Read

Employee Expense Reimbursement Management: Types & Policies

Vlad Falin

November 3, 2022

5

Business expense reimbursement is one area of spend management that business owners do not always give its due. And yet, nearly every organization will have to reimburse employees for their expenses at some point.

Part of the problem is that these expenses can vary significantly, from buying office supplies to traveling or even medical costs. If your business deals with many types of expense reimbursements, you might wonder what you need to cover and how you should handle it.

If you’ve had trouble working out your organization's different business expense reimbursements, or you want to learn more about repayments, you’ve come to the right place.

Today, we’ll take a look at the different types of business expense reimbursements and even share some tips to help you streamline your expense reimbursement process.

{{reimburse-employees="/components"}}

What is expense reimbursement?

A business expense reimbursement is simply the act of paying back an employee for expenses incurred while performing a job for your organization.

Technically, almost any type of expense can qualify as a business expense for the purpose of reimbursement, depending on the reimbursement policies of the business. But to give you a clearer idea, here are some common examples of reimbursable expenses:

  • Business travel costs
  • Meals and entertainment
  • Employee education or training
  • Medical expenses
  • Gas expenses for a company-issued or private vehicle
  • Business supplies or tools
  • And other miscellaneous business-related expenses

You could handle these expense reimbursements individually, meaning you review each expense separately, or you could create a policy for employee expense reimbursement. 

{{effortlessly-manage-banner="/components"}}

Do I Need to Have an Expense Reimbursement Policy?

You are not required to have an expense reimbursement policy, and in some cases, reimbursing expenses is not even mandatory to begin with. Though that largely depends on the legal framework of your country.

However, since it is customary in the UAE and the MENA region to reimburse employees for expenses, then it would be wise to create guidelines and policies to help you organize and streamline that process.

Creating a policy for reimbursements helps set the right expectations for employees about what qualifies for repayment and enables you to streamline your expense reimbursement process.

With an expense reimbursement policy, your employees will know precisely what they can be reimbursed for, how to request said reimbursement, and how long it would take to receive the funds.

Whether you have a business reimbursement policy or not, you need to have a clear picture of which expenses your employees might incur for your business and how you would go about reimbursing them.

  • Is the expense tax deductible?
  • Is this a common type of business expense in your industry?
  • Do you have a policy in place for this expense?
  • Are there any types of emergency purchases that an employee might need to make?

Types of expense reimbursements

Traveling and accommodation

One of the most common types of reimbursement requests is for travel expenses. Gas has been a particular pain point for many businesses in the MENA region due to the rising costs of fuel. Other examples of travel expenses include moving to and from an airport or travel terminal, travel tickets, public and private transportation expenses, car rentals, and lodging.

Office supplies and communication

If your organization relies heavily on digital work, you might need to reimburse your employees for supplies like laptops, tablets, software purchases or subscriptions, training materials, and more. 

Also, if your team needs to move around frequently and you need to maintain communication at all times, reimbursing them for their cell phone plans might be necessary. In particular, this applies to teams in sales, marketing, and business development. 

Food and entertainment

Business trips typically cover employee meals as reimbursable expenses. As long as the expenses are incurred in the interest of the business, they’re reimbursable.

Other expenses

Medical expenses, such as health insurance, insurance premiums, and tuition, are another form of employee expense that is often reimbursed by companies. If your business deals with these types of expenses, make sure you have a clear policy for handling them.

8 tips to simplify your expense reimbursements

1. Learn what you need to reimburse

Although the legalities of employee reimbursements vary from country to country, it’s traditionally customary for employers to reimburse their employees for expenses incurred on behalf of the company. 

It is important to note, however, that your employees cannot claim reimbursements for every purchase made, only those that are specifically tied to your business in some form.

While the specific type of expenses you have to reimburse will vary from industry to industry, you should have a general idea of what costs an employee might have to cover out of pocket in the process of working for you.

  • Do they need to travel around in their own vehicle?
  • Do you need them to be communicated at all times?
  • What kind of equipment do they require?
  • Are there any health risks associated with their job?

These types of questions can help you figure out which expenses you will have to deal with. Clear guidelines about what is and isn’t reimbursable will help reduce instances of fraudulent reimbursement requests.

2. Use a spend management platform

With the right expense management software, you would be able to automate and optimize end-to-end workflows throughout your process. 

For instance, with a spend management platform like Pluto, employees can use a mobile app to record expenses as they incur them.

In this way, your employees no longer have to save receipts or wait before entering their expenses. Plus, Pluto can automatically assign reports to the right reviewer, making the review and approval process more efficient.

Not only that, but Pluto can also tag the receipt so the categorization of the expense is much easier and reporting is real-time.

In addition to providing digital copies of relevant documents, Pluto can notify your finance team of approvals and deadlines.

Spend management platform for expense reimbursement
Pluto Spend Management Platform

3. Spend management platforms enhance collaboration

Pluto’s expense management solutions come with an employee portal so that your finance team can collaborate seamlessly with your employees. 

This allows you to save time when you need to discuss any irregularities with their expense reports. Additionally, your employees can use Pluto to check the status of their reimbursement requests.

The finance team can also use Pluto  to manage costs more efficiently due to its analytical capabilities, real-time reporting and instantaneous spend limit settings.   

4. Create a Thorough Expense Reimbursement Policy

When creating your reimbursement policy, you’ll want to make sure that it covers as many angles as possible. 

One way to do so is to invite stakeholders from multiple different departments, such as HR, finance, legal, and procurement, to a brainstorming session, as their knowledge will make it easier to draft the policy.

5. Crafting your reimbursement policy

It’s also critical to consider the following when drafting your expense reimbursement policy:

  • The specific type of expenses that can be reimbursed
  • The process your employees need to follow to submit their expenses, including any proof and supporting documentation
  • Whether any allowances will be given for expenses, and how to manage any excess
  • The specific time an employee has to submit their expense report
  • How the approval process will be handled
  • When and how your employees are reimbursed

6. Promote the adoption of the policy

One way to help employees adopt the policy more quickly is by making it readily available to them. The policy should be emailed to your employees or posted on your internal networks.

Employees should be informed when they will receive their payment from the company. You should set up a transparent and clear process to communicate what can be expected in terms of expense reimbursement. 

7. Be extra clear about deadlines and payments.

Be sure to let them know how they will receive the payment, such as via direct deposit or check, as well as how they will receive recorded confirmation of the payment made (such as a statement on their paycheque). You can complete this step easily with the help of an online payroll solution.

It is important to keep things running smoothly when it comes to paying employees. By processing reimbursements timely and reliably, you can easily prevent frustration caused by late payments. 

Having your employees pay out of their own pockets and not receiving payment back sooner rather than later can cause unnecessary ill feelings toward your company. When you handle reimbursements well, it reflects back on you as a respectable and considerate employer who cares about employees.

8. Make sure your employees follow the deadlines you set

You need to provide employees with deadlines for submitting expense reports, such as one week before their next pay date, so they can be reimbursed and get approval for their claims. 

Make sure the expense reports comply with the policy guidelines by giving yourself enough time to review them. By doing so, you can consult with the employee if there are any discrepancies, missing or incomplete documentation, or expenses that do not fall within the policy.

It’s important to submit expense reports on time since certain business expenses are tax deductible. 

Optimize your expense reimbursement management process

It’s not enough to know what your expenses are and to create a policy for their reimbursement. 

You also need to make sure that your reimbursement process is organized and efficient.

Otherwise, you run the risk of creating bottlenecks if you get slammed by more requests than you can handle. You can avoid this by optimizing the process used to submit reports and their attachments, ensuring all reports are reviewed in a timely manner and processing reimbursements as quickly as possible.

Having put all of this in place, it’s now time for the audit. The importance of audits is particularly important for enterprises and mid-size firms where employees incur large expenses. Auditing your expense reports also helps you identify loopholes in your policy and reduce instances of fraudulent claims.

You can also use audits to analyze your business expenses and identify areas for reduction.

Ensure there is an organized system for expense reimbursement requests

You should ensure that the system your employees need to use to submit their expense reports is easy to use and understand. 

Pluto allows the employee to submit all necessary supporting documentation, such as their receipt, the total amount of the purchase, a description of the goods or services purchased, and the date of the transaction.

Use a corporate card or direct deposits to remove the need for reimbursements

A corporate p card is a great way to prevent employees from paying out-of-pocket for business expenses.

You can track your expenses more efficiently and effectively with corporate cards, which provide spending limits that prevent employees from abusing their privileges.

Consider issuing corporate cards only to your regular travelers, or try direct deposits if you’re concerned about the cost. 

Alternatively, you can also use direct deposits of reimbursement funds to eliminate the reimbursement process. 

Two benefits result from this: One great perk of following either process is that your finance teams will have better visibility into the reimbursement process, making auditing employee expenses easier.

Key Takeaways

  • The best way to deal with business expense reimbursements is to have a rock-solid reimbursement policy in place. This way, you can reimburse employees for their costs on your terms.
  • Another great way to manage your expenses is to make use of a corporate card to eliminate the reimbursement process altogether, though this might not be feasible for all cases.
  • As in many situations, your best option will most likely come in the form of digitization. Using a spend management platform like Pluto, will not only give you much better visibility over your employee spending but also streamline the reimbursement process for you.

Find out how much your business can save with Pluto

Discover your savings with Pluto's Cost Saving Calculator and take control of your expenses. Unlock cost-efficiency now!

Calculate Now

Learn how Pluto is helping Keyper        to eliminate petty cash spending and optimize spend management

Read More

At Pluto Card, our mission is to assist businesses of all scales make well-informed choices. To uphold our standards, we follow editorial guidelines to guarantee that our content consistently aligns with our high-quality benchmarks.

You may also be interested

5
All
Guides
December 1, 2023

Mohammed Ridwan

Purchase Order Automation: Transforming Business Transactions for the Better

The sales team needs a new SaaS product for cold calling, but the approval is due. It has been weeks, and neither the finance nor the legal team has reverted. The sales team keeps following up, and the procurement team is stuck in the loop of approvals, only to spend some more weeks negotiating with the right vendor later.

This is a common scenario in most companies where teams follow a fixed standard operating procedure, and procuring basic items takes months. All this, combined with multiple tools, complicates procurement further. One tool to raise requests, one for approvals, one to manage vendors, and so on. 

In this blog post, we will discuss how to automate purchase orders and simplify the procurement process. Instead of relying on hundreds of procurement automation software, we will look at how you can automate with minimal effort. 

What is Purchase Order Automation?

Purchase order automation is the process of automating and removing all the manual tasks associated with creating purchase orders. 

This is what the traditional procurement process looks like in most companies:

  • Employees fill out forms to raise purchase requests, but have a long wait before they receive a response.
  • The procurement team struggles to manage hundreds of purchase requests and seek approvals from different departments.
  • The finance team is disliked by both employees and the procurement team because they focus on cost-saving and resource optimization.

As a result, there is continuous internal resentment. 

Automating parts of this process lifts the weight off of each of them. Instead of relying on forms and different task management tools, you invest in centralized software to manage requests, set approval workflows, and maintain vendor databases.

How to Automate Purchase Orders

Here is a simple four-step method to automate your purchase orders: 

1. Find the Right Automation Software

We have explored the top procurement automation software previously, which will help you evaluate the alternatives available. To pick the right one, look for the following features: 

  • Ease of use- To simplify adoption and reduce training time
  • Flexible workflows- To adapt to complex organizational hierarchies
  • Integration- To connect and sync with existing accounting systems and ERPs
  • Reporting- To support data-driven decision-making and enhanced transparency
  • Real-time visibility- To track expenses and identify thefts and fraud
  • Scalability- To accommodate increased transactions and users without performance issues

2. Integrate With Your Accounting Software and ERPs

Integrating with your ERP

Connect your existing accounting software and ERPs to procurement automation software to sync vendors and transactions across multiple software platforms. 

As a result, it becomes easier to maintain vendor databases and reconcile accounts. You can streamline purchase orders and eliminate chances of errors. You get real-time visibility into the status of orders, ensuring that relevant stakeholders are informed at every stage.

3. Set Up Policy and Approval Workflow

Setting up policy and approval workflow

Create and enforce guidelines, rules, and approval hierarchies for purchase orders that align with organizational policies. This includes the following steps:

  • Outlining the approval workflow to follow the organizational hierarchy
  • Setting spending limits to control the amounts allocated in a single purchase order
  • Syncing and defining the preferred vendor's list
  • Specifying user permissions, access levels, and actions based on roles within the procurement process
  • Activating alerts for relevant stakeholders about the status of purchase orders, pending approvals, or other critical updates

This step will enhance security, communication, and transparency throughout the procurement workflow.

4. Implement Automation

Finally, once you complete the setup, you will be able to automate the following parts of purchase orders:

a. Approval Workflows

Creating approval workflows

You can set up trigger-based approval workflows without requiring any technical expertise. From approving purchase requests to clearing payments, you can set up a proper hierarchy with all the required stakeholders. 

So whether a purchase demands approval from three managers or three departments, you can accommodate the complexities without any delays.  

b. Vendor Database

Automate vendor list sync

Instead of importing/exporting or manually maintaining vendor data in your procurement software, you can integrate the software into your existing accounting system and ERPs for a convenient two-way sync.

You can also create a list of items for each vendor, making two-way and three-way matching easier. 

c. Receipts

Automate receipt management

Be it from email or WhatsApp, you no longer need to upload receipts and information in your system manually. The software captures the receipts and other key details via OCR, eliminating redundant record-keeping. 

Additionally, you can bulk upload the invoices to add all the information in a centralized platform and sync across accounting systems. This simplifies reconciliation and provides complete visibility into each expense. 

d. Expense Categorization

Automate expense categorization

You no longer need to manually add tax and general ledger (GL) codes to any expense. Based on the key information extracted via OCR, the software categorizes the expenses. Plus, this syncs across platforms, accelerating reconciliation. 

e. Goods Received Note (GRN) Matching

GRN matching

With OCR and receipt information retrieval, two-way and three-way matching becomes easy. The stakeholders can side-by-side compare the purchase order, invoice, and items listed. This significantly reduces the time spent on GRN matching and consolidates all the information on a unified platform. 

f. Audit Trails

Audit trails with Pluto

You get away with the need to maintain thousands of receipts and documents and get all the key information on a unified platform. From purchase requests to stakeholders involved and order status, you get complete visibility into each order. 

This audit trail becomes a blessing during the audit season when you only need 30 seconds to retrieve a specific receipt or document.  

How Automating Purchase Orders Makes Procurement Easier

While automation comes with multiple benefits, one reason to try it out would be gaining control and visibility. 

You go from not knowing what the teams need, where the money is going, which department spends the most, or why these reports don’t make any sense to getting clarity on every aspect of procurement, not just purchase orders. 

Here are five more benefits of automating purchase orders: 

1. Reduce Error and Manual Tasks

You minimize the risk of human errors that come from manual data entry. For instance, a manual typo in the quantity ordered leads to complications and delays. Similarly, a mistake in categorization can cause legal issues. Automation ensures accuracy by eliminating such human errors.

2. Faster Reconciliation

You get real-time data synced across your accounting systems, easing the reconciliation process. The finance team can quickly match records, such as invoices and receipts, without delays and discrepancies. Further, this eases the process of GRN matching, helping you close books much faster with accuracy.

3. Streamlined Approvals

You accelerate the approval process for purchase orders even with complex hierarchies. Instead of waiting for physical signatures or manual confirmations, you get trigger-based approval workflows. As a result, you can set up a proper notification system to send purchase order requests to designated approvers, speeding up the entire approval chain.

4. Compliance Support

You can enhance compliance with organizational policies and regulatory standards. For instance, the system can flag a purchase order exceeding predefined spending limits, ensuring compliance with budget constraints. This helps prevent unauthorized purchases or deviations from established guidelines.

5. Scalable

You can scale procurement easily to meet the evolving needs of the business. As the organization grows, the automated system handles increased transaction volumes without affecting or increasing the manual effort.

Your Search for a Purchase Order Automation Tool Ends Here

Stop looking for different automation tools for each step in your procurement process. You don’t need an individual solution for purchase requests, purchase orders, and processing payments. You can automate it all on a single platform and ensure accuracy and consistency among your accounting systems. 

At Pluto, our main aim is to stop the chaos and make procurement easier for three core stakeholders—spenders (employees), savers (finance teams), and sourcers (procurement teams). We streamline the entire process on a centralized platform and give you more visibility and control at each stage. And whether you want to automate one step or digitize your entire procurement process, Pluto gives you the flexibility to meet your needs. 

Refer to our dedicated post on procurement automation to understand how a single procurement platform can sync with your accounting systems and automate the procurement process on a centralized platform.

5
All
Guides
January 3, 2024

Vlad Falin

Petty Cash Reconciliation: What It is, How to Do It, & Best Practices

The panic sets in when the custodian makes the entries for petty cash expenses and the balance mismatches by, let's say, AED 1500. 

When discrepancies happen, you have two options: mark it as a write off, or spend hours carrying out an investigation. Write offs are generally not accepted in companies and can lead to problems during audit season. The best option is to investigate. 

While the amount is meager, this cashier must scrutinize each voucher and receipt for the next few days to find the loophole. The employee in question will have to review over 100+ documents to spot the discrepancy, disrupting the petty cash operation and causing delays in closing the books.

This post will cover how to reconcile petty cash and optimize the process, so you never have to face this situation. We will look at some best practices to ensure the custodian does not spend weeks accounting for the missing AED 1500.

What is Petty Cash Reconciliation?

Petty cash reconciliation is the process of matching opening and closing balances of petty cash, where the difference must be equal to the total of documented petty cash expenses. 

Either the custodian or someone from the finance department performs this function to ensure the accuracy and completeness of records. It helps identify and rectify discrepancies that may arise due to errors of omission, commission, or principle. 

How Often Should Petty Cash Be Reconciled?

Petty cash reconciliation is generally done once a month if you rely on manual processes for petty cash management. It allows for timely identification of discrepancies, ensures efficient tracking of small expenses, and facilitates prompt resolution. 

However, if you have an expense management platform to record all the petty cash expenses digitally, you reconcile petty cash in real time. Since you directly add all the transactions on the platform, reconciliation becomes easy with the ability to track each cash money movement in an auditable platform. As a result, you identify discrepancies at the earliest and avoid a balance mismatch.

What Are the Steps of Cash Reconciliation?

If you use a digital platform for petty cash management, reconciliation becomes easy as the system highlights any discrepancy in the real time. So, it is as simple as flagging transactions with missing receipts.

petty cash reconciliation

However, if you have a manual petty cash process, here are the petty cash reconciliation steps:

1. Ascertain Fund Balance

Begin by determining the existing balance in the petty cash fund. This involves counting the physical cash on hand and comparing it to the initial amount allocated to the fund.

2. Gather Documentation Proofs

Collect all receipts and documentation related to petty cash expenditures. Ensure each expense is supported by a valid receipt, providing a clear record of how the funds were used.

3. Categorize Total Withdrawals and Spends

Categorize the various expenditures based on their nature (e.g., office supplies, refreshments, etc.). Tally the withdrawals within each category to gain insights into the distribution of expenses.

4. Reconcile Differences

Compare the total of documented expenses with the physical cash on hand. Identify any discrepancies or amounts that are unaccounted for. This step is crucial for ensuring that all expenditures are correctly represented.

5. Record in General Ledger

Record the reconciled petty cash transactions in the general ledger. It formalizes the financial entries and ensures that the petty cash activity is accurately reflected in the organization's overall accounting system.

6. Replenish

If the petty cash fund is running low or depleted, replenish the funds. Submit the reconciled documentation to the finance or accounting department for approval and allocate the necessary funds to restore the petty cash balance.

Challenges of the Manual Petty Cash Reconciliation Process

Here are the top four challenges of the manual petty cash reconciliation process:

1. Risk of Fraud, Waste, and Misuse

With manual reconciliation, it becomes easier for individuals to manipulate or misappropriate funds without proper oversight. The absence of real-time tracking leads to instances of waste or misuse of petty cash, posing a significant challenge to financial integrity.

For instance, an employee might submit duplicate receipts for the same expense, pocketing the reimbursement and leading to financial discrepancies. Duplicate receipts are difficult for custodians to keep track of when there are 1000’s of receipts. 

2. Custodian Chasing for Receipts

In a manual system, the petty cash custodian has to press the employees for the collection of receipts for expenses. It is time-consuming and delays the reconciliation process. It also leads to incomplete and missing documentation.

3. Lack of Internal Control

Manual processes lack the robust internal controls that automated systems offer. This absence of controls makes enforcing consistent adherence to organizational policies challenging and increases the risk of errors or unauthorized use of petty cash.

For example, an employee may submit incomplete or inaccurate receipts for petty cash expenses, leading to inconsistencies. As a result, it becomes difficult to ensure adherence to documentation standards.

4. Missing Cash or Documentation

The manual handling of petty cash poses a threat to losing physical money or documentation. Misplacement of receipts or cash, whether intentional or accidental, leads to hindrances in the reconciliation process and compromises the accuracy of financial records.

For instance, an employee may unintentionally misplace a set of petty cash receipts during an office activity. The missing documentation will create difficulty reconciling expenditures, introducing uncertainty into the financial records.

From these challenges, we understand that while we focus on optimizing the reconciliation process, we must first refine our petty cash management process. 

Instead of focusing on improving the assessment process, we shall first work on the internal procedures of approvals and documentation. It will ensure the completeness and accuracy of records and save custodians from spending weeks matching the balances.

Best Practices for Petty Cash Reconciliation

To avoid mismatches and ensure the accuracy of records, adopt the following best practices:

Maintain Receipts Digitally

Digitally store receipts using an electronic system or expense management platform to ensure a secure and easily accessible record of all transactions. It eliminates the risk of physical receipt loss or damage and facilitates efficient reconciliation.

Stringent Documentation and Regular Review

Ensure clear and detailed receipts for all expenses to enhance accountability. Regularly review these documents for prompt identification of discrepancies. It fosters transparency and helps maintain a true and fair view of the financial statements.

Set Controls

Establish precise petty cash policies and procedures for petty cash management, including predefined spending limits and approval processes. Such controls prevent misuse and ensure that expenditures align with organizational guidelines. You can additionally specify the expense category and vendors for enhanced control.

Securely Store Cash and Documents

Designate a locked and controlled space, like a safe or lockable drawer, for physical cash and accompanying documents in the petty cash system. Limit access to authorized personnel to minimize theft or mishandling risks. Regularly reconcile cash on hand with documented transactions to promptly identify and address any discrepancies, ensuring the overall integrity of the petty cash process.

Maintain a Log

Keep a detailed log or ledger of all petty cash transactions, including dates, amounts, and purposes. It serves as a comprehensive record for reconciliation and provides a historical overview of petty cash usage. A better way would be to maintain a digital log, which will be more accessible and accelerate the reconciliation process as well.

Use of Virtual Cards

Shift to virtual or prepaid cards for the petty cash process. Virtual cards allow for controlled and traceable spending with transactions automatically recorded. This digital approach enhances security and simplifies the reconciliation process. 

However, these virtual cards should not be mistaken for shared corporate cards or employees' personal debit cards, which could be reimbursed later. Such confusion makes the petty cash process more chaotic and takes away the ease of reconciling with digitization. You lose visibility, and the employees wait weeks to get reimbursed.

Digitization Simplifies Petty Cash Reconciliation

Petty cash reconciliation strengthens when the foundation is set right. It means having defined policies and methods. 

An expense management platform further assists the teams to manage effectively by providing real-time visibility. It helps you enforce the policies with advanced control and simplifies the approval and documentation process by providing all the details on a single dashboard, leaving no loopholes for any mistakes. 

Book a demo today! See how you can digitize your petty cash process to save time and ensure that a mismatch, even of an insignificant amount, never haunts your team. 

5
All
Spend Management
November 10, 2022

Leen Shami

Understanding Business Expenses

All companies and businesses will incur business expenses, but how can you know what exactly is considered business expenses? And how will the introduction of UAE corporate taxes affect business expenses and income reports?

What are business expenses?

Business expenses are costs a business incurs to run the business properly. In simpler terms, they're expenses made by the business for the business.

With the UAE introducing corporate tax laws in 2023, it's crucial for businesses to be able to track and categorize their business expenses, as some of them may be tax deductible.

While the IRS may divide business expenses into ordinary and necessary business expenses, the UAE takes a different approach.

Ordinary business expenses are anything that is "common and accepted" to a business, whereas necessary expenses are anything that is "helpful and appropriate" to a business but not essential.

The federal tax authority in the UAE does not take a similar approach and only considers business expenses as tax deductible or not. We will discuss this in a later section.

  • {{time-money="/components"}}

Examples of business expenses

Business expenses include a wide range of expenses, from insurance to office space, to online subscriptions, such as Zoom, Figma, or Adobe.

Let's break it down; if a design agency bills a client AED 120K per year, that doesn't mean they made a profit of 120K. When a business brings in revenue, it must account for the business expenses made to provide its clients with its services. These services include digital software subscriptions, office rent, employee wage, and/or wifi fees.

Here are some examples of the most common business expenses:

  • Advertising and marketing
  • Business travel (fuel, airfare, taxis, etc.)
  • Employee costs (payroll, salaries, insurance, perks, etc.)
  • Employee equipment (such as laptops, monitors, phones, etc.)
  • Legal fees
  • Office space rent & utilities
  • Software subscriptions

While many more expenses are considered business expenses, these are the ones most businesses will incur.

Types of business expenses

When setting up a budgeting plan, business expenses play a vital role in keeping the businesses' financials in check. When preparing a budgeting plan, finance teams typically begin by looking at the three types of business expenses incurred.

These business expenses include:

3 types of business expense; fixed, variable, and periodic

1. Fixed expenses

Fixed costs are costs that do not change; they happen at known intervals, such as month to month.

With predictable costs, budgeting is more straightforward, as these costs are always expected and never come as a surprise.

Examples of fixed expenses include:

  • Rent
  • Employee payroll/salaries
  • Utility bills
  • Insurance

2. Variable expenses

Variable expenses are business expenses that change from month to month. These costs vary depending on a company's production or sales volume; if production or sales increase, variable expenses increase, and if production or sales decrease, variable expenses decrease as well.

Variable expenses are typically a business's largest expense, as some may be unexpected or unaccounted for.

To calculate the variable cost, multiply the quantity of the output by the variable cost per unit of output.

Total variable cost = Total quantity of output X Variable cost per unit of output

Examples of variable expenses include:

  • Shipping expenses
  • Sales commissions
  • Raw materials (used in production)

3. Periodic expenses

Periodic expenses are business expenses that happen infrequently or, sometimes, semi-regularly.

Typically, periodic expenses happen on a quarterly or yearly basis, such as annual car insurance, but can also come as a surprise, such as a company car repair.

Budgeting can be tricky with periodic expenses, especially when expenses are infrequent.

Examples of periodic expenses include:

  • Maintenance & repairs
  • Merger and acquisitions costs
  • Major equipment purchases

Profit and loss statement report

A profit and loss (P&L) statement, also known as an income statement, is commonly used when businesses record business expenses. Through the P&L, businesses can determine their taxable income. This is especially important for UAE businesses with an annual net income above AED 375,000.

The 3 categories of an income statement include the following:

1. Costs of goods sold (COGS)

Costs of goods sold are the costs associated with the production of goods sold by a company. This typically includes direct costs only, such as materials used and labor costs to create the goods sold. Indirect expenses are not calculated regarding COGS; these include sales and marketing.

For a business to determine gross profit, the costs of goods sold must be deducted from its revenue. They also affect how much profit a company makes on its products.

2. Operating costs

For a business to run, operating costs are unavoidable.

Generally speaking, operating costs relate to a business's daily maintenance and administration. These include costs such as COGS, payroll, rent, and overhead costs. However, non-operating costs, such as interest and investments, are excluded from an income statement.

An income statement reflects operating income after operating costs are deducted from revenue.

3. Depreciation

When accounting for depreciation, there are two types to look at:

a. Depreciation expense

A depreciation expense is a loss in value of fixed assets that companies record through depreciation. During the period you use an asset, its value decreases, and the price you originally paid for it is allocated over time.

An example would be a physical asset that loses value over time, such as a car or vehicle.

b. Accumulated depreciation

Accumulated depreciation refers to the accumulated depreciation charge a specific asset has taken as it wears down or becomes obsolete. Accumulated depreciation is shown on the balance sheet, unlike depreciation expenses reported on the income statement.

Personal and business expenses

Knowing the difference between personal and business expenses incurred is vital, especially with the UAE corporate tax law coming up. Business expenses can be used to lower a business's taxable income; however, personal expenses incurred are not considered deductible expenses.

So, what's the difference between personal and business expenses?

Personal expenses

Personal expenses are purchases made for personal reasons and cannot be used as deductible expenses.

If you make a purchase for the business but add in an item for personal use, it is crucial to have two transactions to avoid mishaps coming your way. Having two receipts will help you record and store the receipt so the business expenses can be used as deductible expenses.

Business expenses

If you're making purchases that benefit the business, such as driving more revenue, they can be considered business expenses. When making business expenses, it's essential to keep a record of the purchase by storing the receipts. By doing so, you can use these business expenses to lower your tax liability by deducting the amount from your income.

Tax deductible expenses

We've reviewed personal expenses, the 3 types of business expenses, and what goes into P&L statements. But which of these are considered tax-deductible expenses? In a nutshell, all the above, other than personal expenses. Let's delve deeper into tax-deductible expenses.

Tax deductible expenses are business expenses that help businesses generate revenue. These expenses are deducted from the company's income before applying any taxes.

Examples of tax-deductible expenses:

  • Administration fees
  • Advertising and marketing
  • Bank charges
  • Insurance
  • Legal fees
  • Maintenance and repair
  • Office expenses
  • Office rent
  • Payroll/salaries
  • Supplies
  • Travel and transportation
  • Utilities

Non-deductible tax expenses

Non-deductible tax expenses cannot be deducted from a company's income.

In the UAE, there are 3 main categories for non-deductible tax expenses:

1. Related party payments from the mainland to a Free Zone Person

The related party payments made to a Free Zone Person that is taxed at 0% on receipt of the income will not be deductible for CT purposes. However, if the payment is attributed to a mainland branch of the Free Zone Person, the related party can claim a deduction.

2. Entertainment expenses

Because these types of expenses often also have a non-business or personal element, businesses can deduct up to 50% of the expense incurred to entertain customers, shareholders, suppliers, and other business partners.

3. Other expenses

No deduction will be allowed for certain specific other expenses, such as 

  • Administrative penalties
  • Recoverable VAT
  • Donations paid to an organization that is not an approved charity or public benefit organization.

How to keep track of business expenses

To maintain your business, it's important to track your business expenses. There are several ways to track business expenses; however, you will need to establish a system to account for costs and accurately manage your business.

Here are 6 steps to keep track of your business expenses:

1. Open a business bank account

A business bank account should be completely separate from your personal checking account and must only be used for business expenses/purposes. This will help you manage your business expenses easily and give you eligibility for business credit cards or, even better, Pluto corporate cards.

2. Select an accounting system

If you haven't chosen an accounting system yet, choosing one that's appropriate for your business is vital. Some businesses opt for spreadsheet software, such as Microsoft Excel; however, to simplify the accounting process, we recommend going for accounting software that will automate the process for you.

3. Choose cash or accrual accounting

Choosing cash or accrual accounting typically depends on the size of your business.

Small businesses can use cash accounting and record transactions when they happen, as volumes are small.

For bigger businesses, accrual accounting is essential, as they have high volumes of transactions. With accrual accounting, only the product sold is recorded, rather than payment received for the product. Similarly, an expense is recorded when a bill is received rather than when an invoice is paid.

4. Store receipts

Storing receipts is essential, as they are proof of business expenses made. You can store receipts by scanning them, taking photos, and keeping digital copies.

5. Regularly manage and record expenses

It's important to track spending and categorize them accordingly. Examine every transaction to compare these business expenses to your revenue.

6. Consider subscribing to an expense software

For some businesses, it is worth looking into expense management software to automate the process of tracking, managing, and recording expenses.

Tracking business expenses with Pluto

If you choose to go for an expense management software, it will help you automate the tracking, managing, and recording of expenses. But Pluto's expense management software offers more than just tracking, managing, and recording your business expenses.

Pluto will keep detailed records of all your expenses, reduce your taxable income, and help you if you are audited or need to reconcile accounts.

With Pluto, you'll be able to do the following:

Store receipts

  • Upload your receipt through Whatsapp or the Pluto app as soon as a business expense is made
  • Store all digital receipts on Pluto's software
Upload receipts using Whatsapp

Record business expenses

  • All transactions are recorded on the software automatically when using Pluto corporate cards
  • Petty cash is automated, meaning expenses are recorded on the spot
  • If an expense is made using an employee's personal card, the expense is recorded automatically as soon as they file for a reimbursement

Track business expenses

  • All business expenses made by employees can be tracked through Pluto's dashboard
  • Daily, weekly, or monthly expense reports are available in real-time
Real-time reporting through Pluto

Accounting integrations

  • Pluto integrates with all major accounting platforms

Auto-categorization

  • All expenses recorded are auto-categorized through Pluto's AI technology
  • Pluto categories are synced to your GL codes

Create tax codes

  • Create and activate tax codes that sync with your accounting platform to mark expenses as tax deductible or not
Create and activate tax codes on Pluto's dashboard

Business expense FAQs

More often than not, business expenses have many different rules. Here are the commonly asked questions about business expenses:

How do I categorize expenses?

Most accounting software already has business categories incorporated in the software, so you can use them and amend them as needed.

Pluto's expense management software allows integrations with significant accounting platforms and automatically syncs to your GL codes and chart of accounts.

Do fuel costs count as business expenses?

If the fuel cost was made for business purposes, such as travel for a client meeting, then yes, it is counted as a business expense and can be considered tax deductible.

However, driving to and from work is rarely considered a business expense.

Can business expenses be carried forward?

The UAE corporate tax law details report still hasn't come out yet. We will update this question once the Federal Tax Authority shares more details in the UAE.

Is personal expenses tax deductible?

No. Personal expenses are not tax deductible.

Is my rent deductible if I am self-employed and my home is my office?

In some cases, yes, it is possible if you are self-employed, but only a certain percentage of your rent will be considered a business expense, for example, 25% of your rent.