Why You Need to Reimburse Your Employee Expenses Sooner Than Later Slow-paying employee reimbursements can lead to resentment, fraud and lost opportunities. Take these simple steps to pay employees quickly and keep your business on track.
By Jim Conroy Edited by Kara McIntyre
Opinions expressed by Entrepreneur contributors are their own.
You may have heard this story (or one like it) before: Imagine this: A top sales executive, Lee, undertakes a sales trip to woo a potential client. The trip successfully bumps your expected revenues for the coming year and beyond quite nicely. Naturally, Lee incurred numerous expenses during the trip — airfare, hotels, rental car, meals and other incidentals. Lee paid these with the understanding the company would reimburse them.
But the expenses aren't reimbursed quickly, and Lee's personal savings and credit cards reflect that. As days turn to weeks and months, interest mounts and late fees are incurred, affecting Lee's personal financial history. Lee becomes disenchanted and frustrated, which is followed by job dissatisfaction and diminished performance. Quiet quitting becomes real resignation, with your Lee's valuable skills and connections now working for a competitor that reimburses their employees on time. That lucrative business deal is likely to go with Lee.
Related: 5 Simple Steps to Prevent Expense Fraud
What you can do — and what you should do
A wide range of business expenses allowed by the IRS often need to be paid by employees. Those that cannot be covered in advance can include unplanned flights, cab or rideshare trips, meals or hotel stays. Other times, employees may be traveling on business with their own vehicle, in which case you should, of course, reimburse them for their mileage and vehicular wear and tear. Other common categories of reimbursable expenses may include training, professional dues, supplies, tools and parts and entertainment (note, while you may elect to reimburse employees for expenses such as taking a customer to a sporting event, those costs are not deductible for you and haven't been since the 2017 Tax Cut and Jobs Act).
The importance of being timely and accurate
Accuracy in tracking your business expenses is important because most, if not all, purchases made by an employee on behalf of your company are for items and services that can be deducted against your taxes.
Some businesses often re-bill expenses to a customer. Examples might be a plumbing or electrical contractor whose employee may need to pick up a plumbing or electrical fixture at a hardware or building supply store.
Employees who lay out their own funds on behalf of your business deserve to be repaid straightaway for myriad reasons. First, the business — and the risks and expenses — is yours and not theirs. You may pay them a salary, but it's not up to them to carry cash or expenses to earn you a profit or secure future business. Don't leave them on the hook for doing you a favor any longer than necessary. Prompt payment also underscores your commitment to them as valued employees.
Related: Don't Throw Money Away By Not Monitoring Expense Reports
Rules are needed
It also helps when employees understand what they're expected to do on your behalf. Give guidelines to employees asked to spend their money on your behalf. That would start with your budget for certain expenses. Establish this in advance. And while the annual list of crazy expense report submissions is amusing to read — from helicopter rides to work to hang gliders "to avoid a divorce" — you don't want your business to show up on that list. Often a budget solves this problem, with the added benefit that you don't have to approve every two-dollar purchase.
As reimbursable expenses are realized, they should be recorded promptly using your preferred system. This may be a spreadsheet, but many small and medium-sized businesses (SMBs) use contract bookkeepers or bookkeeping platforms. More often, they rely on document management systems with expense-tracking features that use optical character reading (OCR) to input data such as receipts and invoices. These documents can be captured in multiple ways, including photographing them, emailing them directly to a cloud server, importing them directly from a computer or scanning them.
Once converted by OCR technology, the data can be manipulated in pretty much any method that makes sense. For instance, you may track them for each salesperson you have, you may track them by which department puts in the request or you can track them by client or project. Your employee can do the entry, too.
Using a cloud-based system that will let you capture receipts in this way means you can avoid the complexity — and errors — of re-keying information and managing spreadsheets. You can sort the data by category, by vendor or by date. Compare that with spreadsheets, where remembering which tab your expense belongs on and ensuring each cell has the proper equations make it that much harder to reimburse your employees promptly. Paper files have similar flaws. Plus, paper can be lost, misfiled or damaged in tragic coffee-spill accidents.
These platforms are also more efficient, which goes hand-in-hand with saving time and money. They make review and control simple, too. Pay your employees back quickly, while gaining insight into what's being spent and for what purpose. You can then make any spending adjustments needed and please your employees.
Related: This One Thing Can Make Managing Your Company's Expenses Super Easy
What's in it for you?
Doing your reimbursements quickly avoids both errors and fraud. It's a risk that's twice as high in SMBs and more damaging to them.
But paying back your employees without delay provides key benefits to you. It improves employee morale and job satisfaction, which makes them better employees. Being anxious when your expenses damage their own finances can also hurt their on-the-job performance and spark resentment. And suppose your reimbursement practices become a problem for employees. In that case, it can also make it difficult to recruit new, high-performing employees.
But when you give employees their money back promptly, everyone will be happy, resulting in time and resources spent on growing the business.
