David Vine looks at how companies tend to forecast annual expenses; points out the error of a pure slash and burn policy; and offers a couple of simple tips to keep control of those purse-strings.

For those finance directors that forecast employee expenses for the coming year by wetting a finger and sticking it in the air, 2008–2009 will prove troublesome. Even those that use the tried and tested method of taking last year's figures and adding a percentage - typically 8-10% depending on inflation - will find it enormously difficult to accurately predict a figure for their organisation's total employee expenses bill.

Complicating an already nebulous calculation is the combination of an economic slow-down in conjunction with rising fuel prices.

Factors influencing calculations

Finance directors in the USA have been quick to slash employee expense budgets at the first signs that the rumoured recession is becoming reality. Stationary supplier, Staples, has announced cut-backs on costs which include a curtailing of employee travel.

Banks, not surprisingly, have been one of the first sectors to take belt-tightening measures by cutting back on expensive meals and taxi rides. The Independent newspaper recently reported that Deutsche Bank has banned its employees from adding adult film channel pay-per-view fees to their hotel expense claims as well as using their expenses to pay for brothels. Far from unheard-of, receipts from strip clubs and for 'escorts' frequently pass through many companies' employee expense payment systems.

Coffee chain, Starbucks has acknowledged some fall-off in growth levels in the UK. Certainly in the majority of UK cities, cafés like Starbucks act as an informal meeting venue for many executives and the slowdown that Starbucks has identified could, in part, be due to a clampdown in unnecessary employee expenses by companies.

As soon as corporate Britain senses a slow-down, employee expense budgets are instinctively cut. Taxi fares, restaurant meals and subsistence purchases are dubbed 'luxuries' rather than considered necessary costs of doing business. Travel budgets: car rentals, mileage, flights, start to shrink and more phone and web-conferencing takes place instead.

But setting next year's employee expense budget isn't as simple as deciding how much to cut back. Sales teams may need to increase the number of prospective clients they take to lunch in order to secure more business. The process may take longer as potential customers take more care with their purchasing decisions and may, therefore, require additional contact meetings.

In order to maintain performance levels, sales executives might have to travel more frequently and further a-field in order to chase new business leads. Executives in the purchasing department might need to visit new, more economical suppliers.

Even if sales teams are less active and more new business meetings are conducted on the business's premises, or by phone, other parts of the company may have an increased expenses requirement as a direct result of the downturn.
Executives in the HR department, for example, may need to venture out of head office to visit other premises in order to deal more effectively with recession-led staff issues - resolving disputes over changes to terms and conditions, cutbacks in hours or changes to shift patterns. Instead of running staff training programmes, HR staff may need to be on hand to liaise with trades unions, or assist with redundancies.

On top of all these considerations is the uncontrollable nature of fuel price rises. Air fares which have been budgeted for might cost up to a third more. A cap set on business car mileage may not result in a reduced mileage cost as prices on the forecourt continue to escalate: not to mention the fact that some employees may be tempted to use their business cars more frequently for family trips and pass the receipts on to the company for re-payment.

Finance directors would be forgiven for thinking that a crystal ball is the most effective tool for establishing an employee expenses budget.

Identifying inefficiencies and creating solutions

Two things stand in the way of accurate employee expense prediction. The first is the lack of an employee expense policy and the second is a policy that isn't enforced.

Realistic limits need to be set for expense categories. In what category hotels and at what nightly rate can directors stay? And managers? In what countries? How much per head should an evening meal cost? When is it, and when is it not acceptable to take a taxi?

If no guidelines are given, then costs can vary enormously: multiplied by X number of expense claiming employees and we're effectively back to sticking a finger in the air.

If employees regularly take taxis because of the location of the office, a regional office or a key supplier, then negotiate a good deal with a reliable firm and ensure that employees know to book with that firm rather than hail a black cab and pay a higher rate.

Regular trips to regular destinations require a deal to be done with a hotel to bring down the average room night cost. If employees spend more than a certain number of nights in hotel rooms, either in the UK or overseas, then contract a travel management company that can put the collective weight of all its clients into negotiating a better rate.

Limits need to be realistic, however, or employees will simply ignore them. Employees and the managers who approve the employee expense claims need to know what can and can't be claimed.

Out-of-policy employee expense claims account for approximately 12% of all expense claims. That figure rises to nearly a quarter of all hotel bill claims and one in six of entertainment claims, yet less than 1% of these claims are rejected for payment by employers. Claims of this nature can vastly distort employee expense predictions.

You can only manage what you control and measure. If there is no system of control and measurement in place, you've got no chance of accurately predicting your employee expenses bill.

With realistic limits in place, that are adhered to, finance directors can take sensible decisions about whether to increase or decrease the hotel room night budget for sales executives, or the per head entertainment budget for prospective clients and plan.

With the correct focus, instead of taking last years employee expenses figure and adding a percentage, they can reduce it.

David Vine is managing director of GlobalExpense, the UK's largest employee expenses service provider. He can be contacted at david.vine@globalexpense.com [1]