Why Does Your Startup Need an Expense Policy?
Startups face a lot of challenges, like working with limited funding, meeting investors’ expectations, and carefully controlling cash flow. One way to help with all those challenges is effectively managing your expenses.
Developing and implementing an expense policy as part of your financial planning and budgeting process is one way you can increase the chances of your startup’s success. A clear policy encourages financial discipline, creates transparency, and establishes accountability. Here’s why your startup should implement an expense policy:
- Controls costs and manages budget. An expense policy keeps your startup’s spending in line with your budget and financial goals. Clear guidelines on acceptable expenses and spending limits help your startup avoid unnecessary costs and manage your cash flow, which is important when you’re operating with limited funding (and what startup isn’t?).
- Provides direction for employees. An expense management policy gives employees clear guidance on the type of expenses that are allowed, how they should submit expense reports, and the documentation required for expenses. A policy prepares employees to make appropriate spending decisions.
- Streamlines expense reporting and approval. Clear policies make expense reporting and approval much more efficient. Employees know what expenses are allowed and what information they need to submit. Approvers can quickly verify that expenses comply with your policy.
- Reduces risk of fraud and misuse. Strict documentation requirements and approval processes minimize the risk of employees misusing company funds or submitting fraudulent expense claims, protecting your limited financial resources.
- Simplifies compliance and recordkeeping. A standardized expense policy makes it easier to track your spending, categorize your expenses properly, and maintain accurate financial records. You’re going to need to report your financials to your investors, and an expense policy helps keep your records complete and accurate.
- Enables data-driven decisions. Consistent expense tracking and categorization helps startups analyze spending patterns, optimize their budget allocations, and make strategic financial decisions.
- Documents expenses for tax purposes. Every startup needs to maximize its tax deductions and minimize its tax liabilities. Accurate expense tracking provides a record of all business expenses, which can help your startup qualify for different tax credits, like the research and development (R&D) tax credit.
What is included in a startup expense policy?
Your expense management policy needs to define the types of things employees can expense, set specific limits, and explain the process for expense submission and approval. An expense management policy for your startup should include:
- Clear categories of allowable business expenses
- Spending limits for different expense types
- A description of required documentation and receipts
- A guide for your expense submission and approval process
- Guidelines for travel, meals, and entertainment
- Consequences for policy violations
For more information, please check out our sample expense management policy.
How should you implement an expense management policy at your startup?
Communication is important. If you’re clear about the importance of the expense policy and your expectations, it will help employees understand why the policy exists and why they need to follow it. You should:
- Clearly communicate the policy to all employees
- Provide training on expense reporting procedures
- Use expense management software to automate and enforce policy rules
- Regularly review and update the policy as the company grows
Expense management makes a difference
Startups work with limited funding, resources, and time. A solid expense policy helps with all of these limitations. By leveraging modern expense management tools, startups can easily implement and enforce policies while gaining valuable insights into their spending. Implementing a comprehensive expense management policy as soon as you launch your startup lets you establish financial discipline, optimize your spending, and scale more efficiently.
An expense policy also demonstrates to your investors and potential investors that the company takes financial management seriously. Financial control and transparency will help your startup navigate challenges, contain costs, and drive growth.
Sample Expense Management Policy
Purpose and Scope
This policy outlines the guidelines and procedures for managing business expenses at [Company Name]. It applies to all employees, contractors, and founders. Our goal is to make sure our company funds are spent responsibly, while enabling team members to effectively carry out their duties.
Expense Overview
- All expenses must have a clear business purpose and be necessary for company operations.
- Employees are expected to use good judgment and spend company money as if it were their own.
- The company will reimburse reasonable and authorized business expenses.
- All expenses must be properly documented and approved before reimbursement.
Expense Categories and Limits
Travel
- Airfare: Economy class for domestic, economy plus for international flights over 6 hours
- Lodging: Up to $300/night for major cities, $250/night elsewhere
- Ground Transportation: Use ride-sharing services or public transit when possible
- Meals: Up to $50/day for meals while traveling
Office Expenses
- Office supplies: Up to $50/month per employee without pre-approval
- Technology: Standard laptop and peripherals provided; additional items require approval
Client Entertainment
- Meals: Up to $75 per person, including employee
- Events: Require pre-approval from department head
Professional Development
- Conferences: Up to $1,000 per employee annually
- Training courses: Up to $500 per employee annually
Expense Reporting and Reimbursement
- Submit all expenses within 30 days.
- Use the company’s expense management software to report expenses.
- Attach clear, legible receipts for all expenses over $25.
- Obtain your manager’s approval for all expenses before submission.
- Reimbursements will be processed within 10 business days of approval.
Corporate Cards
- Corporate cards may be issued to employees who frequently incur business expenses.
- Use a company credit card for all eligible business expenses, when possible.
- Cards are to be used for business purposes only.
- Personal use of corporate cards is strictly prohibited.
Travel Booking
- Use the company’s designated travel booking platform for all business travel.
- Book travel at least 14 days in advance when possible to secure better rates.
Prohibited Expenses
The following expenses are not reimbursable:
- Personal entertainment or leisure activities
- Fines, penalties, or traffic violations
- Spouse or partner travel expenses
- Alcoholic beverages (except for client entertainment within limits)
- First-class or business-class airfare upgrades
Policy Compliance
- Employees who violate this policy may be subject to disciplinary action.
- The finance team will conduct regular audits to ensure compliance.
- Any attempts to defraud the company will result in immediate termination.
Exceptions
Exceptions to this policy may be granted in rare circumstances and must be approved by the CFO or CEO.
Policy Review
This policy will be reviewed annually and updated as necessary to reflect changes in business needs and financial circumstances.
By implementing this expense management policy, [Company Name] aims to maintain financial discipline, ensure transparency, and maximize the effective use of our venture funding. All employees are expected to adhere to these guidelines and help us build a sustainable and successful company.
Important Note:
- This is a sample policy and may require adjustments based on your company’s specific needs and budget.
- Regularly communicate any updates to your expense policy to all employees – they can’t follow the rules if they don’t know them!
- Encourage your employees to raise questions if unsure about any expense category or reimbursement process.
