Managing Employee Expense Advances: A Complete Guide
It can be a bit unnerving for managers when employees request a cash advance for expenses, especially if they’re new. Offering cash in advance for expenses is undoubtedly a risky gambit.
But at the same time, these requests often come from a very genuine place. Employees cannot always be expected to handle expenses on the company’s behalf, regardless of the size of the amount. It’s also possible they’re worried about not being reimbursed on time.
Arriving at a reasonable middle ground becomes paramount when the lack of faith goes both ways.
Expecting employees to cover business expenses with personal funds may not be ideal, but cash advances come with risks. This guide will help you find the perfect balance between trust and accountability.
What is a prepaid expense?
As the name implies, a prepaid expense refers to funds paid upfront for approved business expenses.
Settling major expenses with service providers beforehand spares the need to offer employees an expense advance or ask them to use their funds. It also saves businesses the trouble of handling reimbursement claims or approving new employee credit cards.
If prepaying expenses saves you the headache, it’s worth it. But if it’s not feasible, you’ll have to consider one of the two options – cash advances or employee spending cards.
Employees may make the occasional provision and pay business expenses out of their funds (expecting compensation later). However, no matter how small the amount or how soon a business can reimburse them, this practice can be seen as unfair to employees.
Especially if it’s a frequent occurrence.
Understanding cash advances for business expenses
Traditionally, businesses provide their employees with physical cash for upcoming expenses. This transaction cannot be treated as a prepaid expense even though the amount is deducted from the firm’s cash account because, technically, the expense hasn’t been paid yet.
Considering the risks associated with offering cash in advance for expenses, it’s hard to be sure the funds will be used for their intended purpose. If they aren’t, the transaction becomes a loss or bad debt, and the expenses those funds were supposed to cover can become a liability.
What is a cash advance request?
Although credit cards have been in the picture for a long time, companies cannot entrust all employees with a credit card. Typically, only a few appointed managers are entrusted with a company credit card, and employees must request approval before using it.
In scenarios involving a series of petty cash expenses, employees are likely to prefer receiving a cash advance instead of going through an approval process for every payment.
Although employees are expected to keep a strict record of all their cash expenses, there’s no way for firms to monitor how their funds are being used.
The challenges of traditional cash advances
Cash advances can be incredibly stressful and challenging for businesses to manage as a long-term practice for the following reasons.
- Security risk: Physical cash is prone to loss or theft.
- Tracking and accountability: It’s challenging to monitor spending and reconcile receipts.
- Potential for misuse: Offering advance funds in cash makes a business vulnerable to unauthorised spending.
Although offering cash advances for business expenses can be challenging, they’re often inevitable. But are company credit cards and expense advances the only options?
Xpence’s prepaid virtual cards: an all-in-one solution
Suppose you want to provide your employees with enough funds to cover business expenses while ensuring that your funds are secure and only be used for approved expenses. In that case, you need to have prepaid cards for business expenses.
How do Xpence’s prepaid virtual cards work?
Xpence’s prepaid virtual cards work like digital wallets. Depending on your needs, you load them up with a specific balance, which can be customized for one-time or lifetime use.
Xpence’s virtual visa card allows you to:
- Issue new cards and start spending immediately.
- Issue an unlimited number of virtual cards for all your employees.
- Issue cards for one-time use to eliminate the possibility of fraud.
- Monitor all transactions in real time.
- Apply spending limits and controls to ensure funds are being used appropriately.
- Reload the balance on your card as needed.
- Make hassle-free transactions using Xpence’s user-friendly mobile app.
- Add receipts or notes to transactions for accurate tracking.
Key benefits of Xpence’s virtual card
Xpence’s prepaid virtual cards can’t be stolen, misused, or overused, but the benefits don’t stop at security. They also offer:
- Live-tracking and spending insights.
- Improved control over budget and spending.
- Automated receipt tracking and bookkeeping.
- Accessibility for remote and overseas employees.
- Hassle-free transactions.
- Advanced analytics and reports.
Getting started is easy. You simply need to submit the account opening form to apply for a virtual card; Xpence’s virtual card can help you manage your spending in a way never possible.
But never forget that the need for this solution has emerged from a damaged sense of trust and responsibility from employers and employees.
At the end of the day, collaboration, trust, and mutual gain will always remain the core pillars of a positive long-term relationship between managers and teams.
Let’s discuss some measures you can adopt to improve team cohesion and financial transparency.
Establishing clear policies and procedures
If you cannot offer a cash advance or a prepaid card for business expenses, your contract with your employees should include a comprehensive policy for reimbursable expenses.
This ensures that if employees use their funds for company expenses, they are appropriately reimbursed under taxation laws. It also ensures that the employees adhere to the firm’s expense policies.
Developing a comprehensive cash advance policy
If companies opt to front physical cash for business expenses, their expense policy must outline the following:
- Eligibility: Includes the expenses or expense criteria eligible for a cash advance.
- Approval processes: The stages of approval for budgets, foreseen and unforeseen expenses, and the chain of command.
- Spending limits: This can include both upper and lower limits if the business has a strict quality standard to uphold.
- Reporting requirements: This includes the format and timeliness with which employees must report their expenses.
- Expectations: A set of guidelines that employees should aspire to follow to improve budget efficiency.
Monitoring and accountability
Implementing systems to monitor funds provided in advance of expenses is essential. Regular audits and accountability measures can help prevent misuse or theft of funds. In large and multinational companies, this typically falls into the job description of a financial controller.
But in SMEs and startups, this function, or rather, headache, tends to fall on founders or top-level managers with other responsibilities weighing them down.
Automated Bookkeeping software isn’t a substitute for a financial controller but can spare small business owners time and stress when trying to scale.
Final thoughts
To summarise, businesses can navigate expense advance challenges by implementing clear policies, leveraging modern tools like Xpence’s prepaid virtual cards, and exploring alternative expense management solutions.
Businesses must never lose sight of the primary goal, which is to strike the perfect balance between trust and accountability.
