reimbursable and non-reimbursable components in the company account books.
- Audit - The company should lay down a process to recheck approvals and ensure that the documents are audit-ready. Employees should also be made aware of the net amount they can expect as reimbursement.
- Reimbursement timeline - The company should set expectations for employees on when they will receive reimbursements.
Please note that you can replace “expenses” from he above process with cash advances or business trips. Travel, advance and expense policies are adjacent to each other in the typical back office structure and need more or less similar treatments in terms of a structured operational process.
Expenses - Receipts, Mileage, Advances and Per Diems
The next component of a healthy travel and expense policy defines what are the kinds of expenses an employee is allowed to make in their capacity. In a typical structure, every expense claimed by an employee has at least the amount, category and date of expense attached to it. The permissibility of employee expenses is hence defined majorly by these criteria -
- Expense categories - Employees should be made aware of what categories of expenses will be considered for reimbursement. This typically involves food and entertainment, software, medical, insurance, stationary and other such categories. It’s important to call out unsupported categories explicitly (example - alcohol etc).
- Expense Amount - The amount that will be reimbursed is usually capped by an upper limit or locked in to a fixed amount (called per diems). The limits are usually a functions of criteria like employee hierarchy, function, category et al.
- Expense Geography - With technological advancements, companies can vary spending limits based on the city or region of the employee making an expense. This is specially applicable to mileage logs claimed by employees.
Business Travel - Mileage, Trips and Lodging
Thanks to the evaporating boundaries of geographical distance between businesses and opportunities, business travel is the single biggest component of employee expenses. Here are the most common elements around business travel that an ideal expense policy should cover -
- Mileage - One of the most common travel scenario for employees is when they drive their own vehicle to work or for work. This is a government recognised reimbursable expense incurred by employees. Your policy should define rates for mileage across different vehicle types, and the destination end-points permissible for reimbursement.
- Business Trips - Employees should be made aware of the scope of business travel (local, domestic and International) that the company is willing to pay for. The controlling variable here is usually employee hierarchy and function, with some outlying cases that mandate the need for pre-trip authorisation.
- Lodging - Employees should be made aware of the standard and scope of lodging that the company is willing to pay for. This is usually controlled by employee hierarchy, geography and other such factors.
Common considerations while designing policies
Considerations around expense categories
These are some common expense categories that you must account for
- Food and meals - This is the most common expenditure after travel.
- Medical and health expenditure - Account for employee health insurance as well.
- Entertainment - Usually is allocated within company and team budgets.
- Supplies and stationaries - Avoidable for large enterprises with a dedicated IT/procurement team.
- Cellphone - Specially applicable to client-facing teams like sales etc.
- Parking and toll - Applicable to workspaces where employees don’t have a dedicated parking or in cases where employee travel is frequent.
- Alcohol - Often capped to a limit or rejected from reimbursable expenses.
- Per diems - Mostly applicable to teams with remote setup or heavy field operations.
Considerations around Travel
- Local travel
- Mileage - Lay down expectations on daily office commute and client meetings
- Rentals and Taxi services - Lay down expectations and preferences around local cab rentals (Uber, Lyft, Grab etc).
- Train and Bus - Account for all means of transport that might be applicable to our company’s context, including bus and Tain tickets, which are more often than not manually generated.
- Scope of travel beyond local
- Region/City-wise slabs - Establish a comfortable slab for reimbursement of travel expenses based on region or city the employee is travelling in.
- Airline tickets - Establish a vendor, class and/or airliner preference for your employees to stick to. It makes sense to control this by the employee hierarchy.
- Lodging - Establish a vendor, class and/or per night amount for all employees. Like airlines tickets, it makes sense to control this variable by employee hierarchy.
- Establish MBT (minimum booking time)
- Travel costs change dynamically today and last minute bookings are likely to cost much higher than bookings made well in advance. It might be a good idea to drive employees to forecast their travel itineraries and make requisitions and bookings in advance in order to control cost.
Not so common considerations around expense policies
There are certain conditions which mandate a reimbursement policy but organisations don’t come across them very often. It’s easy to miss these conditions and it’s a great idea to be prepared for them.
- Candidate reimbursements - Most organisations, from small and medium businesses to large corporates, reimburse any expenses that a job applicant might have to incur as part of their hiring process. Your policy should incorporate rules around this.
- Delegation of expense reporting - Enterprises often delegate expense reporting of C-Suite executives to their assistants or secretaries. These cases should be handled in a manner where the delegate is able to report expenses without exposing any unauthorised access to information or actions.
- Splitting expenses - Splitting expenses is a very common case in most organisations, wherein a single business expense might have been shared by two or more than two employees. You policy must lay down criteria for reimbursement in such cases.
Examples of comprehensive expense policies
It might be a good idea to look at how other enterprises manage employee expenses when trying to create one for yourself. Following are some publicly available expense policies for your reference. Please note that unthoughtful replication from another enterprise is often a bad idea and we discourage it.
- Corporate Travel and Expense Policies
- Expense Policies in educational bodies
- Expense policies in non-profits
- Candidate reimbursement policies
Best practices for designing travel and expense policies
There are tonnes of sample and real expense policies available across the web, however, one size absolutely does not fit all in this case.
Every business has its own unique context and needs to design policies around it. With employee empathy being the directive principle, here are a few things you should keep in mind when designing policies
- Expense Categories - Where do your employees actually spend money most often? For some it might be travel, for some it might be cellular bills, for some it might be food and for some it might be office supplies. You need to list every category that sees expense from even a single quartile of actively expensing employees.
- Spending limits Benchmarking the amount spent by employees in each category across various hierarchy levels of your organisation and setting sensible spending limits in accordance will help you setup policies without afflicting employee satisfaction levels.
- Spending medium - It might be a good idea to encourage your employees to use a particular mode of payment if it sets the context of your business. It could be driven by a corporate card program. This can be used to drive employees away from making expenses in cash, which are often unaccountable for.
- Calling out non-refundable - While it’s imperative to call out what is allowed, its equally important to let your employees know what is not allowed. This will help avoid cases where employees might feel unpleasantly surprised on the absence of reimbursement.
- Explicit, simple process - Your policy document should be made available to employees during onboarding process to help set clear expectations, and the process should be simple enough for employees to follow. One of the biggest dissatisfactions amongst employees is a product of complex workflows around reimbursements.
- Vendor preferences - If your company has a specific tool or vendor in place for common expenses like travel etc, your policy should communicate that to the employee.
- Continuous optimisation - Spending patterns and preferences change very fast. Your policy should record and account for these changes and accommodate the changing interests and preferences of employees and company.
- Proactive information - From violations to approvals, all stakeholders around the process must be kept thoroughly informed. This includes letting employees predict the reimbursement amount and timelines.
- Define accountability - One of the biggest operational problems around this process comes in when no one is ready to talk a blame. Employees, approvers, audit and finance teams must all be informed about their roles and responsibility, and what they’re accountable for.
- Transparency - This is critical, and involves small events like informing why a report or an expense might have been rejected, or why a certain process has been delayed.
Enforcing travel and expense policies
An approach to implementation
A typical implementation of expense policies accounts for the two major questions for any expense claim -
- Who is making this expense?
- What expense has been made?
This is NOT the ideal implementation strategy, but the possible permutations and combinations from this will guide you in making the first steps and picturing the scope of policy. Based on the above two aspects, you can create a grid which looks like this -
Best practices to consider
- Building a robust process
- Mimic company hierarchy - it makes it easy for your employees and managers to understand the approval workflow.
- Define critical path - This is useful when your company has secondary level checks (policy checks or audit runs after an expense has been approved). The critical path defines the minimum number of checks and stakeholders that an expense should absolutely go through before being processed for reimbursement.
- Allow bi-directional flow - Expenses when rejected may need to be sent back to the employee for correction, a situation when you need to consider ensuring backward flow of information. Another such case might be in requisition workflows, when an authorisation needs to go from a manager/approver back to the employee.
- Make it comprehensive
- Be explicit - Detail out the expense categories and types that are considered and not considered for reimbursements. You should highlight any common error/inefficiency in the process as part of the policy document.
- Set expectations - Provide employees visibility into the amount caps and budget thresholds, if any. This ensure your process doesn’t come up as an unpleasant surprise to employees.
- Ensure mobility
- With over 80% of average workforce being mobile, the nature of business expenses today mandates a mobile application at the very least. Mobile apps that capture receipts and log mileage are a must to allow for a healthy employee experience.
It’s 21st century for your business, business tools and employees - There is absolutely no case that stands for manual expense management today. Expense management software market is booming and it’s time your company jumped in on the digital wave. Some of the common features available these days can make implementation of expense policies very easy -
- Real-time policy checks - Informs employees of policy violations in real-time, as soon as they are done creating an expense. This reduces a lot of back-and-forth between approver and employees.
- Enforce powerful checks that are not possible manually - Checking for accurate geography of an expense item (like geotagging a milage log) is possible only with automation
- Powerful audit logs - Every movement of a receipt or a claim inside the system leaves a digital footprint which can be used to justify compliance with audit authorities.
- Matching transactions from source - Softwares allow for automatically matching expense claims in s system to possible related transaction entries from Corporate cards or benefits cards.
- Automatic policy enforcement and classification - Machine automatically detects policy violations and categories them as critical or non-critical, making life much easier for the finance and accounting teams.
- Duplicate detection - Software can automatically detect duplicate bills across users or for the same user, eliminating one of the most common errors in reimbursement process.
- Paperless process - Automation allows for soft copies of digital receipts, enabling companies to reduce their carbon footprint and go paperless.
- Alcohol detection - Allows for automatic detection of alcohol and liquor items in a receipt/claim.