How Do I Reimburse My Employees?
Let’s talk about the giant black hole of productivity in your company that causes pain for everyone involved: employee reimbursements.
Maybe an employee took a client out to dinner, ran to the store to finish a project or purchased flowers for a client’s special occasion. For a variety of reasons, there aren’t enough (or no) company credit cards — may be an employee left theirs at home or had an expense outside of the company accounts, and now they need the company to pay them for it.
The company needs a process to transfer money from the company’s bank account to the employee’s personal account. This happens all the time, and chances are, there is an opportunity to improve this pain point.
There are three primary methods that companies use to reimburse their employees. Each one presents different pros and cons, so it’s important to weigh your options. Remember, the goal is to gain efficiencies and reduce headaches for your employees.
Let’s assume your company is already paperless, managing receipts by employees submitting via phone apps in real-time rather than stuffing envelopes full of receipts at the end of the month. Also, the accounting department is recording the expenses via the submitted receipts regularly throughout the month in the PSA to be billed to the client.
With these assumptions, let’s take a look at three primary ways companies can reimburse their employees for expenses.
1. Print a paper check and hand it to the employee.
“Cutting” a check is the process of printing a check, putting it in an envelope, and either handing it or mailing it to an employee.
Before you ridicule this option, know that there are advantages. They primarily revolve around the non-disruptive nature of this process. People understand this system because it has been routine for the better part of the past century. Like all “this-is-the-way-we’ve-always-done-it” processes, management does not need to irritate employees by “moving someone’s cheese,” so to speak. You can just let it go the way it always has.
Additionally, some appreciate the tangible nature of checks. In a paperless world, people still long for something tangible.
However, this method has quite a few disadvantages.
First of all, it’s 2021. It is quite surprising this is still a commonplace money practice.
Let’s also not forget that we are in a worldwide pandemic, and we’re trying to distance ourselves and keep from transmitting germs via touch. Exchanging a check may pose an unnecessary risk.
It takes a painfully long time to load and print check stock to sign the check as well, adding more work for the person who’s writing it.
Then, the employee needs to deposit the check in the bank. They may physically go to the bank, or they may even take a picture of the check to put it in their checking account. Either way, it is still an additional step in the process for the employee.
Finally, it’s expensive. Check stock, envelopes, and printer ink cost money, and the time the accounts payable clerk spends preparing these is valuable. If you’re mailing the check, pay up for postage too.
2. Reimburse employees through payroll.
If you have a payroll integration linked to your accounting file, you have the ablitiy to “map” the code you wish to use when linking these payments to the accounting file. If it’s mapped correctly, there is a default the payroll clerk can enter for reimbursement, and it will go directly into the P&L as an expense in whichever category you choose.
There are some advantages to this method. Depending on your payroll provider, there is no extra charge for the transaction since the transaction is already going through payroll.
No additional steps are required for the employee to receive it. They can look right at the pay stub and see they received the reimbursement. If it’s important to them, they can also monitor it on their year-to-date pay stubs.
However, the major downside to sending reimbursements through the payroll is there’s only one expense code. If you’ve already mapped your payroll to the accounting file, the employee reimbursement code is only one expense. It may not seem like a big deal, but if you’re concerned about client expenses being coded to the correct cost of goods or cost of services line, reimbursing via payroll isn’t going to help you.
(The left side represents the description in the payroll software and the right maps to one expense account in the accounting file.)
You won’t be able to allocate the cost of the item purchased to the cost of goods sold regardless of its nature. You cannot enter it into the cost of goods sold directly. The expense is sent to the mapped expense code. This method doesn’t allow for a very user-friendly or dynamic profit and loss if you are trying to set it up to be functional and easy to read.
While this method is convenient for the business and the employee, it is problematic because it does not allow for a robust reporting process as many businesses prefer.
3. A third option is to reimburse the employee by sending an ACH payment through an accounts payable platform.
A major advantage of this process is there is a separate approval and documentation system allowing for pictures of the receipts and internal controls. It is entirely paperless, and the expense can be coded to any account (COGS or expense) to maintain an accurate picture of profitability.
The downsides include the cost, time, and coordination with the employee. The accounts payable software has a cost, and generally, there is a fee for transacting money through those platforms. A separate approval process is required. While it is a best practice for internal controls, it is also a time constraint. Finally, the recipient would still need to authorize the ACH deposit into their personal checking account, at least initially. (People are much more motivated to enter their bank account information when they are receiving money!)
These are three ways businesses can reimburse their employees and some pros and cons of each. If you want to step back from the weeds for a minute, remember the goal of an accounting system is to support the business.
The process should be as painless as possible. Employees should not be “harassed” by an accounting department looking for receipts, and the accounting department should not need to “harass” employees because there should be a system in place to transact business smoothly.
This will keep your employees focused on the clients and improving your business rather than managing receipts and expense reports.
Streamlining your employee reimbursement process is just one way that you can improve your business, and every tiny improvement makes your business more profitable and scalable.