Advance Payment for Expenses: Best Practices

If you’re working on your company’s expense management policies and processes, you might need to think about advance payments.

This is where employees are issued funds upfront to cover a work-related purchase. But what’s the best way to manage expense advances, if you should even do it at all?

Read on for everything you need to know, including tips and best practices.

We’ll also introduce you to Wise Business expense cards, which offer full control on international employee spending in multiple currencies, and even pay 0.5% cashback on purchases.

💡 Learn more about Wise Business

What is the advance payment of an expense?

Advance expenses are where employees are issued a payment before making a work-related purchase.

In the vast majority of cases, it works the other way round. An employee makes the purchase using their own money, then submits a claim and receipt to the company for reimbursement.

However, it isn’t reasonable or fair to expect employees to make certain payments from their own funds - such as large sums or regular payments. This is where advance payments may be used.

For example, an employee travelling to conferences on behalf of the business will need to book several work-related flights or hotel bookings in a short period. This could amount to thousands of pounds, so it’s not fair to expect the employee to cover this expense themselves.

In this kind of situation, the company may give the employee access to business funds (i.e. through a company debit or credit card) or make an advance payment to cover the cost.

Advance payment vs prepaid expense

The terms ‘advance payment’ and ‘prepaid expense’ are often used interchangeably, but they can be slightly different.

Advance payment may refer to a sum issued to the employee specifically for the purposes of paying a work-related expense.

Prepaid expenses may refer to prepaid company cards, which are loaded with funds so that the employee can make the required purchase without having to use their own money.

Advance payment for expenses - the process

Each company will have their own processes for managing expenses, including advance and prepaid expenses.

But generally speaking, the process will work like this:

1. The employee is given a specific budget for spending within a set time frame, or for a particular project or purpose (i.e. a week-long conference). Research may need to be done into potential costs such as travel, to ensure that this budget is reasonable.
2. An advance payment is issued to the employee - this may be in the form of a direct bank transfer, or a prepaid card loaded with the required funds.
3. The employee incurs the expenses
4. The employee submits an expense report, providing receipts and full documentation for the expenditure.

FAQs - Advance payment of expenses

How do you record expenses paid in advance?

All companies will have their own accounting processes. But it's common practice for expenses to be recorded in the period when the spending occurs, rather than when the employee is issued with the advance payment. This should mean that you can treat advance payments in a similar way to recording standard employee expenses reimbursement.¹

What are examples of advance expenses?

Advance expenses are most commonly used for employees who need to travel a lot for work. For example, for sales representatives travelling all over the world to meet clients or attend conferences.

It wouldn’t be fair or reasonable to expect these employees to cover some of the big ticket travel expenses such as flights and hotels themselves. Company credit cards, prepaid cards or advance payments are usually used as a way to manage these.

Wise Business expense cards: international expenses made easy

If your business operates internationally and your employees are regularly spending time abroad for work, Wise Business expense cards could be the ideal solution.

These contactless international debit cards work for spending and cash withdrawals in 150+ countries worldwide, with no foreign transaction fees or subscription fees.

Whenever someone spends or withdraws cash overseas, the currency is converted at the mid-market exchange rate, with just a small conversion fee to pay.

There’s also 0.5% cashback paid on all eligible spending.

Once you have a Wise Business account, you can order unlimited expense cards for just a one-off fee of £3 a card. You can add employees to your account, with controlled access - and you get full control over spending their limits.

What’s more, it’s easy to integrate Wise with your accounting tools, and your accountant can view team spending for smarter collaboration.

Get started with Wise Business 🚀

After reading this, you should have a better idea of what advance payment of expenses are, and how to manage them. They’re best used only occasionally, or you’ll need to develop an alternative solution for regularly recurring employee expenses.

Sources used:

Sources last checked on date: 18-Sep-2024