One - KPIs and reporting
The first category to think about is based on your own company KPIs and reporting.
Is there any aspect of your expenses spend that needs to be added into reporting for management?
One example would be advertising spend. Online advertising often can only be paid for by credit card and your employees may simply claim them back on expenses.
But if you don’t split advertising expenses from the employees’ mileage and subsistence claims it’s going to look like they spend an awful lot each month! And you’ll struggle to report on your advertising spend too.
Having a category to group costs into, regardless of the nominal code means that you can easily identify things that need to be added into your reports manually.
Two - Directors costs
Directors often have credit cards and some tend to use these as an extension of their own personal card.
They may choose to charge things to their company card that are clearly personal expenses and the business may or may not pay these on behalf of their director.
If the company decides to pay these and doesn’t deduct from their salary then this is just another form of salary and needs to be reported.
HMRC call these ‘disguised payments’ and you’ll need to be able to identify these as payments to a director that need to be reported and tax paid.
Imagine, for instance, that a director accidentally puts fuel in his personal car on the company credit card. The board may take a view that this should be seen as a ‘perk’ of being a director and so agree to pay it on their behalf.
In this case, this is clearly an extra payment that needs to be handled properly.
They will also need to be reported at year-end as part of the ‘Directors Emoluments’ note in the statutory accounts.
For management accounting purposes this will be a business expense and should be charged to the correct nominal code.
However, you’ll still need to be able to identify these and so attaching them to a category of ‘directors personal’ for instance will allow you to highlight the values that need to be correctly analysed out without moving them from their original nominal code.
Handily, it will also identify who the main culprits are!
Three - Using groupings
If you are working in a company that has a convoluted nominal ledger with codes all over the place you may well find it difficult to pick out all the codes that relate to a particular type of expense.
Changing the nominal ledger codes isn’t a task to be taken lightly so using categories to group expenses is a smart move.
Let’s imagine that you want to track the amount of money the company spends on travel.
You have a series of different codes that are all split up across the nominal ledger and reporting on them is time-consuming as you have to make sure you catch every code for your reports.
Instead of changing the nominal ledger, you can simply attach the type of expense to a ‘travel’ category and it won’t matter where they appear in the nominal.
Four - Subsistence
Some types of expenses always cause issues!
When employees spend money on food you will always need to check that it has been treated correctly for VAT and that it is within company policy.
You may have a series of account codes that relate to subsistence related items such as food bought on a work trip or business entertainment and these will need extra care when checking.
We’ve seen companies that have nominal codes for employee breakfasts, one for lunches and one for evening meals!
Adding them to a subsistence category all of their own allows you to look at them separately and make an individual assessment rather than hunting through every expense claim for issues.
Five - Expenses that will be recharged
Many companies reach a recharge agreement with their customers that allows them to invoice for employee expenses that are incurred working on behalf of the client.
There are two ways to deal with this, set up a recharge nominal account which just adds yet another account to what could already be a confusing chart of accounts or you can use a category.
In fact, we’d suggest two; recharges and disbursements.
Recharges are expenses that you are going to charge to the customer because they enabled you to do work on their behalf (in other words you are adding value).
Disbursements are things that you pay for on behalf of the customer that you don’t add any value to. An example here would be where you pay for a software subscription for them.
Using categories allows you to split the VAT treatment correctly (charge VAT on recharges but not on disbursements) and allows you to make sure that you don’t claim back the VAT on disbursements.
Six - Charity donations
Employees and directors will often make donations on their credit card to charities.
This can sometimes take the form of advertising in a periodical or can simply be a cash donation or sponsorship.
Your company may report charity donations in its statutory account notes and so you’ll need to be able to find these easily.
The business may also want to publicise the good work it does for charity and so being able to identify the total amount of donations made, either directly through the nominal or in the expenses system will save you time and hassle.
Use categories to save you time
Using categories in your expenses system is the smart move as it takes away the time-consuming trawls through the nominal to find particular expense types.
A small amount of time spent thinking about how to make your life easier will pay dividends later on especially at month or year-end when you are often under pressure anyway.
We’d suggest analysing the sort of queries you get asked constantly and seeing if categories would make your life easier – you could be surprised!