How To Manage Out Of Pocket Expenses
Posted 2 years ago by Gidon
When running a business, you’ll likely come across regular small expenses that can be easier to pay for using your own cash rather than via the company account. However, while paying for the items may be quicker this way, logging, tracking and reimbursing these costs can be more time consuming, so it’s essential to have a system in place that means these small expenses don’t become a big hassle.
What are out of pocket expenses?
Out of pocket expenses refer to costs that you pay out of your pocket rather than through the business and are later reimbursed. Common examples include parking charges, taxis, train tickets and work-related supplies. As these costs are usually low, it can be easy to forget about them, resulting in a huge pile of receipts that need to be processed when you do remember. In order to better manage your out of pocket expenses and to ensure your financial records are properly maintained, it’s worth putting a process in place to record, claim and store them.
How to manage out of pocket expenses
The key to this is getting into the habit of recording your expenses as soon as possible after they’re incurred. Using online accounting software can be of benefit here as it means you can submit your expenses from just about anywhere rather than having to wait until you’re back in the office. In addition, it is worth scheduling in a monthly reminder to check that you’ve dealt with all relevant expenses over that period. If you have employees, setting a date by which out of pocket expenses need to be submitted each month is also good practice.
Also, to ensure consistent records, think about how you categorise these costs and keep them the same each time. So, if you classify car park fees as travel the first time you encounter them, keep them in this category going forward. This will make it much easier to monitor your costs and see if there are areas where spending is high and can potentially be scaled back if needed.
If the number of out of pocket expenses incurred by you, or your employees, is becoming too much of an administrative burden, it may be worth opting for company credit cards or even prepaid cards. This means you no longer need to have the cash to hand to pay for expenses and, if you opt for prepaid cards with specific amounts on each month, it can make cash flow projections easier. Of course, credit cards need to paid off each month to avoid interest charges, and their use can be difficult to monitor if you give them to multiple employees, so they may not be suitable for everyone.
How do I record out of pocket expenses in my accounts?
As with all expenses, it’s essential that these are recorded accurately in your accounts. When making out of pocket expenses as a limited company director, enter the expense into your account as you would any other, but note that the money came from you. The payment will then be added to your director’s loan account, showing that you have put the money into your business. The amount can then be withdrawn at any time.
One thing that must be remembered when managing out of pocket expenses is to keep your out of pocket expenses separate in your records from those paid through your business account. This will ensure your accounts are always accurate and what is recorded as in the bank is correct. Should HMRC ever inspect your accounts, it’s crucial that this is the case. Also, be sure to keep your receipts, whether electronic or paper, to support your claim should HMRC request them. If you’re claiming for petrol for business use of your car, a mileage log is also a must, showing the date, destination, mileage and reason for the trip.
And, of course, all expenses out of pocket or otherwise must meet HMRC’s definition of being wholly and exclusively for business purposes to be classed as an allowable expense.
Out of pocket expenses and AccountsPortal
It’s quick and easy to manage out of pocket expenses using AccountsPortal.
When doing this for the first time, you’ll need to create a supplier account for yourself or the relevant staff member. You can do this by clicking Add New Contact in the main Contacts section and inputting the relevant information.
Next, follow these steps each time you want to record an out of pocket expense:
- Create a purchase invoice for each invoice you pay or receipt you collect. This can be done in Purchases > Add New Invoice. Allocate the purchase invoice to the staff member that paid for the out of pocket expense.
- You can then pay yourself or your staff from the business bank account or petty cash to reimburse the total out of pocket expenses incurred.
- Finally, enter the payment and allocate it against the staff Supplier account.
Read our guide on expense management tips for small businesses for more advice on expenses.
Further Reading
Hospitality VAT rate set to rise to 12.5%: How to manage the change in AccountsPortal