Expense reimbursement process for businesses in 2024

Expense reimbursements are typical in today’s work environment. An employee expense can range from $3 for a coffee to a few hundred dollars for a business flight. These can add up to billions of dollars that companies need to reimburse their employees.

When it comes to expenses and reimbursements, two things come to mind. For businesses, it’s about effectively controlling business spending and increasing compliance. For employees, it’s about faster reimbursements and better employee experience.

Let’s look deeper at this costly but necessary reimbursement process.

What is expense reimbursement?

The simple definition is a reimbursement given to an employee for the expense incurred.

Not all employee expenses are reimbursable. Reimbursements vary based on the employer’s policies and guidelines, as listed in the company’s expense reimbursement policy.

What kind of expenses do companies reimburse?

While there can be many expense categories, the following are the most common type of expenses that are considered reimbursable::

Business travel expenses (e.g., fringe benefits, per-diem rates, airfare, mileage rates)
Food and accommodation expenses (e.g., per-diem meals)
Employee education or training-related expenses
Business tool (hardware/software) costs
Office supplies and incidental expenses
Entertainment expenses

While business expenses can be categorized differently, employees must comply with the company’s expense policy to be reimbursed.

Employee expense reimbursement process

An employer usually has a framework of reimbursement processes to manage thousands of expense reimbursement requests. Each company should have an expense policy that sets IRS-compliant guidelines and a framework to ensure reimbursements within reasonable time.

Traditionally, the manual reimbursement process involves the following steps:

An employee incurs an expense and saves the receipt/invoice.
The employee initiates the reimbursement process by filing the expense or sending the expense receipt to the manager for approval.
The manager then approves the expense and sends it to the finance team.
The finance team verifies the expense and initiates the reimbursement by crediting the employee with the repayment.

Depending on the size of the company and its expense policy, the reimbursement cycle varies from somewhere between a few days to a month. The process can involve multiple approvals and checks to prevent expense fraud.

Challenges in the process

While the reimbursement process sounds simple and fast, it is far from reality. IRS mandates that employers reimburse employees in a timely fashion, within a reasonable period of time.

With increased challenges like the rising number of expense frauds and non-compliance, it has become more complex than ever.

Let’s have a deeper look at some of these challenges and the ways to tackle them:

Unclear expense policy

Many companies don’t take expense policies seriously, which leads to ambiguity. Employees remain confused about spending and often submit non-compliant reimbursement requests and claims.

Adherence to policy is necessary for reconciliation and seamless spend management. A clear expense reimbursement plan is crucial to avoid long expense claim processing cycles, resulting in delayed reimbursements and increased employee frustration.

Inaccurate expense reporting

While a few companies have adopted a paperless employee expense reimbursement process, many employers are still stuck with the traditional methods. These manual methods have increased human error, including erroneous receipts and expense reports.

Technology and integration challenges

With many legacy outdated software in place, integration with new modern-age financial tools hinders processing and remains a persistent challenge even for the largest enterprises.

The absence of mobile-friendly solutions for expense submission and tracking poses a significant drawback.

Lack of spend visibility

The reimbursement cycle gets delayed when your reimbursement process doesn’t offer real-time visibility of expense claims. These expense claims add up toward the end of the month and bleed into the month-end processes, delaying closing the books.

Without analytics of such data, companies cannot have an accurate picture of their spending data and cannot make informed cash flow-related decisions.

Fraudulent claims

Companies often see fraudulent claims where employees intentionally inflate the cost incurred, submit the same claim multiple times, or stealthily use company money allotted for business expenses to buy personal effects instead.

With no clear expense policy and implementation framework in place, such cases of expense fraud are difficult to detect and curb.

Poor employee experience

In many expense claim instances, employees are forced to spend their own personal money for work purposes and follow up for weeks or even months for reimbursement. Such out-of-pocket expenses reduce employee morale, and the frustrated employee loses trust in the company’s processes.

Traditional reimbursement processes rely on cumbersome manual data entry of expenses, which is slow and eats away precious work hours of the finance team.

While the challenges persist, companies can resolve them by adopting modern tools and fixing the current flaws.

Is your reimbursement process fixed or flawed?

Expense filing: Is your expense filing automated by an OCR-enabled tool that auto-captures invoice data?
Fraud detection: Does your process automatically highlight or flag a mismatch in data between the invoice and claim?
Policy compliance: Are all your employees aware of the company’s expense policy? Does your process ensure automatic compliance with your policy?
Approvals: Does your process automatically loop in the right approvers?
Visibility: Do you have real-time visibility of all the expenses claimed and reimbursed? How much time does your finance team spend on expense auditing?

If all the answers to the above questions are yes, your expense reimbursement process seems to be tuned well. If not, it’s time to look deep and fix the broken link.

The case for automation

The reimbursement cycle can last weeks or even months. This traditional reimbursement process relies on tedious manual data entry of expenses, which is prone to errors and wastes precious employee time.

In the wake of growing cases of expense fraud and non-compliance, companies need to automate different steps of the reimbursement process.

Expense filing and approval

Employees who incur business expenses save receipts or invoices to file for reimbursements later. This expense filing is mainly done on an ad hoc basis. When all the expenses accumulate over a month, the employee submits a monthly expense report to the manager, who then approves the expense and forwards it to the finance team.

Employees find it tedious to keep track of all such receipts and manually file them. Managers who must approve the expenses constantly on the go, often on email trails, find themselves frustrated.

This entire process can be automated using a tool that integrates with emails and other tools to capture the expenses automatically on a platform, file them, and speed up the expense approval process. This, in turn, can slash the reimbursement cycle by weeks without the need for constant email follow-ups.

Accounting expenses

Finance teams that struggle to track employee expenses manually lack overall spend visibility. With a high volume of reimbursement claims, manually accounting for expenses and reimbursements is a hassle.

Many companies have opted for a centralized, integrated tool that manages the expense accounting and reimbursement process together.

Reconciliation

Finance teams spend hundreds of hours authenticating reimbursement claims to ensure accuracy.

Automation can handle expense reconciliation at different steps of the reimbursement process, such as digitizing expense filing, matching payment transactions with submitted expense claims (bank reconciliation), matching expense reports with invoice and receipt data, and highlighting discrepancies.

With this, let’s look at the available options for your business.

Futuristic employee expense reimbursement solutions

Most companies have automated some, if not all, of the steps in the reimbursement process.

Be it ocr tools for data extraction from expense receipts and invoices or adapting one-stop expense management solutions, there are many intelligent, adaptable solutions for different steps of the process.

Let’s have a look at some of them here:

OCR technology has transformed how receipts and invoices are processed. By extracting text from images and digital documents, OCR enables:

Automated data entry: This reduces manual errors and saves significant time, as the relevant information from receipts is automatically populated into the expense management system.
Enhanced verification: OCR helps verify receipts’ authenticity and cross-check them against submitted claims, improving reimbursement accuracy.
Digital record keeping: With OCR, digital copies of receipts can be stored efficiently, making it easier to retrieve documents for audits or compliance checks.

Expense management software

Enterprises are rapidly moving to integrated expense management software to streamline their expense reimbursement process.

These platforms offer a comprehensive suite of features to simplify every aspect of the reimbursement cycle: expense filing, tracking, approval, and reimbursement.

Features of expense management software:

Digitized expense filing and reporting: Auto-capture expenses from different sources, such as emails, app invoices, and text messages, and auto-populate the expense reporting process.
Real-time analytics: Finance teams and leadership can gain insights into the spending patterns of employees through dashboards and can use customized reports to control spending and forecast the budget.
Policy compliance: Expense management can identify and red-flag reports that violate your company’s expense policy. Approvers and finance teams have complete visibility of cases of policy violations.

Workflow automation

Workflow automation can streamline multiple steps of the reimbursement process, such as the approval process, and ensure that expense claims move swiftly from filing to reimbursement.

Features of workflow automation:

Customize approval flows: Workflow automation can automatically route claims to the appropriate approvers based on the category, amount, and department of expense.
Timely alerts and notifications: Automated reminders keep all approvers informed about pending actions, due dates, and policy violations, ensuring nothing falls through the cracks.
Integration with accounting systems: Automating the transfer of approved expenses into the accounting ledger speeds up the reimbursement cycle and reduces administrative overhead.

Corporate credit cards

While many companies don’t allow all employees a direct line of credit, corporate credit cards are a great way to ease the stress of the reimbursement process.

If the size and frequency of expense reimbursement claims are higher, employers can offer the convenience of corporate credit to some, if not all, employees. Managers, frequent travelers, and sales representatives constitute the most significant chunk of employees who claim frequent reimbursements.

Corporate credit cards are an intelligent cashless reimbursement option as they are faster, easy to use, and widely accepted. They are increasingly becoming the future of cashless expense management.

These cards record transactions in real-time on expense software and can be integrated with accounting software. Some companies offer corporate credit cards for business and employee spending to consolidate cash flow management in one place.

How to fix your reimbursement process with Nanonets?

All employers find the need to reimburse employees for various business expenses they incur. We at Nanonets understand how complicated these processes can be and how integral they are for your business. We have built the technology to make your reimbursement process seamless.

Flow is an AI-based expense reimbursement tool that offers automated data capture for intelligent expense processing. With advanced OCR and machine learning capabilities, Flow can extract relevant information from various expense documents such as receipts and invoices. It provides a user-friendly interface, customizable OCR models, and seamless integration options, making it a versatile solution for expense management.

Interested in exploring Nanonets for your company’s expense reimbursement process?

Frequently Asked Questions (FAQs)

Q: Are reimbursements taxable?

A: Generally payments made to employees are subject to taxes, so the employer will withhold and then contribute those taxes on behalf of the employee. But according to IRS guidelines, an accountable plan is a provision that allows employers to reimburse employees on a non-taxable basis when certain requirements are met. Having an accountable plan ensures compliance with IRS norms for business expense reimbursements and deductions that are judged taxable income.

Q. How to manage invoices and receipts for reimbursements?

A. Modern tools automatically extract crucial data from your receipts by harnessing OCR and machine-learning models trained using AI. You can leverage these to manage invoices and expense receipts and streamline your reimbursement process.

Q. How to create an effective reimbursement policy?

A. An expense reimbursement policy is a rulebook in business spending. You can read our guide on how to create an effective expense policy.

Q. Is reimbursement considered income?

A. Employers need to reimburse employees who have spent their personal money on business-related expenses. When employees receive an expense reimbursement, they typically won’t be required to report such payments as wages or income.

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