Expenses: expensive business

Expenses: expensive business

Cost cutting plans are crucial in tough times, but few companies factor in reducing expenses as part of that, but curtailing employee expenses can immediately help the bottom line

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

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

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

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

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


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