Taking economy classes

The quest for post-recession growth is forcing an increasing number of firms to take stock of how they manage their expenses. One of the main subjects that should be scrutinised by finance directors and senior partners is business travel and related expenses.

European companies spend almost £94bn on business travel each year. This is often the third largest expense after salaries and information technology, representing, on average, 4.8 per cent of total costs, with European companies spending the annual equivalent of £1,000 per employee. However, until recently, many companies have failed to manage this spend efficiently, relying on informal systems and missing out on potential savings of up to £4.6bn.

Firms often fail to realise that controlling costs does not mean cutting down on business travel. Whether in the middle of a recession or emerging from one, travel is essential in securing new business and maintaining contracts. Visits to clients are often critical in order to deliver a high-quality service. The challenge is how to balance tightening-up costs with extending the effectiveness of the travel and expenses budget.

While firms can often charge travel costs to the client, they nonetheless will have a proportion of spend that they cannot, and managing these travellers can be difficult. A number of problem areas immediately spring to mind: cash advances for travellers, for example, are a costly practice both in terms of administration and the impact on cash flow; so too is the accountability – or lack of it – among partners; and failure to submit expenses accurately and on time can have a severe effect on profitability.

The most fundamental action companies should take is to institute a formal written travel policy. This should be supported by a range of tools for its efficient implementation, not least of which is the selection of a business travel agency, and, where appropriate, a facility such as a corporate card. It may seem an obvious move, but statistics prove otherwise.

American Express research has shown that while 60 per cent of European companies do have a formal travel policy, a further 35 per cent say they operate only informal guidelines and 5 per cent admit to having none whatsoever. When you recall the £94bn spent yearly by European companies on business travel, the scale of lost opportunities becomes apparent.

A basic checklist for assessing a company's existing business travel and related expense management systems consists of who, why and how much?

Senior partners need to consider what type of policy will best suit their practice and who will be responsible for its implementation. Questions to be asked are: who are your business travellers, where are they going and how much cash do they require? Do you need one or more travel agents to give you sufficient scope and choice? Finally, from a taxation standpoint, what are the Inland Revenue requirements and how can you reclaim VAT on travel expenditure made abroad?

Having instigated a travel policy, it is also essential to ensure employees adhere to the guidelines. The policy needs to be communicated throughout the organisation – to both the traveller and the travel booker. Systems need to be incorporated into the implementation of the policy that allow for constant monitoring and feedback. This is one of the main arguments in favour of employing a specialist business travel agency to handle arrangements, leaving the firm to manage what it is best at.

Business travel agents can no longer be considered merely as flight or hotel bookers. They have become management consultants in travel, providing in-depth industry knowledge and the skills to construct complex itineraries and provide guidance in an increasingly complex marketplace. Modern business travel consultants are also required to be technologically literate and able to employ a variety of travel management and reservation systems.

Through a combination of industry knowledge and buying power, business travel agents are in the strongest position to get the best deals for their clients, while helping corporations ensure that employees stick to corporate travel policy.

One of the most effective systems for controlling employees and regulating their costs when travelling is a corporate card. First, it reduces cash advances. The amount of cash outstanding at any one time in the average company is several thousands of pounds, rising to hundreds of thousands of pounds in large corporations. Yet our research shows that for the average company, the administration cost of issuing a cash advance is £14. This is both expensive and unnecessary – up to 50 per cent of cash advances are returned in full without being used, and the money would be better off in the bank, earning interest.

A corporate card is a more convenient and reliable method of payment for employees but, more importantly, it delivers substantial cost savings. A card can remove the need for central accounting of cash advances and reduce the average cost of a cash advance to £2. Fewer transactions mean less administration costs, more efficient billing and, in some cases, cash advances can be cut by as much as 80 per cent.

Furthermore, direct or central invoicing eliminates the need for a full “accounts payable function”, the cost of which American Express estimates at £8 per invoice. A simple corporate card statement detailing an employee's expenses, which is then approved by a supervisor and settled by the corporate card supplier with the invoicing companies directly, will wipe out this cost altogether.

Tracking expenses through corporate card billing can facilitate the management, budgeting and forecasting of the expenditure of each individual and the firm as a whole.

Corporate card billing statements provide a useful source for monitoring employees' travel spend. Most firms, however, require more sophisticated information gathering, in a format which can be matched to their administrative needs.

Card suppliers can collect and store all the data from a client's travel transactions and collate it into a range of detailed Management Information Systems (MIS).

MIS offer a comprehensive set of tools for monitoring expenditure patterns and identifying opportunities for cost savings. This data is also invaluable in assessing which costs have been incurred for which client.

The MIS reports can also illustrate potential savings against actual expenditure, and this information can be used in negotiations with suppliers to obtain better rates.

VAT reclaim is a prime example of business travel expenditure not being maximised by European companies. It is estimated that eight out of 10 companies are unaware that they are even eligible to claim back substantial amounts of VAT from expenses incurred on overseas trips.

The reclaim process has always been lengthy and bureaucratic, and, in the past, it has been recommended that companies leave it to expert reclaim agencies – but that is changing. VAT data can be included in MIS reports to assist clients tracking in which countries VAT has been paid, and therefore, where it would be most cost-effective to claim.

Business travel is becoming more – not less – important. Ironically, advances in technology, such as video conferencing, will support business travel. It has been shown that, while video conferencing is clearly one way to communicate globally, most executives prefer to close the deal face-to-face.

But by following some of the guidelines in this article, firms will be better prepared to meet the challenges of controlling their business travel, and its related expenses.

The Lawyer and LeisureWeek will be holding a seminar on developments in holiday law on 17 July 1997.

10 steps to better travel

1. Give the responsibility for the management of business travel and related expenses to a senior partner.

2. Develop a suitable travel policy which is tailored to your firm's corporate culture, balancing the need for cost savings along with administrative demands and employee morale. The travel policy should be reviewed regularly.

3. Designate a travel manager to oversee the implementation of a travel policy and the management of travel-related expenses and negotiations with suppliers.

4. Communicate the policy to other partners and employees – in particular, to those who undertake business travel and those responsible for making the travel arrangements. The policy should encourage compliance and indicate a clear benefit to the firm's operating costs.

5. Consolidate all of the firm's travel through a single business travel agency. This will ensure business travellers are offered both the lowest available rates as well as a high level of customer service. The agency should be able to supply management information to track policy compliance and provide a record of spending with suppliers.

6. Select a corporate card programme that meets the firm's expense management and reimbursement needs. Issue cards to all employees who are travelling on business. Gather data on the travel spending patterns of employees through corporate card and travel agency MIS reports. Use this data in supplier negotiations.

7. Eliminate cash advances through use of a corporate charge card. Corporate charge card users benefit from extra travel insurance and access to emergency services.

8. Select suppliers that best fit your firm's travel patterns and negotiate special rates and services. A company must be able to demonstrate that its policy is enforceable and can cover an incremental number of travellers to that supplier in order to earn future discounts or rebates.

9. Examine indirect costs of travel management and search for opportunities to engineer costs out of the process and cut down on

paperwork.

10. Continually monitor and review your policy, procedures and suppliers.