Accounting

The 5 Biggest Purchasing Policy Challenges

Manufacturing executive Ken Stork has a saying about what happens when businesses aren’t proactive about putting the systems they need in place: “If you need a new process and don’t install it, you pay for it without getting it.”

When it comes to finance, there’s one area in particular where teams have been paying the price without reaping the rewards: their expense policy. The same challenges come up, again and again:

  • How do you get your team to read, understand, and comply with the policy in the first place?
  • How do you keep the policy up to date and ensure it covers everything employees might need to know?
  • How do you strike the balance between empowering employees and maintaining company control?

But the real secret to designing effective purchasing policies in the twenty-first century is not to add a few paragraphs here or tweak the wording there; it’s to move beyond the idea of a written purchasing policy altogether. Here are five of the biggest pain points that teams encounter with their purchasing policy—and how the right tools can render all of them a thing of the past.

Challenge #1: Employees forget that there is a policy (or what it says)

Here’s a scenario that may sound familiar to many finance professionals: A new employee joins the team. Someone from finance walks them through the company expense policy and explains where they can find it later for future reference. The finance team member gets the new employee to sign off, confirming that they’ve read the policy for documentation purposes.

And then four months into their tenure, that same employee heads to a work conference and comes back having racked up a stack of crazy expenses. But when the finance team explains to them that half of what they’ve spent isn’t covered by the policy, they say “What policy?!”

While it can be tempting to chalk this up to laziness or malice, the truth is that it’s typically neither. It’s just that the employee has genuinely forgotten what the policy is. Research has shown that people retain less than half of the information they encounter after one hour. At one day, that amount shrinks to 30%. After a week, it’s just 25%. By the time that new employee is on their way to that conference at month four, you’re lucky if they remember they saw an expense policy, let alone what it said.

And it’s not just new employees who have trouble remembering and complying with expense policies. Teams today are busy. When an employee gets to a juncture where they need to purchase something in order to move forward with their job, the last thing they’re going to do is read a 10-page-long expense policy and try to decipher which of the 50 rules applies.

“People want to know two things: what’s my budget, and who do I need to approve this,” says Teampay VP of Finance Peter Nesbitt. So while the impulse to document every contingency an employee might encounter when spending company money is understandable, it just doesn’t make sense for the way companies and their people operate today.

What should finance teams do instead? Rather than writing up pages of policies and then hoping that employees comply, put that information in code instead. With the right tools, you can program the policies that team members need to follow directly into the purchasing process itself. The result: employees comply with the policy automatically, without having to memorize policy to get there.

Challenge #2: Policies that don’t cover everything employees need to buy

For a long time, the vast majority of employee spend fell neatly into one category: travel and expenses (T&E)— costs incurred either while traveling or entertaining clients.

But those days are long gone. Today, teams are spending on all kinds of things that don’t fit neatly in the T&E category, but aren’t rent and salaries, either. And that’s creating some new wrinkles in the expense policy for finance teams to deal with.

A few examples of the kinds of things employees spend money on today: SaaS subscriptions for software tools like Twilio; on-demand professional services; and team perks like fitness memberships and office equipment. According to one report, four of the top five places employees are spending money are Uber, Lyft, Amazon, and Starbucks.

This is where the limitations of a written policy come into play. When the things employees need to do their job effectively are constantly shifting, drafting a written policy that covers every contingency where an employee might possibly need to spend money isn’t just complicated—it’s virtually impossible.

By switching from a reactive, documentation-based policy to a proactive, tool-based one, finance teams can ensure their policies are flexible enough to cover the full range of expenses a team member might need to cover, without having to anticipate those needs in advance.

Challenge #3: Purchasing processes that are buried under layers of bureaucracy

In the tug of war between employee empowerment on the one hand, and oversight and control on the other, most finance professionals will probably admit that the pull toward control is the strongest. After all, mistakes can’t happen if every purchasing decision is documented, reviewed, and approved by multiple stakeholders, right?

But every decision has a cost, and in this case, that cost is the most valuable resource that teams today have: time. Employees today often need to make purchases in real-time in order to move forward with their deliverables. If they have to wait for the request to go through a drawn-out approval process, their work suffers. And for managers tasked with giving out approvals, being constantly pulled away from their primary tasks to review purchase requests can have an adverse effect on productivity.

Of course finance teams need controls—there’s a reason they’re called controllers—but the key is to implement those controls without adding friction and unnecessary bureaucracy to the process. By coding your purchasing policy into your spend management software, you can establish the appropriate controls without making the process cumbersome for your employees.

One of a computer’s biggest strengths is the ability to set rules and create workflows based on those rules. With the right tool, finance teams can set guidelines to govern purchasing behavior upfront and route requests to the right people automatically. For example:

  • For purchases under $100, no approval required
  • Purchases over $100 by Employee A can be approved by Manager B
  • Purchases over $500 should be sent to Manager B and then routed to Finance Employee C for final approval

Different spending decisions require different levels of control, and teams should aim to set policies that are flexible and reflect those different contexts. The result: purchasing decisions get the level of oversight they need, without dragging team members into a drawn-out, convoluted approval process.

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Challenge #4: Over-dependence on reimbursing employees for purchases

We’ve discussed already how spending decisions are increasingly being made at the level of the end-user. On the surface, this seems like it eliminates a lot of red tape and streamlines processes. After all, the team member is the one making the purchase, and they probably have access to their bank account, so why not have them purchase the things they need as they need them, and settle up accounts after the fact?

But the reality is that this approach puts an unfair burden on your team—and makes assumptions about their personal financial situation that are unfair for an employer to make.

This quote from a CFO in response to an anonymous questioner on the finance community Proformative, who waited more than thirty days to be reimbursed for expenses he or she incurred through work, sums it up perfectly:

“I have always argued that reimbursements should be EXCEPTIONS and NOT the norm/policy. We have to bear in mind that these are expenses that the company should have incurred at the time of the expense…and using the employee’s funds is an accommodation by the employee to the company. It is NOT incumbent for an employee to advance money for the company. A case of an accommodation that became the norm. Heck, I would even advocate for a Thank You note for every reimbursement to the employee.”

Nobody should have to pay out of pocket for the privilege of doing their job, even if the company does reimburse them later.

In addition to the unfair burden that post-hoc expense reimbursement puts on team members, there’s the risk of fraud and error that emerges when teams rely on employees to report expenses accurately. One report found that the median cost of expense report fraud for companies with more than 100 employees is around $30,000. And for companies with fewer than 100 employees, that amount can increase by up to 28%.

So what’s the alternative? Here again, technology has the answer: intelligent payments. By introducing proactive controls with software that governs purchasing behavior on virtual cards, physical cards, or purchase orders, you can keep all business spending within the company ecosystem and give employees the flexibility to make purchasing decisions on their own—without having to spend their own money to do it.

Challenge #5: Telling employees to use their own judgment

Some well-meaning finance teams have given up on trying to manage team spend in favor of a more laissez-faire approach. But while it might sound good in theory to trust your team to make the right decisions, there’s a big problem with this approach: “Best judgment” means different things to different people.

For one employee, “best judgment” on a business trip might mean booking an Econolodge in the suburbs and riding the train into town; for another, it might mean booking a hotel downtown right next to the conference center and ordering room service menu for every meal. And when Employee A learns what Employee B’s interpretation of “best judgment” looked like, the result is often resentment and tension across the team.

Some companies have iterated on the “just use your best judgment” mantra in order to find a minimalist policy that more accurately captures what employees should aim to achieve with their purchasing. Netflix’s purchasing policy, included in its famous culture code, is also five words, but it makes an important rhetorical shift: “Act in Netflix’s best interest.”

The focus here is on doing what’s best for the company, not what the employee would do “if they were spending their own money,” another popular way that teams tend to frame a more minimalist policy approach.

Netflix’s trust in its employees is admirable, but it still puts the onus on individual employees to make the right call, a decision that not all team members are experienced or comfortable enough to make.

By automating the approval process, team members can get the guidance they need to feel confident in their purchasing decisions, while still having a say in the tools and support they get to do their job.

The purchasing policy of the future is proactive, not reactive

Proactive policy is smart policy. By empowering employees to buy what they need and without sacrificing controls, finance teams can get ahead of company spend and stop trying to enforce the rules retroactively.

Tools like Teampay, allow companies to design their policy around the way teams spend money today with:

  • Automation that eliminates tedious manual labor and unites the disconnected pieces of your purchasing process into a single workflow
  • Proactive controls that code your purchasing policy into the software and ensure compliance
  • Intelligent software that governs spend on any payment method to eliminate rogue spending and prevent employees from going over budget
  • Real-time visibility that lets finance teams monitor and approve spending in real time

By leveraging the right tools, you can run your purchasing process—instead of your purchasing process running you.