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Travel and Expense Policy: Best Practices for SMEs

Financial operations
Expense Management
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By
Zuzanna Kruger
|
August 8, 2024
Travel and Expense Policy Best Practices

If you are a small or medium-sized enterprise (SME), you know that every pound counts. Managing business travel-related expenses can be a significant challenge, especially when trying to grow your business while controlling costs.

If you ever found yourself overwhelmed with expense reports and reimbursement forms, struggling to explain to employees why certain spending cannot be approved, you’re not alone.

Let’s dive into how you can create a travel and expense policy that works for your SME, keeping your bottom line and your employees happy.

Why Your SME Needs a Travel and Expense Policy

Before we get into the details, let’s talk about why you need a good travel and expense policy. First, let’s discuss the numbers:

These numbers reveal the massive financial impact of business travel on SMEs. With global spending approaching $2 trillion and individual trip costs averaging over $1,000, travel expenses can quickly become a major drain on your resources if not managed properly. Moreover, the lack of safety plans for nearly half of the business travellers exposes a critical gap in risk management.

A comprehensive travel and expense policy isn’t just beneficial—it’s vital for your SME’s survival and growth. It protects your bottom line, ensures employee safety, and aligns travel activities with your business objectives. Clear guidelines within the policy can streamline the expense claims process, preventing issues related to dishonest claims and ensuring timely reimbursement, which boosts employee morale.

In the next section, we’ll explore how implementing such a policy can dramatically improve your SME’s financial health, operational efficiency, and risk management.

Expense Management, Cost Control, and Financial Health

Now that we’ve established the significant financial impact of business travel on SMEs, let’s delve into how a well-crafted travel and expense policy can serve as a powerful tool for your company’s financial health and operational efficiency.

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    Financial Control: By setting clear guidelines and spending limits, you gain better control over your travel budget. This allows for more accurate forecasting and helps prevent unexpected costs from derailing your financial plans.
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    Cost Optimisation: With a structured policy, you can identify cost-saving opportunities, such as preferred supplier agreements or optimal booking times, without compromising on the quality of business travel.
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    Risk Management: A comprehensive policy helps ensure compliance with tax regulations and company standards, reducing the risk of audit issues or potential fines.
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    Operational Efficiency: Streamlined processes for booking travel and submitting expenses can significantly reduce administrative burden, allowing your team to focus more on core business activities. Automating the expense management process can further enhance efficiency by reducing setup time and integrating expense partners, which provides valuable insights into spending data for future optimization.
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    Employee Satisfaction: A fair and transparent policy demonstrates that you value your employees’ time and effort. This can contribute to higher job satisfaction and help in attracting and retaining top talent.

By implementing a robust travel and expense policy, you’re not just managing costs—you’re creating a framework that supports your business goals while taking care of your most valuable asset: your people.

In the following sections, we’ll guide you through the process of creating and implementing such a policy tailored to your SME’s needs.

Your Travel and Expense Policy

Creating an effective travel and expense policy is about striking the right balance between control and flexibility. Effective travel and expense management can streamline the policy creation process and ensure compliance.

In this section, we’ll break down the essential elements of a well-crafted policy, providing practical guidance on how to tailor each component to your SME’s specific needs and culture. From setting clear spending limits to streamlining the reimbursement process, we’ll cover the key areas that will make your policy both effective and user-friendly.

Keep It Simple and Clear

It is crucial to create a travel and expense policy that is clear, concise, and easily comprehensible. Avoid the common pitfall of producing overly lengthy or complex documents that employees may find difficult to read or understand. Instead, focus on crafting a policy that uses straightforward language and avoids unnecessary jargon.

For example, instead of: "Employees are required to use cost-effective transportation methods when travelling for business."

Try: "Choose the cheapest option to get around for work trips."

This not only makes it easier for your employees to understand, but also helps to avoid any confusion or misunderstandings.

Break your policy into clear sections with headings like:

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    Travel Booking
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    Accommodation
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    Meals and Entertainment
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    Transportation
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    Reimbursement Process

Pro tip: Use bullet points and short paragraphs so it's scannable. Your employees will thank you.

Set Spending Limits

One of the hardest parts of creating a travel and expense policy is setting the spending limits. You want to be fair to your employees and also protect your bottom line. Here's how to do it:

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    Research average costs: Look into the average prices for hotels, meals and transportation in the cities your employees travel to. This will help you set realistic limits that won't leave your employees out of pocket or force them to stay in subpar accommodation.
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    Consider your budget: What can your business afford? Analyse your historical travel spend and project future needs based on your business growth plans. This will help you set limits that are sustainable for your business.
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    Be specific: Set clear limits for each expense category. For example:
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    Hotels: Up to £100 per night in standard cities, £150 in high-cost cities
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    Meals: £15 for breakfast, £20 for lunch, £30 for dinner
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    Transportation: Economy class for flights, a standard class for trains

Remember, these are just examples. Adjust to your business needs and location. Consider seasonality, event-driven price surges and regional cost differences when setting your limits.

Also, a tiered system should be considered based on employee seniority or travel frequency. While this adds complexity, it can help address the different needs of different employee groups while still maintaining overall cost control.

Make Booking Easy

The easier you make it for employees to book travel and track expenses, the more likely they are to follow your policy. Consider using a travel management platform that integrates with your expense management system. This can help you:

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    Enforce policy rules automatically: Many platforms allow you to set up your policy rules within the system, so it automatically flags or blocks bookings that don’t comply. This takes the guesswork out of policy compliance for employees.
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    Get better rates through negotiated deals: Travel management platforms often have partnerships with hotels, airlines, and car rental companies, so you can get corporate rates that aren’t available to individual bookers.
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    Simplify expense reporting: With integrated systems, expenses can be auto-categorised and receipts attached, reducing the time and effort required to submit expense reports.

Additionally, using an expense management tool like Fyorin can streamline processes such as expense claim approvals and receipt submissions, enhancing both efficiency and accuracy.

If a complete travel management system isn’t within your budget right now, at least provide clear instructions on how employees should book travel. For example:

“Book all flights through our preferred travel agency, TravelRight. For hotels, use hotels.com and choose options within our limits.”

Consider creating a list of preferred vendors or a travel portal that aggregates options within your policy guidelines. This will make it easier for employees to book compliant travel without feeling overwhelmed by choices.

Common Scenarios

Your policy should cover common situations that your employees will encounter. For example:

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    Personal and business travel: Clarify how expenses should be allocated when an employee extends a business trip for personal reasons.
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    Entertaining clients: Set guidelines on what is acceptable entertainment expenses and what documentation is required.
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    Using personal vehicles for business travel: Specify mileage reimbursement rates and how to track and report mileage.
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    Tipping: Provide guidance on tipping amounts in different situations and countries.
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    Lost receipts: Outline the process for documenting expenses when receipts are missing.

Here's an example of how to handle client entertainment:

"When entertaining clients, you may spend up to £50 per person on meals. Alcohol is limited to 2 drinks per person. Always include the names of attendees and business purpose on your expense report."

Consider adding a FAQ section to your policy to cover these scenarios. This will be a quick reference for employees and reduce the number of questions your finance team has to deal with.

Be Flexible (Within Reason)

Clear rules are important, but remember, sometimes situations arise that don't fit into your policy. Add a clause that allows for some flexibility in exceptional circumstances. For example:

"In exceptional circumstances where policy exceptions are required, employees must get written approval from their manager and the finance department before incurring the expense."

This gives you room to move without opening the floodgates to policy abuse. You need to strike a balance between control and flexibility. Consider a tiered approval system for exceptions based on the amount or type of expense.

Flexibility can actually encourage compliance. If employees feel the policy is reasonable and takes into account unusual circumstances, they'll be more likely to follow it.

Communicate and Educate

Creating a good policy is only half the battle. You need to make sure your employees actually understand and follow it. Here are some additional tips:

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    Include the policy in your onboarding process for new employees. Make sure new starters are aware of the policy from day one. Consider creating a quick quiz or interactive module to ensure they understand the key points.
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    Run regular training sessions. Go over the policy's main points and any updates. These can also be a good opportunity to gather feedback and address common questions or concerns.
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    Send reminders about key policy elements before major business trips or events. A quick email reminder can prevent policy breaches and smooth expense reporting after the trip.

Review and Update Regularly

Your business is growing and changing, and so should your travel and expense policy. Set a reminder to review your policy at least once a year. Consider:

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    Are the spending limits still realistic? Inflation, changes in travel costs or changes in your business will require you to adjust your spending limits.
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    Have there been any tax law changes that affect expense reporting? Stay up to date with tax changes that impact your policy or reporting requirements.
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    Are there new technologies you can implement to make the process easier? The expense management software market is constantly evolving. Regularly review if new tools can improve your process.
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    What feedback have you received from employees? Pay attention to common pain points or frequently asked questions. These will guide your policy updates.
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    How has your business changed? New markets, different types of client interactions or changes in your workforce will require policy changes.
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    Are there new types of expenses to consider? For example, the rise of remote work has introduced new categories of expenses for many companies.

Regular reviews will ensure your policy is fair, compliant and effective. Consider setting up a small committee with finance, HR, and frequent travellers to conduct these reviews.

Putting It All Together: A Sample Policy Structure

To get you started, here's a more detailed structure for your travel and expense policy:

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    Introduction
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      Purpose and objectives of the policy
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      Scope: Who it applies to
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      Key principles guiding the policy
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    Travel Booking
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      Approved booking methods and platforms
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      Class of travel for different trip durations
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      Advance booking requirements
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      Use of loyalty programs and points
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    Accommodation
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      Approved hotel categories and star ratings
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      Spending limits by location
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      Extended stay policies
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      Non-reimbursable items (e.g., minibar, in-room entertainment)
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    Meals and Entertainment
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      Per diem rates or spending limits for different meal types
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      Rules for client entertainment and business meals
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      Alcohol policy
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      Required documentation for group meals
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    Transportation
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      Guidelines for using taxis, ride-sharing services or public transport
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      Rules for using personal vehicles, including mileage reimbursement
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      Car rental policies and insurance requirements
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      Parking and toll reimbursement
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    Other Reimbursable Expenses
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      Internet and phone usage while travelling
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      Laundry services for extended trips
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      Tips and gratuities
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      Business supplies or emergency purchases
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    Non-Reimbursable Expenses
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      Clear list of items that won't be reimbursed (e.g., personal entertainment, traffic fines)
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    Expense Reporting
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      Step-by-step guide on how to submit expense reports
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      Required documentation and receipts
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      Deadlines for submission
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      Approval process
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    Reimbursement Process
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      How and when employees will be reimbursed
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      Cash advances
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      Currency conversion for international travel
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    Policy Compliance
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      Consequences of non-compliance
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      Process for policy exceptions and approvals
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      Audit procedures
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    Safety and Security
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      Guidelines for staying safe while traveling
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      Emergency contact information and procedures
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    Sustainable Travel
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      Encouragement of eco-friendly travel options
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      Carbon offsetting programs, if applicable
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    Data Protection
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      Handling of personal information in expense reports
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      Compliance with data protection regulations
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    Definitions
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      Glossary of key terms used in the policy
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    Frequently Asked Questions
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      Answers to common questions about the policy
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    Contact Information
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      Who to contact with questions or concerns
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      Resources for more information

Remember, this is just a starting point. Customise to your SME's specific needs and culture.

Regional Considerations

When creating your policy, be mindful of regional variations, especially if your SME operates in different countries:

United States

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    Comply with IRS guidelines for business expenses. The IRS has specific rules on what constitutes a business expense and how to document it. Read Publication 463, which covers travel, entertainment, gift and car expenses.
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    Be aware of state-specific regulations that may impact travel and expense policies. For example, some states have their own meal per diem rates that differ from federal rates.
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    Consider the impact of the Tax Cuts and Jobs Act, which eliminated the deduction for entertainment expenses. Your policy should clearly differentiate between meals (which are still partially deductible) and entertainment.

United Kingdom

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    Match the policy to HMRC guidelines for allowable business expenses. HMRC has guidance on what expenses are allowable for tax purposes, including specific rules for subsistence and mileage allowances.
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    Ensure expense data handling complies with GDPR. This includes being clear on how employee data from expense reports will be stored, used and protected.
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    Be aware of Making Tax Digital (MTD) for VAT. If your SME is VAT registered and above the threshold, you will need to ensure your expense management system can integrate with MTD-compliant software.

European Union

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    Consider EU regulations on travel and expenses, including VAT reclaim processes. The EU has complex VAT rules, and reclaiming VAT on business expenses can result in big cost savings if done correctly.
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    Address cross-border travel within the Schengen Area, including visa and insurance requirements. While travel within the Schengen Area is generally straightforward, your policy should address any specific requirements or restrictions.
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    Be aware of Posted Worker rules if you're sending employees to work temporarily in other EU countries. These rules can impact minimum wage requirements and working conditions.

Conclusion

Having a fair and effective travel and expense policy for your SME doesn't have to be a pain. Keep it simple, clear and business focused and you'll have a policy that works for your business and your employees.

Remember, the goal is to make it easy for your team to do their job while travelling, not to create more barriers. As your business grows and changes, so should your policy. Regular reviews and updates will keep it working for your SME.

By following these tips, you'll be on your way to easier expense management, happier employees and a healthier bottom line.


Fyorin, your global financial partner

Interested in transforming your treasury management function? Get in touch with us at [email protected]

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Zuzanna Kruger
Growth Marketing Manager
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Zuzanna, Growth Marketing Manager at Fyorin, leverages her SXO and B2B expertise to uncover fintech trends and user insights. She translates these findings into practical strategies, helping businesses like yours optimise global financial operations and navigate the evolving financial landscape more effectively.

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