Ultimate Guide to Expense Management Automation

Manually managing expense reimbursements is becoming a thing of the past for a reason. Processing expense reports and verifying payments can be time-consuming. Additionally, hunting down receipts or missing information only adds to the time and frustration. By automating the entire process, you can regain that time, avoid errors, remain compliant, and pay your employees faster.

Let’s dive into how to automate expense reimbursements in six easy steps and the key factors to consider.

What are Expense Reimbursements?

Expense reimbursements are payments made to employees for business costs they’ve covered out of pocket. Typical expenses include travel costs, client meals, office supplies, professional development, and mileage for business trips. The Internal Revenue Service (IRS) specifies that reimbursements aren't taxable to employees(opens in a new tab) if they meet the following three criteria:

1. The expenses must have a clear business connection

2. Employees have to provide adequate substantiation within a reasonable timeframe

3. Employees need to return any excess advances promptly

Challenges of Manual Expense Reimbursement

Manually processing every expense report can take too much time for everyone involved: Employees pay out of pocket and complete their expense reports, and then they wait to get reimbursed. Finance teams spend hours matching receipts to credit card statements and manually entering data into spreadsheets. Some expenses require additional approvals, further extending the processing time.

Another challenge is compliance. Missing receipts or incomplete documentation can turn non-taxable reimbursements into taxable wages, creating payroll tax complications. Without clear audit trails, your business may be vulnerable during tax season or if questions arise about specific expenses. You can solve many of these challenges by automating expense reimbursements. The following steps show you how.

Step 1: Define a Clear and Compliant Expense Policy

Before automating the process, your company needs a solid expense policy. This policy lays the groundwork for automating expense management by outlining reimbursable expenses and the necessary documentation. The policy should include the following vital elements:

• Eligible Categories: List specific expense types you'll reimburse (travel, client entertainment, etc.)

• Spending Limits: Set per-meal, per-night, or per-trip maximums

• Required Documentation: Specify receipt requirements and business purpose details

• Submission Deadlines: Set a requirement for expense reports to be submitted within 60-90 days to maintain accountable plan status

• Approval Hierarchy: Define who approves expenses based on amount or type

Step 2: Choose the Right Expense Management Software

The best software for your company depends on your business size and expense volume. Evaluate and streamline workflows across your tech stack and integration capabilities. Look for solutions that enforce your policy automatically through built-in rules and required fields. Here are some essential features for small businesses:

• Mobile Receipt Capture: Employees can take photos of receipts on their phones to submit them

• Policy Enforcement: The software can automatically flag expenses that are out of policy

• Credit Card Integration: The system auto-matches transactions to submitted expenses

• Approval Routing: You can set up multi-level workflows based on the expense amount or expense type

• Report Generation: The software generates export-ready reports for accounting and tax purposes

Step 3: Digitize Receipt Collection and Expense Submissions

Paper receipts are the biggest obstacle to expense automation. Modern expense tools use optical character recognition (OCR) to extract merchant names, dates, and amounts from photographed receipts. They eliminate manual data entry while creating digital backups for tax compliance.

Communicate to employees that they should photograph receipts immediately after purchases. It's also a good idea to submit expenses weekly rather than letting them accumulate. For recurring expenses like monthly software subscriptions, you can set up auto-categorization rules to reduce repetitive tasks.

Step 4: Automate Approval Workflows and Controls

Manual approval chains can slow down the reimbursement process and frustrate employees. With expense management automation, you can set up intelligent routing based on the expense amount, category, policy, or employee level. Build in automatic escalation for expenses that sit unapproved after 48 hours. Here's how this process may look:

Step 5: Integrate Expense Tools With Payroll and Accounting Systems

True expense management automation means expenses flow directly into your payroll and accounting systems without manual re-entry. It avoids data siloes created by standalone expense systems. When you integrate HR tools to link expense data to payroll processing, you ensure reimbursements are processed correctly for tax purposes.

Here are some priorities for integration:

• General Ledger Coding: Expenses automatically post to the correct accounts

• Payroll Processing: You can include reimbursements in regular payroll runs

• Tax Reporting: Proper classification ensures non-taxable treatment

• Audit Trails: You can access complete documentation from one system

Step 6: Set Up Reimbursement Schedules and Payment Methods

To automate expense reimbursements, you need to decide how and when to reimburse your employees. Some businesses issue separate payments. Others add reimbursements to regular payroll and opt for bi-weekly reimbursement cycles. This approach simplifies processing while giving your employees predictable reimbursement timing. If you employ frequent travelers, consider issuing corporate cards with preset spending limits to reduce their out-of-pocket expenses.

How Automation Improves Accuracy and Visibility

Automated expense management can save you time. It also improves accuracy and compliance. Automated systems consistently enforce documentation requirements, thereby reducing the risk of errors and overpayments. Real-time dashboards can help you identify trends and control costs. You can use the data on spending patterns for budgeting and vendor negotiations.

Building a Faster Reimbursement Process with Justworks

Automating expense reimbursements speeds up the process for employees to get reimbursed and cuts down the time you spend managing reports. The key is choosing a software that integrates with your existing payroll and HR systems. Justworks' modern HR platform offers integrations and special offers for expense management solutions, including Brex, Expensify, and Ramp. Get started with Justworks today.