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.
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.
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.
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.
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?
Depending on the stage of a business, cash should be monitored on a monthly basis, with broader policy reviews on a quarterly cycle.
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.
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.
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.
Here’s a simple process you can use to reduce the risk of expense fraud:
Two of the biggest mistakes we see companies make when designing expense policies are;
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.
Expense management software has a range of benefits, here are Luna’s top three:
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.
Here is a shortlist of reports you could create related to expenses:
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!
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.
To make your expense policy as efficient as possible, conduct a review, based on performance at fixed intervals to test the efficiency in action.
Thanks to the team at Luna for sharing all these amazing tips on implementing an expense management policy.