Employees, business owners and consultants typically incur extra expenses performing their work or services for their clients. In most cases, it is a perfectly reasonable expectation that organizations reimburse their employees for these costs. Consultants and freelancers can usually add reimbursable expenses to their invoices, provided they meet the company’s expense management guidelines.
However, just because you can have an expense reimbursed or added to your invoice, it doesn’t necessarily mean that you should. Expense policies are essential to keep everyone on the same page about what can and should be charged. They also assure that invoices don’t include unpleasant surprises.
Save time in approvals with clearly defined and communicated guidelines.
What costs can you include, and which ones should you leave out? Let’s clear up any confusion by taking a more in-depth look at this topic.
In this article you’ll learn
Employees usually have it a lot easier than freelancers because most companies have a comprehensive expense policy they can refer to for specifics.
Consultants and freelancers don’t have this luxury. They often choose not to include a reimbursement fee on the invoice because they aren’t clear on what they can and cannot charge.
Before we get started defining specific expense categories, let’s understand what constitutes a valid business expenditure that you could pass on to a client.
The expense must have a clear business purpose and relate to a service you need to do your job. This definition is expansive and could cover anything from printing services to purchasing an airline ticket. The local legislation will have a lot to say about what constitutes a valid business expenditure. Make sure you understand the legal requirements for your country.
There will need to be some proof provided as evidence of the expenditure. Suitable forms of evidence include receipts, invoices, or some other document related to the cost. Keep in mind that proof of the payment is also a legal requirement for tax purposes.
The details required for expenses will be different for each country. But most will expect that you display the total amount, including tax, a description of the fee, and the place of purchase.
Employees will have to report the outlay as soon as possible, with leftover funds returned to the employer within a suitable time frame.
Any expenditure which fit the above criteria will likely be allowable tax deductions.
By now you understand more about what a reimbursable expense is and your legal requirements regarding them. Now it’s time to consider the various categories of costs for which you can seek reimbursement. Many costs will be incidentals, such as meals and communication, but others can add considerable amounts to an invoice.
When everyone involved knows what the next step is, overall efficiency increases.
A reimbursable expense is not a license to go out and spend big. The usual procedure is to keep the costs reasonable by agreeing to an upper limit before work commences.
The vast majority of billable expenditures will fall into one of the following categories:
Occasionally, you may have to travel vast distances to conduct business. If you are jumping on an airplane to travel internationally, then your costs will be high.
Further to the costs of travel, there will be need to pay for a great many other things because of it. Most of them are both essential and reimbursable.
Getting to the airport will usually involve a taxi or public transport ride. But this is just the start of your journey and the beginning of a long list of accrued costs. The airfare will obviously be a sizable percentage of your costs. Adding to this are the food and drink purchases you may need to make in-flight.
Once you arrive at your destination, you will have more transport fees as you make your way to your lodgings. These can be another sizable expense depending on the length of your stay.
You may require visas if the trip takes you out of the country and traveling to international destinations will usually require vaccinations. Neither of these costs are insignificant and should be considered when costing a project. They are also mandatory requirements for travelers, so you cannot toss them aside as non-essential fees.
Travel reimbursements are a regular part of doing business for many organizations. But there are also lesser known, sometimes overlooked expenses that are worth including in the discussion.
A lot of employees wouldn’t think of their internet costs as valid costs. After all, most would consider internet access a staple cost of doing business. However, if you are on the road and need to pay extra for mobile data, or stay at a hotel that charges for Wi-Fi. Consequently, internet access is a necessary and billable expense.
Most projects requires team work. If the members are remotely separated, there needs to be infrastructure to keep the lines of communication open. These items will also incur extra costs.
Employees will need to be careful about seeking reimbursement for meals and entertainment. As a general rule, the client’s presence will usually be required to make it a legitimate reimbursable expenditure.
Of course, costs for meals incurred as part of travel will automatically qualify as a reimbursable expense. These expenses won’t always require the client be present.
The list of office supplies and materials is expansive. It covers everything from paper, printer ink, and coffee, to a new keyboard or courier costs.
For example, your client may have gotten tied up at the last minute and requires a courier to deliver the finished product. You now must pay transport costs, so it’s reasonable to expect that you will add this fee to the invoice as a reimbursable expense.
A lot of smaller fees can add up to significant amounts, so it is critical they are accurately tracked.
It can be tricky knowing what qualifies as a reimbursable expense and what doesn’t. Ask yourself some questions about the fee to determine if it qualifies, including:
If all your answers to the above are yes, then it’s likely you can claim the expense as reimbursable. Don’t write-off expenses you are unsure about before talking to an accountant, or a professional with experience in business finance.
There are many types of reimbursable costs. Spend management software with automated expense reports can do a lot to help keep them under control. But how do you come up with reimbursable expenses to which everyone can agree?
Here are five tips to consider:
Clients will not appreciate a surprise inclusion on their invoice if they did not receive fair warning that they would be charged. For this reason, it’s always a good idea to set precedents before the start of a project. The aim is that everyone is on the same page about billable expenses.
Include an expense clause in the contract, and check with your clients and customers about whether they have their own policy regarding billable expenses.
Look at the expense from the viewpoint of your client. Would you find it to be reasonable? If not, then your client will not find it reasonable, either. Treat your client’s fairly when adding expenses to their invoice, and you will keep them loyal to your organization.
Multiple expenses lumped into categories should be itemized out on the invoice to make everything clear to the client. A single category with a large sum next to it will probably get them asking questions. Spell out all expenses, so the client knows what they have received precisely, and for how much.
It’s also a good idea to ensure you can provide corroborating evidence about each expense should they ask. Spend management software with an automated expense report feature makes this a quick and painless task. The report will also contain essential information for tax purposes, which your client will appreciate.
Expenses won’t all come with the same tax implications. Keep in mind that some expenses might not reap a full tax refund or deduction. But your company does not necessarily have to bear the full brunt of the cost.
Many companies like to add a margin when invoicing their expenses. In these cases, you will have to register the expense as the cost of goods sold (COGS) or claim them yourself.
The above is general information only. It is in your best interest to seek professional advice when it comes to maintaining accurate tax records. You do not want to get on the wrong side of the tax office or your clients when it comes to billable expenses.
Don’t wait too long before sending out your bill including the expenses which you expect to be reimbursed. Deliver the invoice promptly so your clients will be expecting it.
Another alternative is to bill for expenses as they occur. This makes it easier to settle disagreements as they occur rather than waiting until the final invoice. Plus, the sooner you invoice your clients, the sooner you will get your money in the bank.
Businesses will always be incurring expenses on their client’s behalf; it’s the cost of doing business after all. However, you must bill your clients accurately and keep detailed records of every transaction for tax purposes.
You can do all these things by using fully featured spend management software that includes prepaid credit cards, and automated expense reports.
A journey of a thousand miles begins with a single step.Laozi
Tracking every reimbursable expense, regardless of amount or type, is critical for a couple of reasons. Firstly, should employers or clients ask for a record, you will be easily able to provide one. Secondly, not tracking your expenses means you could be missing out on extra profit, or a much smaller tax return.
Spend management software has the features you need to track all your expenses – whether reimbursable or not – accurately. You can easily set up different categories and automatically track every payment without effort.
Ensuring you have the necessary features in your spend management software will make it easier to keep accurate records, including:
Your only task with spend management software should be to investigate the accuracy of the expenses and checking the category allocation.
For an extra level of efficiency, automated expense software can allocate the expense categories. This will deliver a report on all expenses accrued on any project by any employee.
Recommended reading: How to Future-proof Your Organisation Through Your Expense Management Software
A prepaid corporate card is an excellent tool that can help keep employees spending under control. At the very minimum it helps you prevent a budget blowout.
Firstly, employees can never use more than the amount allocated to the card. Secondly, managers can easily review the expenses should there be an issue. Electronic statements provide an audit trail of the costs an employee is accruing. The card is unlikely to be used for anything other than legitimate business expenses.
Volve’s corporate card comes with an automated expense management solution and reporting tool. This enables all functions of business to capture productivity growth potential from time-cost reductions, greater accuracy, increased visibility and control.
From sales to human resources to finance operations, management can look forward to shifting resources from repetitive manual practices to realizing strategic goals that create more value and deliver higher returns.
Experience how one single solution can improve accountability, accuracy and efficiency. Test drive Volve today free for 30 days.