Tuesday, July 5, 2011

Flow of Funds: Expense Reimbursement

If you are a manager, odds are you are going to be spending a lot of money out of your own pocket for work-related purposes. After you incur your expenses, your firm reimburses you. That's the standard way most firms work.

I remember talking to one of my former MBA students about his new job. Right after his MBA he was loaded with student debts. The pressure was on to find a job. He was an outstanding candidate and within a few weeks he found a marketing and strategy job that he loved- at a firm that loved (Bombardier). In month two, he was sent on exciting assignments to the UK, Germany, and Mexico. He told me how he incurred large work-related expenses and when he had to extend a stay in London in his 2nd month at the firm, he couldn't pay his hotel bill. He complained that his firm still hadn't paid off his first month's of expenses. I told him, "I've been there". Quite frankly, a lot of people I talk to have been there.

This blog today relates to something that many managers have faced and wondered about. What happens to my expenses? Of course, every firm is different, has different needs, different cultures, different checks and balances, and different processes. I'll compare two "opposite ends of the spectrum" that I've had in my life. The first experience is my entrepreneurial experience. The second involves my work at a university.

As many of my readers know, immediately following my MBA, I started up a company with my best friend. Within days we added a 3rd partner. Via a merger/acquisition a 4th. Decisions were made fast. Decisions with money were made equally as fast. Most of the time we didn't have money to spend which made the decisions that much easier (*entrepreneurs will appreciate that sentence.) But here is a typical way that we operated with expenses:

If I visited clients in Washington, Pittsburgh and Houston one week, the day I'd come back, I'd see my business partner Neil, with expenses prepared. Neil always had a pulse on the company receivables and payables. Assuming our cash flow was ok, Neil would issue me a reimbursement check that he would sign . Then we'd get a 2nd partner signature (any expense over $100 needed two partner signatures- any expense under $100 was petty cash honor system). Reimbursement was on the spot. Sometimes, Neil would say, "Cash flow is tight right now. We're waiting for company X to pay us ... as soon as they pay us, we're good for payroll and your expense will be right after." Sometimes I would have to wait 2 months, which was an eternity especially when you are not taking a salary. All partners understood sacrifice and appreciated the the prioritization of personal expense reimbursements.

Entrepreneurial Example of Expense Reimbursement (click image to enlarge image)


My entrepreneurial experience anchored me on how processes and reimbursements worked and should work. Reimbursements were informal and mostly instantaneous (although sometimes delays were painfully unpredictable). At my firm, each partner had bought into the concept of integrity and frugality in such a way that frivolous spending was not part of the culture. Checks-and-balances beyond that of 2 partner signatures on a check were not necessary. Quite frankly, one signature would have been more than enough. We would all sacrifice personal pleasures if it would help the firm.

When our company grew, we brought in professional talent. We hired the best- from a record breaking salesman from Kellogg's to a superstar EM from McKinsey. Travel rose significantly with our new high-priced talent, and expense reimbursement would occur formally twice a month. Thus began our introduction to formal expense reimbursement processes. As you can imagine, this entrepreneurial experience is opposite to most large organization's formalities.

The Large Organization

When an organization has hundreds of employees who incur work-related expenses, formalities have to be introduced. It is pretty obvious why that is. First, not everyone is honest. The large organization is a lot more impersonal and so personal relationships within the organization matter less. It seems like a lot less of a crime if you cheat a bureaucracy than if you cheat someone you know. Second, some honest folks just might not know the boundaries of work-related spending. Third, the sheer volume of expenses that need to be processed requires order. So, the need for bureaucracy and checks and balances rise.

Here's an example of the "formal end" of the spectrum. To the best of my knowledge this is how the process works for my expense reimbursement for the Study Abroad program that I run at a university. Different color boxes represent different individuals involved in the expense reimbursement process. The grey arrows represent the step-by-step flow of the process. The smaller black arrows represent "send backs" if there are issues with the expense file. (click image to enlarge image)



In the above process, eight different individuals (including the expense bearer) are involved with the 12-step process. Given the amount of individuals reviewing the file, this process can be a very slow (just think if someone is away how reimbursement can be delayed) and costly too. It will never win an award for efficiency. At the same time, its rigor and robustness will catch dishonest expense reporting and will ensure a tightly run balance sheet.

Of course, there are many different processes for firms to do their expense reimbursements. Most organizations want a balance between efficiency and rigor. I submit that laying out a flow chart like I have done above is a good starting point. It can help firms introduce checks and balances to guard against fraud and bad expenses - but also find ways to streamline inefficient, expensive processes.

6 comments:

  1. You've done a service to your university to present that flow of funds diagram.

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  2. That looks a lot more complicated then what I have the visibility to - all I have to do is write up my expenses, get my boss to email his approval to Accounts Payable and I'm magically paid back on my next pay cycle, as long as I do it the week before payday.

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  3. Complicated lynn? It's clear the point that Bob is going after in a diplomatic way: His university needs to streamline. Are you pissed off Bob?

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  4. Like the 2 Flow Charts - it's kind of nice to hear that even in small entrepreneurial environments, the process can be long (but for other reasons).
    How do you simply the 12 step process in a huge organization?

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  5. Wonderful post Bob, this diagram should be shown at least once to any Bcom or MBA student to realize how bureaucratic are some organizations.

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  6. i everyone i am finding some MBA stud stuff something business regarding. I like your post dear. nice blog.
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