Best Practices of Financial Reporting for Small Business

It’s a good business practice to manage expenses carefully. Even a successful, cash-rich business should be meticulous about how they’re spending money. (Often that is how they become cash-rich and successful in the first place). A business that is short of cash or is forecasting losses needs even closer oversight.

Enter the humble Expense Report, one of the tools used to manage expenses.

What is an Expense Report?

An Expense Report documents the expenses incurred by the business or by employees so they can be periodically analyzed, paid, and reimbursed.

How are Expense Reports used?

Processes will vary but a starting point is often an employee who incurs an expense on behalf of the company, for example, a travel expense. Sometimes the employee will pay this expense with their own funds and use the Expense Report to be reimbursed later. Alternatively, the employee will use the Expense Report to signal that the business should pay the expense directly to the vendor.

A manager will ‘authorize’ the expense (or not) and a member of the finance team will maintain these reports for audit purposes and for recognition in the financial statements. Further analysis will reveal how much each division of the business is spending… and what they are buying.

What is an Expense Policy?

An Expense Policy sets the guidelines for spending money across the organization. It includes rules about who can incur expenses on behalf of the organization, the purpose of these expenses, and the value or amount of any expense. A common example is a Travel and Entertainment Policy. Some businesses will also maintain an Approved Vendor Policy which specifies the list of vendors from which the business can buy goods and services.

Employees are required to follow the policy and the finance or payroll department will verify the details of any expenditure to ensure it is supported by appropriate documentation.

What are some Best Practices in expense reporting?

Again, each organization is different but important points include:

• Expense Policies should be updated and clear. Time is wasted and mistakes are made where the rules have become blurred or are consistently not followed.
• Use tools to make the process easy. There was a time when most employees would fill out a paper form, sign it, and submit it for approval (with receipts attached). Fortunately, cloud-based software allows much of this to be automated and paperless. Ideally, the process should not be a hassle for any team member.
• The Expense Form should specify the name of the person completing the form, their department or division, the purpose of the expense, the date of incurring the expense, the expense amount, and the vendor name.
• Providing employees with an ‘Allowance’ can simplify processes. An example is that employees on a business trip are provided a daily amount to cover food and transport. This is paid in advance and no further forms or supporting documents will be required.

How does the Business benefit from excellence in Expense Reporting?

Driving accountability in terms of spending habits is really important. This creates discipline across the business and avoids bad habits or even fraud. Note, this accountability applies to ALL team members who should share an interest in the business using its cash wisely through sensible ‘internal controls’.

Analyzing past expenses helps with budgeting. Also, accurately recording these expenses will enable more useful financial statements. Tax deductible expenses may require a specific consolidated report submitted to the tax authorities.

Conclusion

The starting point for effective expense reporting is to develop policies which make sense in your business. These policies should be clear and allow some flexibility while creating a sense of discipline and accountability. They should also be periodically updated because conditions change.

Then develop processes to make expense reporting easy… and follow them. Most team members don’t want to spend time thinking about expense reporting but excellent policies and processes are part of the foundation for a successful business.

Need more financial oversight in your business?

Hart Partners specializes in helping small to medium-sized businesses take charge of finances in order to improve profits and create positive cash flow. We firmly believe that to do that properly we need to understand how your business is run— to be a part of it.