Revamping Expense Management: How Our Client Saved $1.2 Million

Business owners are always looking for ways to be more efficient and cut costs. That’s especially true during the current crisis. Here is a story of how we helped one of our clients reduce their expenses in an unexpected way.

The Background: Uncontrolled Spending at Unicorn Industries

When we onboard a new client, we always look for opportunities to implement internal controls and best practices. During this process for our client — let’s call them Unicorn Industries — the first thing we noticed was that they spent an average of $125,000 per month on their American Express card. Eighteen employees had their own credit card tied to the parent account, which was personally guaranteed by the CEO.

The Problems Encountered

Credit cards certainly provide convenience, but best practices balance this convenience with prudent fiscal controls. Without proper controls, spending quickly got out of hand as Unicorn grew. Management found it difficult to anticipate every potential type of charge. After a purchase was already made, it was not possible to reverse the credit card charge..

In addition to controlling spending, these are some of the problems Unicorn encountered:

No receipts. It was difficult to enforce a requirement to submit receipts for credit card purchases because there was no mechanism for employees to do so easily.

Not auditable. Unicorn learned this the hard way during their financial statement audit. Tracking down receipts for substantiation of expenses was challenging and time consuming.

Accrual based accounting is problematic. Credit card expenses are usually recorded on a cash basis – when the charge hits the statement. In order to create accurate accrual-based financial statements, we had to go back and review all credit card transactions to make adjustments to put them in the correct period.

No approvals. Once a charge is made on a company credit card, it’s too late to review for compliance with the policy and budget.

No review. There was no mechanism in place to review charges on a timely basis.

Difficult cash planning. Expenses paid by credit card are not included in accounts payable. This created a problem with planning for cash flow.

Personal guarantee. The Amex cards were guaranteed by the CEO, who was personally liable for the account.

Risk of tax exposure. The IRS requires companies to have what’s called an “accountable plan.” The plan must require employees to submit substantiation of expenses. The IRS wants to ensure that reimbursements are legitimate business expenses and not an avoidance of employment tax by essentially paying wages under the guise of reimbursed business expenses. If there is no substantiation of expenses under audit, the IRS may determine that all reimbursed expenses are personal and therefore wages included on employees’ W-2s. If that happens, the company will be assessed employment taxes and substantial penalties. This is not a risk worth taking.

The Solution

We worked with Unicorn to come up with a solution that helped them find the balance of convenience and prudent fiscal policies. They were able to control their expenses and are saving $1.2 million on an annual basis.

Here is how we helped them leverage automation and implement best practices:

Personal credit card: The Amex cards were all closed.

Corporate card: We researched credit card options with no personal guarantee. Unicorn opened a corporate Amex card which is now secured by the company. Only the CEO and President have access to this card.

Travel expenses: We researched options for using the corporate card to book travel, including airfare and hotel. Employees now book all travel through a travel agency that uses the company’s policy to obtain the lowest cost options. Employees must request a trip through the agency and travel must be approved by a manager prior to the actual booking. Approved costs are paid by the company’s new corporate Amex card.

New policy/accountable plan: We worked with Unicorn management to draft an expense reimbursement policy for non-travel related expenses. The policy sets parameters for reimbursable expenses such as a per diem for travel meals. Employees must use their own credit cards and submit a report and receipts for reimbursement.

Expense reimbursement software: We presented options for expense reimbursement software applications to automate the process and make it convenient for employees to submit for reimbursement and for management to review and approve expenses. It also helps us to account for expenses in the proper accounting period and to maintain receipts. The client selected Certify (we use both Certify and Expensify for our clients). Employees easily submit receipts by taking a picture with a cellphone app.

Approvals: All expense reports must be approved, and only expenses that are within the parameters are reimbursed.

Bill Pay:  Vendors that were being paid by credit card are now processed through QuickBooks and Bill.com. This gives Unicorn more control over approvals and cash flow.

The Company attributes the drastic reduction in expenses to the new policy parameters, management focus on approvals and employee compliance. Employees are more conservative in charging expenses when they’re spending their own money up front. As our client noted, “The possibility of having an expense denied is a powerful motivation for compliance.”

Here are some examples of credit card charges that were eliminated and contributed to saving the Company $1.2 million per year or 15% of their expenses:

• • • • Personal Amazon Prime memberships (Sorry, but ordering office supplies through a personal Amazon account doesn’t justify reimbursement for the annual membership fee).
      • Software subscriptions no longer needed but on auto-renew, or too many employees with subscriptions. For example, only the VP of sales really needed a subscription for Docusign, not the entire sales team.
      • Liquor store purchases
      • Private car service to the airport
      • Airfare upgrades
      • Excessive cost for airport bars for employees traveling together
      • Employee perks such as buying smoothies for the entire company

Unicorn found that the benefits of implementing controls over credit card purchases and control over spending far outweighs the cost of implementing the software and best practices.

ABOUT JUNA FINANCIAL SOLUTIONS

At Juna, we’re here to help. If you have any questions on how to implement controls or expense reimbursement software, please contact us at info@junafinancial.com.