How to Create a Company Expense Policy

NEW YORK ( MainStreet) -- When you've grown to the point where employees need to travel, entertain or want to work from home, it's time to stop pulling out your wallet and create an actual system that won't give your accountant a heart attack.

An expense policy isn't for every business, nor should it be one-size-fits-all, says Michael Alter, president of small-business online payroll service SurePayroll, a subsidiary of Paychex ( PAYX).
You may approve of your reps taking customers to lunch every day. Either way, a company expense policy will set the tone and keep accounting simple.

Alter offers suggestions on how small-business owners can create effective and appropriate expense policies.

Why is having an expense account important for a small business?

Alter:There are three main reasons. It's good practice to know where your money is going so you can allocate it appropriately. The second thing is culture. How you define an expense policy and the language you use says something about the company and the culture you're trying to set. You really want to have it as a way of reinforcing the culture and beliefs of what you want the business to be about.

On the one hand, if you're trying to drive a very thrifty culture in your business ... you might have a policy that when you go to the airport you always have to park in long-term parking as opposed to "We always reimburse for parking." It sets the tone for what can be expensed.

Or employees can always expense coffee in the afternoon if you're going out with employees because you want to encourage camaraderie and team building.

Thirdly, there is legal and compliance reasons for it. You want to stay in compliance with the IRS. Sometimes it's deductible, sometimes it's not. And it also could -- from a legal perspective -- minimize your exposure.

What are some rules of thumb for creating a policy?

Alter: There's clearly advantages to being specific, but there are also advantages of leaving judgment to your employees. I'm a big believer in treating your employees as you want them to treat your customers. If they abuse the policy then have a conversation, as opposed to a number of specific rules that imply you don't trust your employees.

It also depends on your workforce. If you have 10 high-powered attorneys, they're going to want to some flexibility, whereas if you had a different type of workforce they may not need as much discretion.

Do you want to give out corporate credit cards? There are pros and cons. When it's on the company's credit card sometimes people are quicker to whip it out, but it gives you better tracking because it's all in one place. But it could be more expensive because you have to pay annual fees.

One of the advantages to small businesses is they are small and can be flexible. When you put too rigid a process in place, you become a big-company process. You lose the flexibility of being small, but you don't have any of the benefits of being big and therefore it hurts you.

I would differentiate between expense accounts primarily for entertaining and business support versus the normal expenses that are incurred by the business that someone might pay for individually.

Are there specific, less-obvious businesses or industries that should make sure they have expense policies in place?

Alter: The technology-related companies and the whole tech component of a business . "Should I be able to expense my iPhone? If I sign up for software and other tools to make me more efficient, who pays for that? Who should pay for it when I need a new printer for my home office?"

So many people work remotely, especially for small businesses. That would be the area that's probably different in the last five to 10 years.

How do you decide how much to limit employees without making it impossible to do their jobs?

Alter: There are a couple of ways. You can clearly mandate lots and lots of rules and lots of limits. The other way end of the spectrum is people using their reasonable judgment and you look at signing off.

There are lots of way if somebody wants to manipulate your expense policy they will. I think you're much better off with general guidelines and doing checks that allow you to reinforce the culture and what you're trying to do.

If you have 10 employees, the number of expense reports you're going to have is not that big. I would sign off on all of them for a period of time. These are sort of living, breathing things that you need to evaluate with time as opposed to a stagnant policy.

What should owners look for when it comes to identifying abuse? Are they blatant?

Alter: You'd be amazed what people would feel entitled to. I always think that you learn a lot about your employees and your business and your culture when you read an expense report. How are your employees spending their time and your money?

If a rep is taking customers to lunch every day, you might actually feel good about that even if he's spending a little more. Or there can be someone that never brings lunch, always goes out to lunch, but they expense McDonald's ( MCD) when they are the on the road. They were going to buy lunch anyway.

-- Written by Laurie Kulikowski in New York.

To follow Laurie Kulikowski on Twitter, go to:!/LKulikowski

To submit a news tip, send an email to:


Follow TheStreet on Twitter and become a fan on Facebook.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

If you liked this article you might like

A New and Different Kind of Market: Cramer's 'Mad Money' Recap (Thursday 12/21)

A New and Different Kind of Market: Cramer's 'Mad Money' Recap (Thursday 12/21)

Every Business Is a Tech Business to Some Degree

Every Business Is a Tech Business to Some Degree

Tax Law, Wells Fargo, AT&T, Apple - 5 Things You Must Know

Tax Law, Wells Fargo, AT&T, Apple - 5 Things You Must Know

Apple, Banks, Earnings and All the Market News You Need in Under 60 Seconds

Apple, Banks, Earnings and All the Market News You Need in Under 60 Seconds

Paychex Stock Is Extended, Be Prepared for a Vicious Correction

Paychex Stock Is Extended, Be Prepared for a Vicious Correction