Why use cards?
Procurement cards or company credit cards are convenient. Cards are widely accepted. They can be linked to phone payment facilities like Apple Pay and Samsung Pay. Wechat Pay is more used than cash going into the 2020’s in China.
Cards excel in three main areas:
- small purchases such as office incidentals. However, try to arrange regular office supplies such as stationary on regular purchase orders on account
- online subscriptions. Many of these purchases tend to be smaller and regular. Payment for these services often requires using services like Stripe and Paypal that make use of a card
- travel incidentals. Look to exclude major ticket items like airfares and hotels from being charged to the card. These can be arranged through agents that you instruct through purchase orders. It is more practical to use a card for smaller items like meals out of the hotel and taxi/ride share fares. Your policies could exclude any claims for hotel in-room entertainment and the minibar. Hotel laundry services can often be very expensive and not required for shorter trips
Managing your cards
Identify who among your staff travels a lot, needs to make small regular purchases for the office or who can manage small online subscriptions that your business uses. You then need train these people in order to use the cards in line with your company’s policies.
1 Cardholder to collect/retrieve receipts
Card holders need to collect receipts. This means keeping the paper receipt at point of sale. For online transactions, these are often emailed, or can be accessed through supplier web sites. It is important that the card holder follow up these online purchase documents. This is especially true for ongoing monthly or annual subscriptions. Annual subscriptions are easy to forget about. You might consider a dedicated procurement card to be used exclusively for these kind of purchases.
2 Reconciling against bank statements
The card holder should be required to present a monthly report. This is much like an expense report or claim when they use their own private cards. Attached to this report (physically and/or electronically) are the receipts/invoices as supporting documents. You can then reconcile transactions on your card bank statements against these documents.
Staff can use a check list of items to check when processing these reports:
- allowable and disallowable charges
- spending limits
- spending trends
You can act to recover unsupported charges on the card. Company policy can provide for this. Your policy can also include consequences for charging certain types of expenses on the card. If employees know that they have to pay back private expenses then they’ll be more likely to treat the card with care. This will cut down on anything “accidentally” slipping onto the card.
3 Accounting entry
Your accounting system can be used to track the outcomes of your reconciliations.This is done by creating a purchase invoice/bill in your accounting system for each monthly statement.
- The bill payment is the total of the monthly transactions as reported by the bank
- The purchase invoice amount is the total of authorized spend
- Individualize each expenditure as a line item if you require this level of detail. Otherwise use one line for each type of expenditure – using the relevant account code in your system.
- If the transaction total these are different (spend being greater than authorized), your accounting system will track that the invoice is overpaid (a debit invoice). The balance is a receivable to you from the cardholder.
3 Bank controls
Consider putting daily spending limits on a card. Some banks provide this feature.
Do not permit staff to take cash advances. The bank may be able to lock down any cash advance capability on the card.
4 Transaction type policies
Procurement cards are a convenience. They should not be used to bypass purchase orders for ordinary day to day operational expenditures. This includes any stock purchases. They especially should not be used for capital expenditure. You should make these limitations clear to card holders. Your policy will; however, need to provide for purchases where cards cannot be avoided. These include online subscriptions, many online purchases and new suppliers.
Alternatives to cards
Your four main alternatives to procurement cards or company credit cards are:
- Purchase orders: They require advanced knowledge of purchases. This makes them a poor choice for incidentals. These kind of purchases need timeliness, while purchase orders are more “heavyweight”. Purchase orders are ideal for regular purchasing or anything that can be anticipated.
- Employee expense reports/claims: The company has weaker control of staff making spending decisions using private facilities such as their own credit/charge cards. You can read more about expense reports here.
- Petty Cash. This is useful for small intermittent expenses; however, it tends to require significant time and procedures to control only small amounts of cash. You can learn more about managing petty cash here.
- Debit cards. These require cleared funds in a bank account to support any transactions made. Working capital is then tied up. It could be better used elsewhere
Personal guarantees on procurement cards
You are not personally liable for the debts of your business when operated in a company. This sounds great, but also means that your small business is unlikely to be credit worthy. Banks will generally not issue cards to your business due unless they can obtain some security. This security is often personal guarantees by company officers or directors. This is particularly the case when the business has few fixed assets.
This means that you, as a business owner, will be required to sign your guarantee on company cards. This includes cards that your staff use. This may be a financial risk you may not wish to take. Risks include the unauthorized use of cards by staff, eg on private travel expenses, that you personally end up having to pay for.
Procurement cards or company credit cards are very convenient for your staff. They excel when expenditure can’t be anticipated. They avoid the complexity of purchase orders. Procurement card controls are stronger compared with those over employee private cards. You will; however, need to place controls on these cards. This includes expenditure reports, reconciliations of bank statements and clear policies providing what the cards can be used for. Avoid using the cards for large items or capital expenditures. If you have to use a card for these kind of purchases, consider a dedicated card.