WHITE PAPER. 10 Expense Management Best Practices

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1 WHITE PAPER 10 Expense Management Best Practices

2 Overview When it comes to company finances, executives take special care to educate themselves on best practices. Finances are key to ROI in a company, and managing company spending plays a great role in a company s overall finances. When executives have knowledge and facts behind the best financial practices, they can make more strategic decisions. Where do you find expense management best practices? Sure, you can look around you and study competitors, but you can t simply copy their methods. Companies need the most up-to-date, strategic guidelines in order to narrow down their decisions into specific actions for their industry. Especially with the technology today, companies need to know what tools are being developed in order to switch from manual to automation. Automating expenses will save time and money filing expense reports, organizing and fulfilling reimbursements, and importing accounts into bookkeeping software. This white paper is intended to help companies make strategic decisions about their finances based on general, yet defined practices. Here are 10 of them, pulled from and strategically compiled thanks to the experiences given in other corporations, firms, and organizations. 2

3 1 Establish pre-approval expectations Pre-mandating approvals before employees make any purchases will lower the risk of overspend and employee fraud. Employees should not have unlimited access to company accounts or cards to make purchases whenever they need. However, some employees feel a lack of control and freedom when restricted or too closely monitored. The solution must involve a pre-approval along with a feeling of control from the employees. Divvy created a system to provide such a solution. Divvy admins can give each employee an individual physical card (included with our free subscription) and divvy account with access to virtual card generation. This gives employees the control and freedom to spend when needed. However, pre-approval comes pro-actively, set up by the admins. Admins can assign each employee to a specific budget. When employees need access to funds, they send a virtual through the mobile app to the admin, defining the exact amount, time of use, what it s for, and other optional notes. Admins can review the request and accept or deny approval. The simplicity of the Divvy pre-approval process and quick access is secure and prevents overspend and fraud without restricting freedom and control from the employee. 2 Create an accountable plan The IRS set the following rules surrounding your reimbursement or allowance arrangement in order to be considered having an accurate accountable plan: 1. The expense must have a business connection. Deductible expenses must be incurred while performing services as an employee on behalf of the employer. 2. Expenses must be submitted promptly. Expenses must be adequately accounted for within a reasonable period of time. 3. Overpayment of expenses must be returned in a timely manner. Any excess reimbursement or allowance paid to an employee must be repaid to the employer within a reasonable period of time. Companies have a difficult time determining what turning in expenses in at a reasonable period of time means. The amount of time depends on the type of situation. However, if employees are taking actions within the reporting process, this qualifies as accurately utilizing that period of time. Some of these actions include: An advance is received within 30 days of the time an expense is incurred. Expenses are adequately accounted for within 60 days after they are paid or incurred. Excess reimbursements are returned within 120 days after the expense is paid or incurred. An employee provides an adequate accounting of outstanding advances within 120 days of receiving a periodic (at least quarterly) statement. 3

4 If a company fails to demonstrate they have an accountable plan, employee expense reimbursements may be considered taxable income and 1099s must be provided to employees incurring those taxable expenses. With that, reimbursements only apply to companies that require employees to use a personal credit card for company purchases. With Divvy, such a regulation is irrelevant since the employees are using company funds through a distributed Divvy card. Along with the reimbursement regulation, Divvy also streamlines an additional requirement from the IRS Code Section 274(d) states that substantiation requires an employee to submit the following items with adequate records (such as receipts): Amount of the expense. Time and place of the expense. Business purpose of the expense. Business relationship of the employee to the persons receiving a gift, being entertained, or utilizing a facility or property. When employees spend money on the Divvy app, the transaction, along with the amount, time and place, business purpose, and business relationship are pre-recorded and automated into the web app in real time. This way, instead of each employee filing a report with the above items, Divvy admins in charge of bookkeeping simple import the Divvy data into their generic accounting software. 3 Decide on a company card strategy If the idea of employees carrying around corporate credit cards conjures up images of reckless spending and big-ticket liabilities, you should take a deep breath and possibly reconsider your position. Today's corporate card programs are plentiful and highly competitive to the point where they offer numerous financial and operational benefits. Many corporate card programs offer several benefits, including the following: Financial incentives and rebates for all purchases. This can add up Carrying a corporate card eliminates the need for cash advances. Most merchants today accept a wide variety of card products, making for rare instances when employees need to dig into their pockets for cold, hard cash. Corporate cards reduce the cost of expense report handling. By integrating credit card data into T&E systems, the need for employees to re-key their expenses is eliminated and the accuracy of the captured data is improved. Many companies don t require a receipt for anything under $75 if a corporate card is use to make the purchase. This reduces the time employees spend creating expense reports, and the time approvers spend ensuring compliance. The use of corporate cards reduces the number of falsified receipts. Reports show that 25 percent of expense claims have fraudulent receipts. An example of this is a dinner bill for $100 that includes a 10 percent tip, but the employee turns in a claim for a 20 percent tip. On a corporate card, an over-statement of an expense like this would be caught. 4

5 The top corporate card programs are offered by familiar credit card providers, including American Express, Visa, Citi, and Capital One. However, in order to fully gain the benefits listed above regarding reduction in expense reporting, many programs need additional expense management software to streamline the expense reporting process using automation. Such software providers include Expensify, Concur, Certify, etc., however, adds additional steps and monthly payments. Divvy is a corporate card program that provides an all in one, card provider and expense management software. Working with card provider, Wex, Divvy provides the benefits and rewards you would find from using a generic corporate card program, along with real-time automation software that eliminates the expense reports process for employees entirely. A common concern of employers in support of corporate cards is employees that rack up charges on their corporate card (company liability), then take their time submitting the expense reports associated with those charges. Companies originally solve this problem by using both a carrot and stick to keep employees motivated to submit expenses promptly. For example the carrot could represent convenience aspect, while the stick represented the strict liability to accept only legitimate business purchases in the reports. However, Divvy eliminates this concern since each card is assigned to a categorized budget with limitations. In addition, employees must request access to funds and wait for approval from admin. Approval is given in a process similar to Venmo, where only specific amounts are transferred. A recent industry survey on corporate card programs cited the #1 reason for implementing a corporate card program was to increase the convenience for employees. When employers were asked the same question one year later, the #1 reason shifted to cost control. Divvy provides both. 4 Build policy automation Before automating expenses, many professional services firms use an intensive audit process to review each accounts payable manually. This takes extra precaution to make sure each report is accurate. Such a process usually requires up to three full-time employees who could be adding much more value to the organization in other ways. By applying expense policy compliance rules through the use of a rules engine, all expenses are validated upfront against corporate expense policy, governmental policies, and even client billable policies. With an automated process, when an employee (or their delegate) enters an expense that is not compliant with policy, the expense item is immediately flagged. Depending on the type of infraction, the employee may be asked to provide an explanation. Approvers determine the outcome or may remove the item from the expense report altogether. If personal items are charged to a company paid corporate card, expense 5

6 owners can mark the item as personal, in which case the expense is automatically deducted from their out-of-pocket reimbursement. Such an experience occurs after expense reports are entered. However, Divvy flags such purchases as they happen using real-time transaction tracking. Divvy users can prevent infractions by monitoring employee spending in real-time. 5 Develop an approval process Some companies keep a mental documentation of an approval process. Employees just know who to go to for approval with funds. However, it is always best to take a step back and discuss roles, delegations, and responsibilities when it comes to who approves funds for specific areas of spending, especially when talking about larger, more sophisticated corporations that must maintain professionalism and organization. Approval routes can be built based on hierarchy (e.g., manager, director, VP), dollar threshold escalation, expense allocation coding, attributes of the expense owner, and many additional criteria. Typical approval routing should have between two-to-four levels of approval. Too few approval levels and firms may not be adequately reviewing their expenses. Too many, and it becomes complex to execute and maintain. Most companies prefer accounts payable staff serve as the final step in the approval process before the approved voucher is exported to the financial system for payment. Divvy allows for quick approval through the mobile app, and all expense approvals are archived in the Divvy web app for analytical purposes. 6 Eliminate any all forms of fraudulent or wasteful spending Many companies rely on careful audits from accounts payable staff. However, this can require meticulous work from full-time employees who have better things to do. Accounts payable staff should not spend the majority of their time babysitting employee spend to make sure no one misuses company funds. However, fraudulent spending is becoming easier accomplish and increasingly justified by employees for reasons such as it was just some extra cash left over from a tip. Here are some common areas of fraud professionals must look out for: 6

7 Laundry expenses are submitted for three-day trips when corporate policy allows reimbursement only after five days. Excessive tipping Hotel expenses include an in-room movie, which is not reimbursable under company policy. International expenses are reported at inflated exchange rates. Meal/entertainment participants include the expense owner s boss, who also approves the expense. Imposed per diem limits based on statutory or corporate requirements are difficult to validate. Requiring hours of auditing gives financial staff a false sense of a job well done. You are not paying them to watch out for these types of risks. Regardless, most companies go through the process of hiring financial personnel just to account for accuracy in all employee expenses. Whatever your system is, the entire process can be avoided with softwares offered by Divvy. Divvy securely monitors all of employee spending in real-time. Employees can only spend the allotted amount on the budget. Also, since budgets are run by company funds, employees never have the need to file an expense report or file for reimbursements. Therefore, the incentive to fraudulently take rations from company funds is non-existent since Divvy makes it impossible. For companies who don t have access to Divvy, they are left to create an auditing process, which involves meticulous work, risk categories, and system to inform expense owners the result of each audit--either to congratulate them for being compliant with policies, or to discuss results and penalization. Expense fraud costs the U.S. 7 Educate employees When you ask employees if they submit accurate expense reports, 94 percent say yes. However, almost 6 percent admit to deliberately changing the reports in their favor. The annual amount of fraud adds up to $2,000. Many employees involved in fraud blame the inconvenience of travel while others say they didn t think it was fraud. However any justification, unless approved by company policy, is defined as fraudulent. economy $2.8 billion per year, and 76% of all expense fraud is committed by those using manual expense submission processes. - Chrome River 2016 The above statistics are relevant to so many companies today. These companies need to educate employees about company policies and provide them with boundaries. Companies can go the route to create specific policies and train employees with incentives; however, most of them are unaware of the new process Divvy created to give control to employees without the risk of fraud. The following are ways to provide this value: Card limits and budgets. Assign employees to specific budgets that are linked to their individual spending card. Employees cannot access these budgets without approval. Real-time transactions. Each employee transaction is recorded in real-time where admins can see spending as it happens. No expense reports. Since all spending happens on the Divvy card, which is linked to a mobile and web app, the transaction data will automate into an accessible report prepared for accounting software. 7

8 8 Streamline travel and expenses Without automation, the amount of manual work that goes into intervening with pre-approvals, expense, and company policy in order to manage employee spend in monumental. The larger the organization, the larger capital required to support the process. Especially when it comes to business travel. Establishing an expense management automation system will ease this manual process and replace substantial human efforts. Companies can accomplish the following through automation: Expenses that are not validated by policy will be flagged. Once an approved purchase occurs, the employees is prevented from making any more purchases without re-approval. Any duplicate expense reports will be flagged. In the case of using Divvy, expense reports are not filed by the employee, so duplicating them would be impossible. Admins have full and easy access to approve or deny funds requested from employees. Accounts payable and financial professionals can spend the time they would auditing expense reports by accomplishing more important, relevant work for the company. Expenses are automatically tracked in real-time, recording relevant information required for proper bookkeeping. This eliminates the responsibility for employees to file expense reports, let alone adjust them for personal gain. 9 Become paperless When kids these days growing these days don t even know what a hard-copy check is, companies should have come up with a better way to approve funds and/or reimburse. Especially if you have spent your efforts automating expense reports, you shouldn t switch to manual when it comes to reimbursements. Best practices for expense management eliminate any hard copy forms of payment for the following reasons: Improve analytics by using online payment methods and virtual receipts. Save the time and money it would take to print and write out checks and reports. Become more professional and up-to-date in your company practices. This will improve company image and credibility. Streamline the expense management process. Keep it consistent on the playing field by automating each step. Decreases the risk of fraud and compliance breaches. 8

9 10 Trust your gut The easy way to go is to look at what everyone else is doing and copy them. However, most companies are not utilizing the best expense management process. Companies shy away from using software that automates and streamlines all of your expenses into one provider such the way Divvy operates. A lot of feedback from people who choose to stay with their corporate cards, expense reports, and third-party expense management vendors instead of innovating towards an all-in-one software comes from their leverage in rewards points and incentives. Each company must base expenses on raw data and compliance. Even if you trust your employees, as your business grows, you can never be too careful. Expense management is key to saving and utilizing your company's funds in the best way possible. So rather than trusting on manual processes, trust your gut when you learn about the new expense management and automation software. Summary 1. Establish pre-approval expectations 2. Create an accountable plan 3. Decide on a company card strategy 4. Build policy automation 5. Develop an approval process 6. Eliminate any and all forms of fraudulent or wasteful spending 7. Educate employees 8. Streamline travel and expenses 9. Become paperless 10. Trust your gut. 9

10 About Divvy Divvy is a secure financial platform for businesses to manage payments and subscriptions, build strategic budgets, and eliminate expense reports. By integrating real-time tracking for every transaction, Divvy provides organizations with instant insight into their spend. With Divvy, you can make informed cash flow decisions, curb losses before they happen, and never have to save a receipt again. For more information, visit getdivvy.com Get a free demo to learn more.