In a recent survey from Robert Half, 56% of CFOs cited an increase in the number of inappropriate expense reimbursement submissions from workers over the past three years. My personal favorites from the results? A pogo stick, 300 tacos and a chicken statue with a top hat. Might be the recipe for a great Saturday night — but likely not in-policy expenditures.
The expense reporting and reimbursement process can be an expensive hassle for company leadership as they attempt to control costs and prevent non-compliant activity. And it isn’t rainbows and unicorns for employees either. Long reimbursement lags, confusing manual processes and the potential to get chased down for missing receipts render the task tedious.
Now that many leaders are considering a permanent move to remote work, the flaws in the archaic expense reporting process are becoming more pronounced. The future of expense reports has been knocking for the past decade — and the new, remote normal is the incentive for finance leaders to finally open the door. It’s time to level up for the benefit of your employees, the sanity of your finance department and your bottom line.
In 2017, Baltimore-based rapper Chad Focus seemed to be at the beginning of a promising music career. Billboards declared him the “#1 Recording Artist in the World.” His debut album, “Get to the Money,” streamed on Spotify. His concerts were advertised as at risk of selling out.
In 2019, the illusion came crashing down. Chad Focus — aka Chad Arrington — was indicted for spending $4 million on his corporate credit card to fund his rap career. As an SEO specialist at an unidentified company, he purchased hundreds of social media followers, fake streams of his songs, bundles of tickets to his own concerts and more.
“Get to the Money,” indeed!
This extreme case, and other stories with less grave consequences, make it clear that card spending limits are a good thing — as are transparency and oversight.
However, instead of implementing a system that incorporates those controls, many companies opt for an old-school route: having employees pay for expenses themselves, then manually submit a claim for reimbursement. Research shows 38% of U.S. employees use their own funds for work-related purchases at least once a month. And close to half of companies are still managing expense reporting manually.
Why do companies cling to the traditional method, particularly when there are more modern approaches available? Some executives hesitate to hand employees a credit card without any controls or limitations. In many situations, they may not have even met the employee. So, many leave individuals to use their own funds — which has its own side effect. Some finance leaders believe employees will spend their own money more wisely than company funds.
In the same vein, more cumbersome expense processes can mean fewer reimbursement claims. Research estimates that employees and managers in the U.S. and Canada lost out on $10.7 billion in unclaimed expenses in one year alone. For some businesses, implementing new tools (which also cost money) that could increase ease of access to reimbursements understandably causes trepidation.
Lots of things are arguably better the old-fashioned way: hand-churned ice cream, written notes, hardback books ... however, expense reports are not one of them. The traditional process for reimbursement can have several unintended consequences:
Making it likely that some employees will need to speak to leadership about their personal financial situation isn’t just uncomfortable — it’s unfair. Face it: The 22-year-old college grad living off ramen might not have the purchasing power for that business trip to Europe. Of the aforementioned 38% of employees who use their own funds for business purchases, two of every five have experienced personal cash-flow troubles due to delays in the reimbursement process. Businesses that treat employees like a rolling bank account risk becoming a source of cost for the employee, not a source of income.
In response to late expense reports, some businesses send out emails to the entire company with a list naming the offenders. Sounds more like the “Shame” scene from "Game of Thrones" than a chummy work environment, doesn’t it? Lost receipts, late expense reports and errors can make the finance team feel slighted. And employees can feel frustrated by the back-and-forth of a complicated process and long wait times to be reimbursed — or worse, being called out in front of the company.
In a manual process, finance is forced to spend a large chunk of time tracking down expense reports, ensuring proper approvals, correcting errors, finding receipts, matching receipts with line items and much more. Non-finance employees and managers burn time entering expenses manually, identifying errors, gathering receipts, documenting non-receipt items and ensuring everything is in compliance with policy.
Archaic expense reimbursement methods have repercussions on internal workflows. However, the implications don’t stop there.
Federal law obligates employers to reimburse employees’ expenses — but only to an extent. The Fair Labor Standards Act (FLSA) says the employee is entitled to reimbursement if expenditures would cause their earnings to fall below the federal minimum wage.
However, some states* have passed their own expense reimbursement laws to prevent or limit employers from passing off operating expenses to their employees. Of these states, several have gone further and stipulated that reimbursements must be made within certain timeframes: For example, Iowa law requires employers to issue reimbursements within 30 days of a claim submission.
These laws, and companies’ applicable reimbursement policies, have come under heightened scrutiny as the “COVID-19 normal” brings new reimbursement challenges. As states continue to implement their own laws regarding expense reports, companies are going to face increasing pressure to pay back employees promptly and correctly. Those with outdated processes could expose themselves to legal risk.
*See appendix for a list of states with their own expense reimbursement laws, including those that say reimbursements must be made within certain timeframes.
Perhaps unsurprisingly, expense management software can pay dividends in terms of a finance team’s efficiency and effort. Let us count the ways:
|Digital Receipt Capture|
|Merchant Code Mapping|
|Flagging Out-of-Policy Costs|
|More, and More Timely, Data|
Instead of tearing through luggage for a tiny, crumpled receipt a month after a purchase, employees with access to expense management software can take pictures of receipts on their phones right away. They can either store that digitized receipt for later or automatically create a new expense report on the spot. Through optical character recognition, some technologies even extract expense report data, like the amount, date and vendor’s name, from a physical receipt — and categorize it accordingly. Systems also send reminders to employees who neglect to upload receipts at the time of purchase.
Have you ever opened your credit card statement and thought, “What was that charge?” After racking your brain, Googling and preparing your ironclad dispute of the charge for the credit card company … you realize it’s not fraud; you just didn’t recognize the obscure merchant code. Now, imagine doing that for a huge amount of purchases you didn’t make. Welcome to the accounting department.
Expense management systems can remove some merchant code confusion by assigning standard merchant category codes to merchant category groups. Companies can skip the time-intensive and error-prone process of deciphering merchant codes, making it easier to map codes to the appropriate expense category. (They can also automate this task entirely).
Perhaps you’re still wondering how on earth Chad Focus spent millions in company money without anyone noticing. Fact is, only about a quarter of companies reported having a system that automatically flags out-of-policy expenses in the 2019 Time & Expense Management Trends Report. Forty-six percent of organizations reported less than a 75% rate of compliance with their time and expense policy, while 26% of enterprise-sized companies said they didn’t know which percentage of submitted expenses were policy compliant.
Manually monitoring policy compliance makes enforcement difficult, particularly as the company and its headcount grow. Many times, policies involve the location of the expense and distance and class of travel, which are very difficult to check. With a manual process, the chance of human error is quite high. It also takes a long time.
And while likely-innocent expense reporting mistakes are difficult to catch, so are instances of purposeful duplication and business expense fraud. As volume goes up, the ability of finance to manually catch these mistakes declines — and the chance of fraud increases.
Software that incorporates the company’s specific expense policies will flag out-of-policy charges in real-time, so either employees can fix errors prior to submission or approvers and the finance team can quickly address issues. In addition to saving time, money and headaches, real-time policy checks can increase employee compliance and company audit readiness.
In a survey by Conferma, over a third of employees stated they had to wait up to or over two weeks to be paid back after submitting a claim. This lag means that a company’s actual spend is obscured for days or even weeks — and any plans based on those financials are already inaccurate and outdated.
With expense management software, however, finance has data with which to better forecast and augment reporting for better budget decisions. Embedded analytics and dashboards can also help identify trends like top spenders, top spending categories and areas for potential cost savings.
Using the data, companies can quickly adjust expense policies, strategies and controls. For instance, they might track frequently-associated vendors, then negotiate bulk discounts with them. A repository of auditable information also makes the audit process easier — particularly for public companies that need to provide it for Sarbanes-Oxley (SOX) compliance.
Perhaps another reason companies stick with their manual expense systems is that close to half of them don’t track the associated costs. No worries, J.P. Morgan did it for you: Companies that adopt electronic expense reporting experience an average 58% reduction in processing costs, averaging $18 per report versus $43 through manual reporting.
Process automation is the biggest win of an expense management system. These systems will likely pay for themselves in staff time savings alone.
Travel management tools, a common extension of expense management software, can increase time and cost savings. These tools can curate the lowest logical fares for flights, hotels and rental cars, configuring the selection to meet a company’s compliance policy. An added bonus? A centralized travel ecosystem makes it easier to take advantage of corporate rates.
Depending on their needs, companies can further automate the expense management workflow. They can enact auto-approvals for a certain vendor, amount or employee, or for any and all compliant expenses, to eliminate some steps from the process. Automation shortens the transaction-to-reconciliation-to-payment process, meaning companies can more easily evaluate expense spend as part of their overall finances.
Several new payment methods promise to innovate business spending. With them, employees are empowered, but the company retains its ability to review and approve payments. These payment methods include:
Credit card limits aren’t new. However, major credit cards are now allowing for company controls, which takes financial protection a (big) step further. Visa and Mastercard are two such issuers: Employers can block transactions on certain days and during specific hours, limit them to a state or the U.S., prevent transactions at specific types of merchants, and place limits on spending. They can easily lift these limits — temporarily or permanently — online, without contacting the card issuer.
Virtual credit cards are an exciting new addition to the business sphere. With online purchases becoming the new norm, many employees will not need physical cards to pay for a majority of purchases. Instead, companies can assign virtual cards.
Like a gift card, a virtual card tends to come with a specific sum loaded in advance. They can either be single use or recurring — perhaps the employee has a monthly media subscription to pay for, or gets a set amount of spending money each week.
Virtual cards also provide more security features. A physical credit card’s data — the number, security code, expiration date — remains the same. This can present issues, particularly when you consider how many vendors the average employee might trust to store their financial information. A virtual card’s information is dynamic. Each time an employee uses the card, the verification data is different. The information can usually only be used to make one charge. Many virtual credit cards also come with customizable features that may not be available on your standard card. For example, you can set “valid through” dates and spending caps and automate bill pay.
Many big banks, like American Express and Capital One, offer virtual card options. And many others are getting into the game. Expense management systems have begun issuing virtual cards as part of their offerings, and third-party apps also offer virtual cards, some of which integrate into an expense management system.
Virtual cards aren’t solely for online purchases. Many can link to programs like Apple and Android Pay for POS transactions or be added to a mobile wallet. Many vendors also offer the option to order physical counterparts to virtual cards. These still come preloaded and with spending limits that mirror a company’s policies, but employees can use them for more traditional, in-person expenditures like client dinners.
To make requesting funds easier, many virtual card systems integrate with a business’s communications channels like Slack and Outlook. An employee can make a purchase request, then track its status after the request is routed to the appropriate approver.
Each business will have different needs in an expense management software. In order to pick a suitable solution, executives should consider several factors:
|What are your main reasons for adopting a modern expense management system?||Identify the main challenges your company is facing in regards to expenses. Is it overspending, time spent, errors, etc.? This will help pinpoint the system features to look for.|
|How much expense reporting does your company do?||Determining how many claimants, approvers and claims your business has, as well as the average cost of expenses, can help “right-size” the software.|
|Are you a public or soon-to-be-public company?||If so, you will need software that has functionality for SOX compliance.|
|What are your employees’ main expenses?||Your company’s needs will vary based on the nature of expenditures. For instance, if a large portion are coming from car travel, software with GPS integration can automatically log and submit mileage.|
|Do you need mobile capabilities?||If your employees are primarily submitting items like media subscriptions for reimbursement, they likely do not need extensive mobile capabilities. However, companies with employees submitting lots of travel expenses will want that feature.|
|Do you operate in multiple countries and currencies?||You will need multi-currency and possibly multi-language support if you wish to integrate offices overseas and/or reimburse in different currencies.|
|Do you want your expense management software to integrate with your existing accounting or ERP software?||Integration with current systems will significantly condense processes and ensure financial data is consistent across all platforms.|
|What are your company’s growth plans?||If you are expecting your company to grow, don’t choose a software that can’t grow with it.|
Making expense reporting easier for employees does not mean that you will be the next victim of a Chad Focus-esque scheme. Modern tools can make expense reports more accurate and faster to complete and process — leaving your employees to fund their rap careers alone.
|State Reimbursement Laws
*Indicates the law stipulates a timeframe for reimbursement.
|Alaska: Code Section 8 AAC 15.165 states that an employee must be reimbursed for a uniform or equipment that is required by local safety or health codes, advertises the products/services of the employer or “cannot be worn or used during normal social activities of the employee.”|
|California: Labor Code Section 2802 states that an employer must reimburse for “all necessary business expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” This opens up expenses to reimbursement that may have not been considered before like a percentage of the service for a personal cell phone that is also used for business reasons. Unlike some other states, it does not matter when an employee requests for reimbursement. California is considered to have the strictest employee reimbursement law in the country.|
|Colorado: If an employer requires an employee to wear a uniform, the employer must pay the cost of purchases, maintenance, and cleaning of the uniforms or special apparel. An employer is not required to pay for clothing accepted as ordinary street wear or for an ordinary white or any light colored plain and washable uniform unless a special color, make, pattern, logo or material is required.|
|Illinois: As an amendment to the Illinois Wage Payment and Protection Act (IWPCA), Illinois requires expense reimbursement similar to California’s labor code. However, unlike its California counterpart, reimbursement requests are required to be submitted within 30 days. Illinois employers are also permitted to establish written expense reimbursement policies specifying the permissible amounts for expenditures along with other requirements for reimbursement as long as those policies are in compliance with the law.|
|Indiana: Indiana Code § 22-2-6-2 allows employers and employees to agree to a wage assignment for the purchase of equipment necessary to fulfill the duties of employment. The total amount of wages assigned may not exceed the lesser of: $2,500 per year; or 5% percent of the employee’s weekly disposable earnings.|
|*Iowa: According to Chapter 91A of the Iowa Code, expenses incurred by the employee must either be reimbursed in advance of the expenditure or within thirty days of the expense claim submission.|
|Massachusetts: Regulation 454 CMR 27.04(4) is unique in requiring reimbursement of certain paid hours and transportation expenses for driving that takes place during commute hours and the workday. Specifically, if an employer requires an employee to report somewhere other than their normal place of work, the employee must be paid for the excess time and expenses compared to their normal commute.|
|Minnesota: Requires that employers reimburse all business expenses incurred by employees (which include “equipment” and “consumable supplies” used in employment) upon termination.|
|Montana: Montana law requires that employers pay for any business expenses that an employee pays as a direct consequence of their duties and responsibilities as an employee, or as a result of the directions of their employer. Rule: 24.16.2519 gives specific examples as to covered expenses.|
|*New Hampshire: According to NH Rev Stat § 275:57 (2014), an employee who incurs expenses in connection with his or her employment and at the request of the employer shall be reimbursed for the payment of the expenses within 30 days of the presentation by the employee of proof of payment.|
|*New York: Section 198c of the New York State Labor Law deems that companies that do not reimburse an expenditure within thirty days after such payments are required to be made, shall be guilty of a misdemeanor. When that employer is a corporation, the president, secretary, treasurer or officers exercising corresponding functions shall each be guilty of a misdemeanor.|
|North Dakota: N.D. Cent. Code § 34-02-01 stipulates that an employer shall indemnify the employer’s employee, except as prescribed in section 34-02-02, for all that the employee necessarily expends or loses in direct consequence of the discharge of the employee’s duties as such or of the employee’s obedience to the directions of the employer even though such directions were unlawful, unless the employee at the time of obeying such directions believed them to be unlawful. The obligation to indemnify does not include expenses incurred to purchase or rent tools of a trade or any other equipment that is also used by the employee outside the scope of employment.|
|*Pennsylvania: Pennsylvania does not mandate expense reimbursements, but if an employer has an agreement or policy that requires expense reimbursements to employees, such reimbursements are considered “fringe benefits or wage supplements” and must be paid to the employee within 10 or 60 days after a claim, depending on the circumstance.|
|South Dakota: Title 60-2-1 states An employer shall indemnify an employee, except as provided in § 60-2-2 for all that the employee necessarily expends or loses in direct consequence of the discharge of the employee’s duties, or of the employee’s obedience to the direction of the employer, even though unlawful, unless the employee at the time of obeying such directions believed such directions to be unlawful.|
|Washington, D.C.: Employers in the District of Columbia are required to cover the costs of employee’s travel expenses, tools, and uniforms in addition to their regular wage or salary. Travel time, except for the employee’s regular commute, is considered hours worked and therefore must be paid.|