Do you frequently reimburse employees for business expenses paid on personal cards? It’s not uncommon for employees to grab lunch with a client, travel to meetings, and purchase company supplies using personal funds.

Reimbursing these expense claims isn’t always as clear-cut and streamlined as business owners would like. In fact, the threat of fraudulent expense claims poses a serious concern, as a recent study uncovered that nearly 1 in 4 employees have committed expense fraud.

Bolstering your expense claim function relies on understanding the basics, like how expense reports work, the associated challenges, and how to implement an efficient claim process. This is exactly what we’re going to cover in this article. Let’s dive in!

What is an Employee Expense Claim?

An employee expense claim is a reimbursement request for business-related expenses that were purchased using personal funds. Most employee expense claims will be related to travel costs, such as airfare, lodging, meals, and auto expenses. However, eligible expense claims can cover a wide variety of costs depending on your industry. Ultimately, the cost needs to be related to conducting business. A meal with a friend that is unrelated to the business would not constitute an eligible expense claim. Qualifying costs should relate to conducting business activities, be reasonable, and be substantiated

Expense Claim Example

Let’s go through an example. Sam has an upcoming work trip and ABC Inc agrees to reimburse him for all eligible expenses. Sam uses out-of-pocket funds for the following transactions: $25 for parking, $150 for a hotel room, $50 for meals with clients, $30 for admission to a museum, and $15 for dry cleaning.

Since expense claims are only applicable to business-related items, Sam will be reimbursed for $240, which covers the parking, hotel room, client meals, and dry cleaning. Visiting a museum has no underlying business purpose; therefore, it is not reimbursable.

How Do Expense Reports Work?

Thorough expense reporting procedures require due diligence from employees and the team members approving the expense claim. Here’s the general process for an expense claim:

  1. Employee Pays for Business Expenses – The first step in the expense reporting process is the transaction. The employee will pay for an expense that is related to conducting business activities.
  2. Documentation – The employee saves the receipt or invoice to substantiate their purchase. The employee might also need to fill out a formal expense claim form.
  3. Approval – Now, the employee will take the documentation to their manager for approval. The manager will evaluate the type of expense, the substantiation provided, and the amount for reasonableness. If everything looks legitimate, the manager will approve the expense claim.
  4. Upper Management Approval – In some cases, there will be another level of approval from the finance team. These individuals will also verify the authenticity of the claim.
  5. Submittal – The packet of information will then move to the individual paying the reimbursements,  usually the payroll department. The payroll department will do a quick run-through of legitimacy and reasonableness before adding the reimbursement to an employee’s paycheck.
  6. Review – On a regular basis, the finance team will review the expenses paid during the prior period, such as last month or last quarter. Here, they will be checking for illegitimate or unusual expenses.

Small businesses and those in the growth phase will usually not have the manpower to separate each of the above functions. In fact, it’s not uncommon to have one individual serve as the payroll processor and the finance team.

This doesn’t mean your expense claim function can’t have the proper controls. Instead, be sure that you are prioritizing documentation and claim substantiation.

Read also: Per Diem allowances for business travel in the UK (HMRC)

Expense Claim Process Challenges and How to Overcome Them

The claims process isn’t without challenges. Your business is bound to encounter a few of these challenges, regardless of whether you’re a small mom-and-pop shop or a large enterprise.

Error-Prone

Working through stacks of expense claims is a tedious process that is prone to errors. After hours of going through receipts, your finance team might let their guard down, increasing the risk of errors.

One of the ways you can combat the risk of undetected errors is to utilize software programs such as N2F. There are programs that automatically scan receipts, compile information, and double check the authenticity. All that’s left for your team to do is a high-level review, saving time and reducing the risk of human error.

Time Intensive

The expense claim process can also be time intensive. What employee tasks provide the most value to your company? Is it sifting through dozens of expense claims or finding new opportunities to grow the business?

Employees that are tied up with the expense claim process lose the ability to work on other high-value projects. Just like errors can be reduced with the right software, manual and mundane procedures can also be overhauled with expense claim programs designed to free up time in your employees’ busy schedules.

Try our expense report software free of charge

Lagging Policies

Without well-defined policies and procedures, your employees could test the waters with ineligible expense claims. If you don’t have clear guidelines, employees can also start spending frivolously, impacting your bottom-line profitability. 

Your expense policies need to be clear, concise, and easily accessible. Employees shouldn’t have to ask dozens of questions to get an answer on if parking fees are reimbursable. They should have all of the resources to determine the eligibility of expenses, such as in an employee handbook.

Additionally, defined policies can substantiate your business position in the event of an audit or inquiry from a regulatory agency. If regulators find that you’ve been reimbursing ineligible expenses, your business could lose the tax deduction and employees might be required to report the reimbursement as taxable income.

Fraud Opportunities

Unfortunately, employee expense fraud is common, especially when the proper controls aren’t in place. Every expense claim that is submitted needs to be thoroughly vetted and backed by receipts or invoices. That is why it’s important to set rigid policies to avoid fictitious expenses.

Minimal Visibility

Another challenge associated with expense reporting is visibility. In many accounting standards, there is a matching principle, which requires revenue and applicable expenses to be reported in the same period.

If your employee took a client out to lunch in May, but doesn’t submit the expense until November, you aren’t fully abiding by the matching principle. Not to mention that delayed expense claims can hinder your cash flow, impact your budgets, and cause poor transparency into the financial health of your organization.

How to Implement an Efficient Expense Claim Process

Overcoming the above challenges is important to implement an efficient expense claim process. Here are some top tips to streamline your expense claim process:

  • Utilize Software – Having your employees submit digital claims can save your team hours of processing time. In addition, digital archiving  substantiates any inquiries from regulatory agencies or individuals approving the expense.
  • Set Spending Rules – Setting spending limits can be a great way to monitor employee spending and safeguard your cash flow. You don’t want employees spending hundreds of dollars each month at the expense of your company. For expenses over a certain threshold, require employees to have pre-approval.
  • Eliminate Silos – Oftentimes, employers will use a separate software program for expense reimbursements, especially if the transactions are run through payroll. Be sure your expense management program communicates with your central accounting system to facilitate the flow of data. For example, N2F interfaces with over 300 accounting software packages, for automatic integration into accounting systems.
  • Require Understanding of Policies – Your expense claim policies should be readily available for employees. Require each employee to read through the guidelines and sign a statement saying they understand the policies. This gives your business additional liability protection.
Read also: Travel request and expense reports: which reimbursement process to set up?

Expense claim management is unique to your business. The policies and procedures that work for your business won’t be the same as another company. For more personalized solutions, reach out to a team member today 👇

FAQs

Building your expense claim function can be overwhelming. We get it! Here are some additional questions that you might have.

Why are receipts important for expense claims?

Receipts are crucial to validate expense claims. Without the proper documentation, your team has no way of knowing what the expense was for and if it’s reimbursable.

Are personal expenses reported as an expense claim?

No, only business purchases should be reported through expense claims. If an employee submits a receipt containing multiple line items, be sure you are only reimbursing the business-related expenses.

What types of employee expense claims are common?

Travel, meal, and supply costs are the most common expense claims.

Are formal expense claim processes required?

Although not specifically required under law, formal expense claim processes are beneficial to minimize your risk of fraud and maintain compliance with regulatory requirements.