Most companies cover expenses their employees incur while working, such as transport costs for meetings, entertainment expenses with clients, or travel costs for business trips. Companies use two primary methods to handle these expenses: allowances and reimbursements.
The Convenience of Allowances
One approach is through a company allowance.
Allowances are fixed payments given to employees to cover specific work-related expenses, regardless of the actual amount spent. For example, transport allowances can be provided to employees who regularly travel to difficult-to-access locations, meal allowances can be given to employees who frequently have business meetings with clients over meals, and mobile phone allowances can support employees, like sales staff or senior management, who need to be reachable at all times.
Allowances significantly simplify the administrative process. Without employees needing to track and submit detailed receipts, companies can avoid the hassle of verifying and reimbursing exact expenses, which can vary each month. Additionally, companies would know exactly how much their staff will spend on allowances each month, eliminating the need to approve individual claims.
However, there are downsides to providing allowances. Employees might underspend or overspend compared to the fixed amount meant to cover their expenses. For example, a sales staff member with a $500 monthly allowance for entertainment and meals might choose to spend below this amount, knowing that any unused allowance would still be theirs.
Another consideration is that certain allowances, such as for mobile phones, transport, meals, clothing, and overseas expenses, may require CPF (Central Provident Fund) contributions, increasing the overall cost for companies. Employees may also need to pay income tax on these allowances.
Reimbursement: Greater Accuracy for Covering Expenses
Reimbursement offers a fairer and more transparent way to ensure employees are compensated for actual work-related costs. While it provides precision in covering expenses, it also involves more administrative work.
When an employee incurs a work-related expense, such as travel, meals, accommodation, or office supplies, they must keep all related receipts for documentation. These receipts serve as proof of expenditures and must be submitted for reimbursement. The process typically involves receipt collection, preparation of an expense report, submission and approval by the employee’s manager or the finance department, and a thorough review and verification by the finance team to ensure compliance with company policy and accuracy of all expenses. Once approved, the reimbursement is processed, and the employee receives payment.
This method ensures that employees are reimbursed for the exact amount spent, providing fair compensation for work-related costs. However, it requires a clear structure and efficient procedures to manage the submission, approval, and processing of claims.
Companies Should Decide Which Fits Them Better
Both allowances and reimbursements have advantages and challenges. Allowances offer administrative simplicity and predictable budgeting but may not always accurately cover actual expenses.
Conversely, reimbursements ensure precise compensation for work-related costs but involve more administrative effort. Companies must carefully weigh these factors to choose the method that best aligns with their operational needs and ensures employee satisfaction.
Read Also: Why Some Companies Choose To Give Allowance, And Others Pay Reimbursements
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