Per Diem vs. Actual Expenses: How Should You Pay Business Travel Costs?
Needless to say, controlling costs and expenses is critical to the success of any middle market business. Because you only want to incur costs that generate profits, reducing business travel is a growing trend. Many companies try virtual means (telephone or video conferences) to interact with clients, but when a business situation is more complex or you're establishing a new relationship, going in person may be the only real option.
When business travel costs are necessary, what can your midsized company do with its limited budget? All companies use one of two methods: a fixed per diem (for example, $100 per day for lodging and $50 for meals) or actual expenses, which has the business traveler provide receipts to report the actual cost and then request reimbursement. There are advantages and disadvantages to both approaches, and one method might be better used for particular costs (such as having a $50 per diem for food and using actual cost for lodging, especially in high-cost destinations) than the other.
Begin by understanding your objectives, client-service expectations and your company's travel necessities. Next, consider the advantages and disadvantages of using per diem to control expenses.
Advantages of Per Diem
- It simply allots employees the per diem amount,reducing the need for the traveler to save purchase receipts. As long as the cost is under the per diem amount, it's approved without the need for documentation.
- It generally facilitates prudence because it compels employees to make appropriate purchases that won't go over the amount. An actual-expenses approach places less pressure on employees.
- It allows more certainty and predictability in travel budgeting.
Disadvantages of Per Diem
- It's sometimes difficult to establish a fair and realistic per diem for different costs in different locations. While a decent lunch in one location might be cheap, that same lunch could be double the cost somewhere else, and the same goes for lodging. This works against the simplicity and predictability of the per diem method.
- It may restrict choices that could benefit your business in special cases. If you send a salesperson to prospect for an important potential client, for example, it might be best for your salesperson to pick up the dinner tab. Such a choice, though, would likely push the salesperson above the per diem.
- It doesn't eliminate the possibility of fraud, and its reduced documentation requirements may actually make it easier.
Using actual expenses for your expense policy is more straightforward, with one notable exception: Because it demands supporting documentation, it may be more time-consuming and labor-intensive in practice. Your employees will need to be organized in maintaining receipts, and it will take longer for your accounting staff to review travel costs. This can lead to discrepancies that take time to investigate and resolve.
It might be best to employ a per diem approach for normal travel situations, using it to cover food and lodging when you have a clear understanding of the destination. When the travel is to a location your people normally don't go or places where costs are higher, you should consider an actual-cost approach.
Many midmarket companies have a per diem for food, incidentals, and typical travel lodging. The key is understanding your own travel needs and the usual costs behind them before implementing one method or the other. What works for one middle market company might not work for yours.
What other ways, outside of expense methodology, can you limit your business travel costs? Let us know what you think by commenting below.
Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+.