Expenses: expensive business

Stagnant growth puts pressure on businesses to cut costs in order to maintain or grow profits. The latest figures from the Bank of England suggest that businesses will need to wait until 2012 before we see a return to ‘normal’ economic growth. It is not just the finance teams in Whitehall that are limbering up to take an axe to spending, almost every business and organisation across the UK is taking a long hard look at cost control to stimulate their bottom line as they ride out the recovery.

A recent show of hands at an industry forum indicated that strategic cost reduction initiatives are already being implemented by around 90% of companies. Curiously though, not one of these businesses included employee expenses in its plans – despite the fact that employee expenses is the second largest controllable spend for businesses and organisations, as well as for partnerships.

Examples which illustrate that employee expenses systems are overlooked as not being strategically unimportant are not hard to find. Poor expenses management is prevalent in both the public and private sector, even in large companies with good track records for compliance and ethical conduct – think Mark Hurd, the former CEO of Hewlett-Packard who resigned last month after claiming thousands in expenses that turned out to be for personal use in an affair with a contractor.

Companies should not fall into this trap. The savings made by improving the employee expenses system go straight to the bottom line, immediately improving profitability and enhancing the company’s cash flow position. The seeds of this improvement lie within the company and aren’t dependent on any external market conditions. A business would need to win a considerable number of new contracts, make a big jump in the amount of sales or bill for significantly increased hours to have the same effect.

A big step towards boosting profits can be made by cutting hundreds of thousands of pounds from the expenses budget. As well as focusing on the amount of money coming into the company or organisation, finance professionals should also pay attention to the amount of money leaking out.

Simply cutting expenses limits on spending categories won’t do the job: 11% of all approved employee expenses claims are ‘out-of-policy’ anyway, and this rises to 20% of all hotel claims and 29% of entertainment claims.

Besides, cutting the hotel accommodation limit for London by £20 per room night, for example, might sound reasonable in theory but is likely to be unrealistic and cause resentment amongst staff who are required to travel further to reach the centre or lower the standard of their accommodation while away from home. The end result might be increased expenses fiddling, as balancing the account on perceived unfairness by employers is the main reason for this kind of fraud.

In 2009, GlobalExpense found that around £2.1bn of the estimated £8.8bn paid out by UK organisations to reimburse their employees for expenses incurred was for fiddled or ‘out-of-policy’ expenses. There are clearly significant savings to be made.

The majority of employees who make wasteful claims do so because they are genuinely confused about the rules, or as a result of laziness and bad habit, rather than deceit.

Employees may round-up a mileage claim to make sure they aren’t out-of-pocket, or bump-up an entertainment claim to compensate themselves for unpaid overtime. They certainly don’t understand that quite apart from not being company policy, certain expenses may also attract a PAYE liability, usually paid for by the employer.

In a recent survey conducted by YouGov, less than half of the employees questioned said that their employer has a written expenses policy. A clear expenses policy that ensures employees understand exactly what they can and cannot claim, written in clear English and easily accessible to employees to refer to, such as on the intranet, is the first step to cutting expenses costs. It is also advisable to include expenses training as part of the induction for new joiners.

The expenses policy categories should be distinct and cover relevant expenses claims that employees may need to make. Otherwise companies run the risk of employees making lots of claims under general categories such as sundries – an expense type against which VAT typically cannot be claimed and which may be used to hide out-of-policy expenses.

But no matter how well calibrated the expenses policy, how clever the software or how streamlined the work-flow, it won’t get results unless it is enforced. However, where a 100% auditing approach is adopted, simply announcing that the new system would check every claim and receipt was enough to cut the employee expenses bill at one company by 20% – before implementation actually commenced.

It is also vital to educate authorisers so that they understand the policy and appreciate the importance of valid receipts to back-up claims. Briefing authorisers supports them with the right knowledge to defend their decisions to reject or query claims, and helps them to handle the subsequent difficult conversations with staff. If authorisers understand the policy, they’ll have no excuse to consistently approve out-of-policy expenses.

Management information held in good employee expenses management systems enables serial offenders making or approving out-of-policy claims to be easily identified.

For example, one company that started enforcing distance checks on mileage claims found that the distance claimed reduced by 30% overall which resulted in a 10% cost reduction – in this case nearly £950,000 straight back on the bottom line.

Not only will greater adherence to company policy cut down on the amount of out-of-policy claims that the business pays out but, as an added benefit, it will also cut down on the amount of PAYE it needs to pay the taxman for benefits in kind to employees.

Analysis of expenses spending data can be used to constantly review the policy and also to make further strategic cost cutting decisions by office, department or team to drive further savings.

Automation of the expenses management system via software solutions on their own will cut initial costs, but the burden of auditing receipts and ensuring HMRC compliance still falls on the in-house team.

Real long-term cost savings are derived by auditing all claims and reporting on data, training and improved enforcement to cut down on fiddling and out-of-policy claims and management reporting to enable strategic expenses decisions. Expenses management systems which improve efficiencies and remove the time-consuming, laborious and often boring tasks of processing and auditing expenses claims, free up payroll and accounts payable personnel to undertake more value added financial analysis.

David Vine is CEO of GlobalExpense