Luna’s guide to designing and implementing an expense management policy

Sohan Dahya
July 14, 2022

Luna is a consulting studio that provides legal, accounting, strategy, and investment help for startups.

Having worked with just under 1000 startups in Australia, it is safe to say they are overqualified to provide some tips on designing an expense policy or improving your existing processes and software.

We caught up with James Drago (Consultant - Virtual CFO Advisory), Grahame Barber (Tax Specialist & Team Leader), and Puneet Bhambhani (Financial Services Consultant) to answer the most common questions about designing and implementing an expense management policy.

Q - What are the first things you should consider before implementing expense management systems?

  • Team structure. Assess the structure required for expense management in your business. For example, do permissions and authority sit with one person or are they spread across multiple teams/business units? Review the current process to see whether a new system can address some pain points.
  • Team roles. Define the key roles in your team for managing expenses. For example, expense submitter, approver, reviewer, etc.
  • Budget allocations. Allocate budgets per person, per department, and as an entire business to understand your cash burn rate.

Q - Why are expense policies such an important part of a financial strategy?

Cash flow is one of the most important aspects of a business. It’s even more critical for startups and small-to-medium-sized businesses. Each dollar counts and priorities have to be managed.

Startups (particularly those developing a new product/technology) could be months or years from making revenue. Investors want comfort in knowing that there is a budget in place and that expenses are being well-managed.

Q - Is there a right time to implement an expense management solution?

The best time to plant a tree is twenty years ago - the next best time is today. The same goes for expense management solutions. Expense management should be implemented right out of the gate if you have raised significant capital.

Q - Are expense policies a one-size-fits-all approach?

Startups are dynamic. Your expense policy should be tailored depending on the goals of the business. In particular, if you’re growing quickly, you will need to frequently reassess your spending limits.

Each entity has its own requirements and startups most often have a diverse range of structures. A policy will likely start at a high level and become more detail-oriented as it is embedded in the broader business plan.

Q - Who should be responsible for designing expense policies?

Regardless of who manages the day-to-day finances and accounting, an active founder should have a role in deciding how funds are spent. Take advice from the team on what pain points they have been experiencing. Is there room for improvement in how they do their jobs and the resources they need?

Q - How often should expense policies be reviewed?

Depending on the stage of a business, cash should be monitored on a monthly basis, with broader policy reviews on a quarterly cycle.

Q - What are the disadvantages of working on a paper-based expense system?

Working on a paper-based expense system increases mistakes for reimbursements and results in lost expense substantiation. This leads to the risk of an ATO review.

Q - How can expense management help productivity at work?

Implementing an expense management policy reduces the anxiety and confusion faced by employees about what is and isn’t covered. It also reduces the time spent on getting expenses approved - if there is a clear plan in place, expense management tools can bring it to life.

Q - How can good expense policies set you up for high growth?

Investors want tight control over cash burn - efficient cash tracking and spending compared with reckless expenditure always help a business be more sustainable with funding. With a good expense management policy, you can monitor the return on expenditure to weed out any expenses that may not be serving a purpose.

Q - How can you ensure that expense fraud isn’t happening in your company?

Here’s a simple process you can use to reduce the risk of expense fraud:

  • Establish clear protocols on the requirements of receipts and other details.
  • Review expense entries posted against the budgets assigned.
  • Transfer ownership of expenses to members of your team. If limited funds are available, the team will ask; are we making the best use of our budget?

Q - What are some of the biggest mistakes companies make when designing policies?

Two of the biggest mistakes we see companies make when designing expense policies are;

  • Not hearing the voices of the people who will be subjected to the policy.
  • Creating rigid policies that don’t offer scope for improvements.

Q - How can you make sure that employees follow the policies put in place?

The best way to ensure an expense policy is followed is to provide training and resources that walk your team through the process. Combine this training with regular check-ins and reviews to ensure the policy is embedded in the daily operations of the business.

Q - What are some advantages of using expense management software?

Expense management software has a range of benefits, here are Luna’s top three:

  • Better control over spending.
  • A transparent record of where cash is flowing.
  • Greater sense of ownership for budgets, receipts, and reimbursements.

Q - For companies dealing with expenses in foreign currency, how can you ensure that fees are kept to a minimum?

To keep FX fees at a minimum, it’s imperative to compare different card offerings and make sure you are getting the lowest rates available.

Q - What reporting should be done on expenses and what cadence?

Here is a shortlist of reports you could create related to expenses:

  • Budget vs spending - Variance analysis
  • Team/unit spending analysis
  • Breakdown of expenditure by area - R&D, employee training, office supplies, etc.
  • Expenses as a % of revenue

Q - How can you unlock value for a business by crafting a world-class chart of accounts?

A world-class chart of accounts helps you gain a deeper understanding of where money is being spent as opposed to a broader recognition of expenses. It gives you enhanced comparability across periods. You can only control what you measure!

Q - Should employees have to pay out of pocket for expenses?

It’s not ideal for employees to pay for expenses out of pocket. You should only use this approach in situations where a budget doesn’t exist and an expense cannot be justified directly. Paying out of pocket creates confusion and adds to the burden of manual approval.

Q - How can you make expense policies as efficient as possible?

To make your expense policy as efficient as possible, conduct a review, based on performance at fixed intervals to test the efficiency in action.

That’s a wrap!

Thanks to the team at Luna for sharing all these amazing tips on implementing an expense management policy.

Sohan Dahya
July 14, 2022