Tracking employee expenses can be a real headache for entrepreneurs. Missing receipts ring a bell? What about never-ending piles of paperwork?

What if we told you that tracking your expenses didn’t have to feel that way? Welcome to the world of the expense report.

With clear policies, the right tools, and a commitment to transparency, you can transform employee expense reporting from a dreaded task to a valuable part of your business strategy.

Done right, expense reports can simplify your finances and make tax time a breeze. Let’s learn how.

What is an Expense Report?

So, what is an expense report?

Expense reports help you track expenses incurred by your employees on behalf of your organization – for everything from big-ticket travel items to everyday meals. After an employee files their expense report, you can reimburse them.

As an entrepreneur, expense reports are key because they:

• Keep track of business spending patterns
• Provide proof of your deductions come tax time

A solid expense report should have all the details of each cost: date, amount, vendor, and why it was necessary for your business. Adding expense codes can further streamline your accounting and give you a crystal-clear picture of where your money’s going.

What Type of Expense Goes on an Expense Report?

Expense reports should include any expenses incurred by your employees that you must record for accounting purposes, also known as “reportable expenses.” These can vary from one business to the next based on your industry, regulations, and other factors.

For example, an ecommerce company might have lots of expenses related to shipping or web hosting. Meanwhile, a SaaS startup might be spending more on tech gear or software licenses.

Let’s look at a few types of expenses by category that commonly appear on business expense reports:

Office Supplies: These are any materials purchased for use in the office. Post-its, gel pens, printer paper – and even the fancy coffee beans that keep your startup energized – qualify as office expenses.

Software and Subscriptions: These are expenses related to software, online services, subscriptions, and licenses needed for business operations. The cost of your accounting software, like QuickBooks, would fall into this category.

Professional Development: These costs are associated with training, courses, conferences, or seminars that enhance an employee’s skills or knowledge related to their job. For example, if your graphic designer signs up for a creative workshop or a seminar to learn a new skill, it’s a business expense.

Home Office Expenses: For remote workers, certain costs of maintaining a home office can be listed as business expenses, such as a portion of rent, utilities, and internet services.

Travel Expenses: These are travel costs incurred when employees take a business trip. This can include everything from airfare, hotel accommodation, car rentals or Uber rides, mileage for personal vehicle use, parking fees, and even tips given to service providers during the trip.

Meals and Entertainment Expenses: These expenses include costs for meals and entertainment that are directly related to the conduct of business, such as taking a client out to lunch or dinner. Note that some of these expenses may only be partially deductible.

If your sales lead takes potential clients to a business lunch or if you host a team dinner after successfully closing a deal, these costs count as business expenses.

Remember, each of these expense categories must be necessary, reasonable, and directly related to your business to qualify as legitimate business expenses. Any personal expenses such as meals, groceries, or phone bills are not reportable or deductible. As a business owner, you need to keep track of these expenses meticulously, making sure each one is documented and justified.

How Often Should I Generate an Expense Report?

Monthly Expense Reports: This is the gold standard for most entrepreneurs. Monthly reporting aligns with typical billing cycles and gives you a solid overview of your business’s financial health.

Weekly Expense Reports: Your business may need weekly expense reporting if:

• You have a high volume of business expenses
• Your business deals with significant cash flow or budgeting issues
• You manage major project-based budgets

Daily Expense Reports: While you should be recording expenses daily (or as they occur), generating full expense reports on a daily basis is overkill.

No matter your style, using a tool like Expensify to automatically generate expense reports can make the process smoother and more manageable. (More on that below – tip number 7!)

7 Tips to Master the Expense Reporting Process

1. Maintain Individual Business Cards

As a business owner, resist the temptation to share your card. Employees should have their own business cards if they’re incurring business-related expenses.

This helps in tracking and controlling spending, reducing stress, and providing more transparency in real-time spending. For instance, some credit card companies like MasterCard allow spending limitations and offer monitoring tools to better track credit card transactions by your team.

2. Implement a Coding System

A coding system makes tax expenses clearer and more organized.

Also, it will make your tax season easier if you have two meals and entertainment (M&E) accounts – one for 50% deductible M&E and the other for 100% deductible M&E.

Meals for large internal company events like holiday parties and summer company outings, or coffee, drinks, and food provided within your office are 100% deductible. Almost all other meals are only 50% deductible for tax purposes.

Keeping those expense reimbursements separate streamlines your process for tracking tax-deductible expenses.

3. Require Timely Expense Reports and Reimbursement

Late expense reports can distort your understanding of current expenses and cause cash flow problems. Reimbursement timelines should be established and communicated clearly to avoid late submissions.

On the other hand, you need to commit to reimbursing your employees in a timely fashion, too. Unless they’re using a company card, employees bear the upfront cost of business expenses. Delays in reimbursement can put financial pressure on them.

It’s best practice to establish a timeline for submitting expenses and stick to the same timeline for reimbursement.

4. Develop Effective Expense Policies

An effective expense reporting policy can help prevent misuse and fraud, while fostering a culture of accountability and transparency.

Here’s what an ideal company policy for expense reporting should include:

• Acceptable Expenses: Clearly define what is considered a valid business expense, highlighting the difference between a business and personal expense. Plus, your employees should always document the “business purpose” of their expenses. Whether it’s client lunches or business travel, having a reason for each expense is vital. Unfortunately, fraudulent claims can make up a substantial portion of asset misappropriation.
• Spending Limits: If there are any spending caps on certain categories, make sure that you explicitly state this. For example, a per diem limit for meals during business trips or a maximum limit for office supplies is pretty common.
• Approval Process: Specify who has the authority to approve expenses. This could be immediate managers, department heads, or your finance team.
• Expense Reimbursement Policy: Clearly explain the process for submitting expenses for reimbursement, outlining how and when refunds will be made. A typical expense reimbursement policy includes submitting an expense report form along with supporting receipts for review.

And remember, policies should not be static! Revisit and revise your expense reporting policies regularly to ensure that they’re still aligned with your business’s goals and tax laws.

5. Audit Regularly

Another good way to keep track of spending? Consider performing internal audits of your expense reports on a regular basis.

Consistent audits are an important part of maintaining accurate records and managing how much your company is spending and where it’s being spent.

An added bonus? Routine audits help you identify any irregularities or discrepancies, like potentially fraudulent activity, and correct them before they escalate. It also can help deter employees from making fraudulent claims in the first place.

6. Keeping Up with Tax Laws

Staying up-to-date with tax laws is key when handling expense reports. Here’s why:

Maximize your savings. Rules about what you can and can’t claim on your business tax returns can change. Keeping up with tax laws helps you claim all applicable tax deductions and avoid fines from errors, saving you money.

Prevent external audits. If you report expenses right, following the latest laws, you’re less likely to attract unwanted attention from tax officials and potential audits.

Improve your financial planning. Knowing the tax laws can help you better predict your take-home profit.

Need help staying on top of tax laws? We recommend leaning on a tax professional – that’s part of their job!

7. Adopt an Expense Report Software

Rather than relying on Excel spreadsheets or keeping track of physical receipts, upgrade to an accounting software for expense reporting. By doing so, you not only avoid human error but also streamline the process, leading to more efficient financial management and faster reimbursement times.

At Acuity, we recommend Expensify, an expense report software and one of our trusted technology partners. It automates every step of expense management, from receipt scanning to reimbursement. Plus, Expensify offers an app to capture receipts and keep track of expenses on-the-go.

At Acuity, we’ve partnered with Ramp and Expensify to simplify your financial tasks. Both offer excellent corporate cards, user-friendly mobile apps, and streamlined expense management. Whichever you choose, know you’re getting a trusted solution.

Keep in mind, though, that an expense reporting software can’t do everything for you! The approval process requires a human touch.

Not quite ready to jump into an expense management software? No worries! Start with a basic expense report template.

For smaller businesses or new startups in particular, a simple expense report template can be a practical solution to the “how to create an expense report.” While not as comprehensive or automated as a software, a well-designed expense report form can provide a solid framework for consistent and organized reporting.

How Acuity Can Help

Expense reports can get tricky, but they don’t have to be!

Here at Acuity, we’re experts in creating effective financial strategies to help you streamline your processes and better understand your spending habits.

Ready to excel in tracking expenses? We’re here to help you develop an expense reporting strategy tailored to your business’s needs.

Remember, better expense reporting means better financial health for your business! Book a free consultation with our team to get started today.