Why talk about Travel and Expense policy best practices?
I think that you would agree with me that although Travel and expense (T&E) spend is not a major contributor to the total spend, it still needs a lot of attention and resources to process the expense reports for employees.
This includes defining a Travel & Expense (T&E) policy, processing receipts, ensuring that receipts match the expense, auditing, reimbursing employees for out of pocket expenses.
It is also an area where you have a high chance of employee fraud.
T&E expense as a percentage of total spend may vary from company to company, but this is always a top of the mind issue for most CFO’s because well-controlled T&E expenses can not only save company money but also prevents any fraud by employees and misuse of company assets.
As per research by Aberdeen group, 43% of best in class companies consider T&E expense management as critical strategy and 48% of best in class companies cite “need to reduce expense processing costs” as a top pressure.
Companies whether large or small realize the potential benefits of well managed T&E spend and invest in tools and technologies to better manage the process.
However, the policy generally comes after implementing the tool and that causes a lot of headaches for employees as well accounts payables who is processing those expense reports.
Following Travel and expense policy best practices, companies should first define and implement a policy, ensure that employee feedback is incorporated in the policy and then look at implementing a tool to automate the expense management process. This will not just lead to process efficiencies but also leads to a friction-free T&E expense reimbursement process. Let’s look at some of the key components of the T&E policy
There are many best practices for ensuring successful implementation of travel and expense policy. These include ensuring that you have senior management buy-in on the policies you are about to implement, keeping the policy simple and focus on adoption then enforcement. Before you go about implementing a travel and expense policy, you should identify clear ownership of the policy. There should be a single individual within a department who is responsible for the adoption of the policy, reviewing what is working and what is not working and collaborating the changes required on an ongoing basis.
Before we get into specific details on each of these best practices, let’s first look at why you need a T&E policy, to begin with.
It is important to have a well-defined T&E expense policy but equally important is to clearly articulate the objective of the policy both for the management as well as employees. Some of the key objectives of the T&E policy are as follows
a) 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.
b) Ensure that employees understand the legal requirements from IRS regarding expenses, for example, the need for a business reason to incur an expense. Companies who explain the need for policies have a better compliance rate as compared to companies who just implement policies without first explaining the need. You can find guidelines on the IRS website.
c) Ensure that employees and their managers understand their duties and responsibilities regarding expenses.
The goal of defining the objective of the policy is not just to define the rules for T&E expenses but to also ensure that employees clearly understand how to behave responsibly while spending company money. A well-defined and communicated policy leads to lower fraud rate and overall reduced spend.
Having a well-defined Travel and Expense (T&E) Policy can have many benefits. Organizations across the board are looking for ways to improve their T&E process and the first step is to have a solid foundation in the form of a T&E policy. As per Aberdeen research group, the top benefit companies are looking for is reduce expense processing cost. Apart from the obvious benefits of reducing the cost for processing, other benefits of a well-defined policy include
Having a standardized T&E policy provides employees clarity on what they should or shouldn’t do, which means the policy administrators are handling fewer calls from employees on how to do something. It is important to define the policy as early as possible, even if you are a small company.
That way, you can tweak the policy as per employee’s feedback and when your company is in growth mode, it is easy to scale the policy across new employees and different locations.
Having just a policy doesn’t lead to fraud prevention but the visibility backed by a strong process does.
What I mean by this is, since you have defined a process to report spending, it will be easier for you to understand the trends and identify if an employee is misusing company assets. For example, if an employee is traveling to the same location, again and again, you might want to audit that to check if this is a valid business need for that or the employee have relatives at that location!
Though cost savings is not the only reason for which you should define a T&E policy, having a well-defined Travel and Expense policy does lead to cost savings. Specifically,
This section is more an overview than a detailed explanation of each component of the T&E policy, use this as a template to create a T&E policy which is customized to your organization needs
1. Expense categories
The first step is to define what spend categories are covered under the Corporate Travel and Expense policy and what special rules you might have for these categories. Common expense categories are
2. Cards vs cash
It should be clearly defined whether employees should exclusively use corporate-issued credit cards or whether an employee can use their personal credit card and cash for employee expenses.
There are pros and cons of each approach, so you should clearly evaluate the alternatives and decide what works best for you. For example, if you are exclusively using cards, then that gives you better visibility into T&E spend but then you are liable for paying late fees if employees don’t file expenses on time.
Not all expenses are reimbursable, IRS guidelines drive some of that and as a company, you might decide not to reimburse such expenses. Some common non-reimbursable categories include
It is recommended that you review your overall T&E spend and identify categories which are not reimbursable. The list of categories generally evolves over time so you don’t need to capture everything on day one.
The T&E policy should have a clearly defined process for reporting the expense and the pre-requisites for submitting the expenses. Some of the common examples are
1. Reporting of the expense reports: if you are using an expense management tool then this process is straightforward but if not, then clearly define how and to whom expenses should be submitted after they are approved.
2. All expenses should be approved at the right authorization level before submitting for processing. The right level depends on the autonomy available to employees at each level of the organization hierarchy.
3. It is a good practice to have receipts for everything but that also requires additional effort to validate those receipts and match it against receipts. You might want to start with a lower amount, for example, anything greater than $20 needs a receipt.
4. All T&E expense reports should be reported within a certain timeframe. If your company has a corporate credit card program, then you might require all expense to be filed within 30 days so that you can pay the bank in time and avoid any late fees charges.
5. How soon employees expense will be reimbursed, for example, 30 days after the expense is reported.
This is the most important piece of the T&E policy. As per financial dictionary, “travel expenses are defined as Expenses incurred when a person conducts business away from home. For example, if one must travel to another location to conduct a meeting with an important client, any lodging, meals, or transportation costs usually count as travel expenses”.
Following should be covered in the travel policy
a) Travel booking: How travel should be booked by employees. There are multiple options available including external or internal help desk, travel booking tools or other travel websites like Expedia, individual airlines sites, etc.
There are pros and cons of each of these approaches but it is better to have a defined approach.
If you are a medium-sized business, it is ok for employees to use any website for booking, however, in that case, make sure that you have a good expense reporting tool so that you can get visibility into spend.
b) Preferred airlines: If you have a preferred Contract with any airlines then make sure that you communicate that to employees.
If your annual spend is under $500,000 chances are that you might not be able to get any preferred pricing from airlines but you can always enroll in the corporate miles program whereby company accumulates miles for every travel.
These miles can then later be redeemed for travel, not huge savings but you can save $50,000 – $100,000 / year depending upon how they are redeemed.
You should also specify if travelers need to book travel in advance or they can book anytime.
As per research by travel booking site cheapair.com the best time to book a domestic flight is 49 days in advance. Now that might not be possible all the time, as per the research, the worst day to book a ticket is one day before the flight, followed by 2 days, 3 days until you get to 11 days out. So, if you can’t do 49 days/ 7 weeks, aim for at least 2 weeks.
c) Business Class vs Economy: The policy should clearly specify when business class travel is allowed. There are multiple ways to structure this, you can implement a policy based on job titles, for example – VP and above can travel by business class. The other way to handle this is to structure by travel time, for example – if the travel time is more than 8 hours then the business class is allowed. You can decide to keep it simple by not allowing business class travel at all!
d) Lodging: There are a couple of things to cover here, first what type of rooms can be booked by travelers, for example, standard vs. suite, etc.
Second, if you have a preferred rate with a hotel, then make sure employees use only that hotel.
The problem with hotel bookings is that employees prefer to book hotels with those hotel chains where they already have a lot of reward points.
This can easily be mitigated by asking your preferred hotel to do a reward/points match. Some hotel chains might not negotiate a national contract so this could be a little bit of work depending upon the number of locations traveled by your employees.
e) Booking cost and exceptions: The goal of this section should be to provide guidelines to employees on acceptable booking cost for airlines, lodging, and car rentals. If the booking cost is over the guidelines, then a process should be in place to approve those exceptions.
BTN (Business travel news) publish a yearly BTN corporate travel index, which is a good start to get a handle on the overall travel cost. For example – as per the 2017 index “the average 2016 cost of a hotel room, including all taxes and surcharges, was $177.36, up 2.6 percent from 2015 levels. New York was the most expensive at $385.08, and San Francisco, Boston, and Washington, D.C., also exceeded $300.”
Defining a policy is one thing, implementing it in a user-friendly manner is a completely different ball game, we will conclude this guide by mentioning some best practices which you can use to successfully implement a Travel and Expense policy in your company
For the T&E policy to be successfully implemented, there must be a clear defined ownership of the policy. Ideally, this should be owned by a finance function or a procurement function.
There are two main reasons for defining clear ownership
First – your policy is not going to be perfect on day one so having clear ownership ensures that someone is tracking the policy adoption and accordingly making changes.
Second – when you roll out the policy, there are always questions from employees, so you need someone to handle employee questions and feedback.
T&E policy implementation is no different from any other change initiative and if you have key executives backing up the policy, there is a higher chance of adoption.
In our experience, the T&E policy is well adopted in cases where a senior executive like CFO (Chief Financial Executive) is supporting the policy. It is good practice for the initial communication to go from CFO on why the need for T&E policy and how employees can provide feedback.
It is not uncommon to see employees going out of the policy and booking travel which is not authorized or travel which is outside the guidelines. The most common reaction to such employee behavior is to act against such employees and set a precedence. Our recommendation is to resist this temptation and focus on rather accommodating the needs of the employees. Understand why the exception handled and if it is a genuine request then figure out a way to accommodate that in the policy. Focus on adoption and not enforcement only, once you have policy fully adopted, you don’t need to enforce it!
While writing the policy, use simple language and avoid corporate jargons.
There are two benefits of that
First – all employees can easily understand what is expected out of them.
Second – there will fewer exceptions because the expectations from employees are clearly defined. Policies, in general, are not well read by employees, I mean who wants to read a 20+ page document to understand how they should travel.
For higher adoption, keep it simple and brief and define as fewer rules as possible. Again, focus on adoption first.
Make sure you have a mechanism to report on the total spend at the department level and at the company level. There are multiple benefits to having good reporting around T&E spend
1. It helps budget owners to better understand how their T&E budget is consumed.
2. It helps finance team to understand spend patterns and any transactions which might be fraudulent in nature.
3. It makes people accountable because their spending is now reported and available to senior management for review.
When it comes to defining Travel and Expense policy, define clear objectives and goals, keep it simple and focus on adoption over enforcement.