Employees lend companies $1.6 billion each month in the form of expenses, according to a 2019 report.
This system works for businesses that need an interest-free loan—and for senior employees who enjoy racking up points for travel. But many employees can’t afford to cover business expenses, and they put their financial health in jeopardy when they use their personal credit lines for business expenses.
It’s not all rosy for businesses either. Companies lose thousands of dollars each year on purchases that violate their purchasing policy. Not to mention, they place a huge burden on their finance team by expecting finance teams to process dozens of expense reports each month.
Asking employees to pay out-of-pocket for business expenses and submit for reimbursement is harmful to employees and businesses. Here are the top six reasons to eliminate this outdated purchasing process.
1. Many employees don’t have the funds to cover the expense
Only 39% of Americans could cover an unexpected $1,000 expense out-of-pocket. Yet businesses routinely expect employees to cover similarly priced expenses, such as airline travel, hotel stays, and conference passes, on their personal credit cards.
This expectation isn’t fair to employees, and it contradicts messages of diversity and inclusion.
“I’m a Black man with not the greatest credit score, living on a tight budget, and although my boss is an ally who tries to drive diversity and inclusion, it feels like a ‘White privilege’ issue that he assumes I somehow have liquidity to cover these purchases,” a source recently told The Washington Post.
Expecting every employee to have a healthy savings account and a deep line of credit isn’t inclusive. It’s also particularly damaging to junior employees who don’t make as much money or are young and only beginning to build credit.
Seventy-two percent of employees between the ages of 18 and 34 are expected to pay work-related expenses out-of-pocket and submit for reimbursement. For an entry-level employee making $35,000 a year, a $1,000 airline ticket is more than a third of their monthly salary before taxes. That’s a burden no one should be asked to take on.
2. Delayed reimbursement can harm your employees’ credit
A third of employees surveyed in 2015 said their company took more than a month to reimburse their expenses.
That means employees need to pay their monthly credit card bill before they’ve actually been reimbursed for the money they fronted. Unless they have the cash on hand to do so, they’ll have to pay interest on the purchase, and their credit will take a hit for the delayed payment.
“I dealt with 29.99% penalty APRs [annual percentage rates] on two different cards and the permanent nuking of my credit limit on another because of having to figure out how to float expenses for employers,” journalist Stacy-Marie Ishmael shared on Twitter.
Employees risk their financial health when they cover expenses for employers, even for a short duration of time. And if the company goes under—or if the employee loses the receipt for their purchase—they may be out of that money indefinitely.
3. Unclaimed expenses cost employees hundreds of dollars each year
Employees don’t always submit for reimbursement on their expenses. Some lose receipts or forget to ask for them, others are too busy, and some feel embarrassed asking for reimbursement on a small expense.
According to a 2015 report, these unclaimed expenses amount to more than $10 billion a year in North America and an average of $390 per employee in the U.S.
Notably, one-third of respondents claimed they didn’t submit because the process was too cumbersome. That’s not unreasonable. At many companies, the process is still manual. Employees need to download and fill out a report, scan their receipts, look up the correct budget for the expense, track down their managers for approval, and then email the report to finance. It’s a rigmarole, and employees rightly don’t think it’s worth the cost of their time.
Not surprisingly, 42% of U.S. respondents said “they feel their employer is gaining a financial advantage over them through the expense claim process.”
4. Processing expense reports wastes your finance team’s time
Seventy-two percent of financial professionals reported that “processing expense reports is one of the most frustrating parts of their jobs” in a recent survey conducted by Teampay and Kelton Global.
That’s a shame, considering the amount of time processing these reports takes.
In the same survey, respondents claimed they spend 55% of their time doing repetitive tasks, such as reconciliation, record keeping, expense report management, and business expense fraud monitoring. Time spend on these tasks amounts to 55 hours, or seven business days, per month, on average.
Why so much time? Finance professionals said they send back about 25% of submitted reports to employees because they are missing information or receipts.
A further 29% of survey respondents said they spend so much time on expenses because their internal processes still rely on inputting data manually into spreadsheets. Others lamented that slow approval processes (29%) and non-compliant spend (27%) are the holdups.
5. Thousands of dollars per year are lost to maverick spend
Research indicates only 33% of employees have actually read their company’s purchasing policy. Not surprisingly, employees then make purchases that violate the policy. After all, with their personal card as their spending medium, there’s nothing to stop them from doing so.
In fact, 65% of the finance professionals we surveyed claimed senior executives at their company knowingly ignore the purchasing policy. Ostensibly, these employees use their seniority to get away with the breach.
These policies result in companies losing an average of $84,980 per year to maverick spend, but for many companies, the number is much higher. Thirteen percent of respondents told us their company loses more than $200,000 on out-of-policy spend annually, meaning $1 million is lost every five years.
6. Your books are never really balanced
You never know in real time how much cash your business actually has on hand (or how much it owes) when employees pay for their expenses out-of-pocket.
Finance teams reimburse an average of $32,210 each month to employees, which means month-end close can easily be off by tens of thousands of dollars.
At the same time, finance professionals can’t communicate accurate data to their senior executives about where dollars are going, limiting the company’s ability to make strategic financial decisions.
End out-of-pocket spending and expense reporting
Expense reporting is an administrative nightmare that burdens your employees and costs your business money. Moreover, employees aren’t your bank, and asking them to front money for your business is a diversity and inclusion issue.
With several solutions on the market that eliminate the need for expense reporting, there’s no reason to keep asking your employees to pay company expenses out of their own bank accounts. Instead, move your company to a spend management solution like Teampay that makes it easy for employees to get the cash they need for business expenses in real time but doesn’t put a financial burden on the employee.
Surprised to hear how much companies are reimbursing employees? Learn about this and other major finance challenges in our new report, Beyond the Balance Sheet.