What are incidental expenses? Take control of your finances

Have you ever wondered why your meticulously planned budget sometimes doesn't quite add up? 

Well, it's not always the large, anticipated expenses that throw you off balance. Often, it is the small, unplanned costs like those extra taxi fares, impromptu team lunches, or minor office repairs that accumulate and create discrepancies. These seemingly insignificant costs, known as incidental expenses, can slip through the cracks and disrupt your financial plans.

You might find it challenging to account for these discretionary expenses because they occur sporadically and often do not come with a paper trail. Unlike your primary expenditures, these costs are unpredictable and tend to appear alongside substantial planned expenses, making them harder to track.

In this blog, we will explore what qualifies as an incidental expense, provide common examples of incidental expenses relevant to businesses in the UAE, outline the challenges they pose and share practical tips on managing these expenses effectively. 

What are incidental expenses?

Incidental expenses, also known as incidentals or miscellaneous costs, are minor expenditures that arise during the course of running a business. These minor costs are not directly associated with your primary business operations and may not be anticipated or included in your budget. 

For instance, businesses with frequent employee travel often face high incidental costs. These costs might include minor expenses for meals, transportation, gratuities, tips for hotel staff or room service availed during business trips.

While business travel expenses are the most common incidental costs, such expenses can arise in various areas of a business as well, and their scale can vary across companies. 

For instance, consider a business that needs to purchase printer ink for office use. For a small business that only prints a few documents a week, this might be a minor and infrequent cost. However, for a larger business that prints hundreds of documents daily, printer ink could become a significant incidental expense.

Common incidental expenses for businesses in the UAE 

Here are some common categories of incidental expenses that you might encounter while operating in the UAE:

• Transportation expenses: These include costs related to travel, such as tolls and parking fees. For instance, if your employees need to travel from Dubai to Ajman for a meeting, they might incur parking fees at the meeting venue. 
• Customer entertainment expenses: When you are entertaining clients or customers, various incidental expenses like taxi fare and tips at the restaurant might arise.
• Communication expenses: Local SIM cards, international calls, and paid Wi-Fi in hotels are essential for the everyday operations of travelling employees. These costs can quickly add up and stress your financials.
• Team management expenses: Team management can involve various incidental expenses such as employee appreciation gifts, birthday celebrations, and team-building activities.
• Ancillary expenses for damaged goods: Businesses dealing with physical goods might incur incidental costs due to damaged inventory. For instance, a grocery retailer might need to write off costs for items that were accidentally damaged during transportation, storage, and handling.
• Repair and maintenance expenses: Office equipment and machinery require regular maintenance and repairs. Incidental costs related to equipment servicing, spare parts, and technician visits can add up to a considerable amount over a period.

Incidental expenses vs. major expenses

Incidental and major expenses are two important expense categories with distinct characteristics that can impact your budget and financial planning in different ways. Here is a comparative analysis of these expense types:

Cost magnitude

• Incidental expenses: These are generally smaller in scale. For example, the cost of a local SIM card for an international employee.
• Major expenses: These are larger and often involve significant resources. For instance, the cost of purchasing a new office computer.

Frequency

• Incidental expenses: Incidental expenses tend to occur more frequently but with less predictability than major expenses. These costs can arise unexpectedly in your everyday operations, making them difficult to forecast and incorporate into the budget.
• Major expenses: Major expenses are typically planned in advance, allowing for better budgeting and allocation of resources.

Impact on budget

• Incidental expenses: While incidental expenses might seem insignificant when considered individually, they can accumulate rapidly and affect your bottom line if not managed effectively.
• Major expenses: These require more strategic planning and allocation of significant resources, often involving approval from higher management or stakeholders.

Tracking and reporting

• Incidental expenses: These expenses often lack formal documentation, making them more challenging to track and report accurately.
• Major expenses: Tracking and reporting major expenses is usually a more structured process. You might have detailed records, approval documentation, and specific reporting requirements for these expenses, making it easier to monitor and justify such costs.

What are the challenges of incidental expense management?

Managing incidental expenses can present several challenges for businesses, particularly those in the UAE region. Such as:

• Risk of fraudulent claims: Incidental expenses, often small and unverified, can create opportunities for fraudulent claims. When employees are not required to provide itemised receipts, there is a higher likelihood of claims being exaggerated or entirely fabricated. For instance, an employee might claim for a taxi fare that was not actually incurred. These small amounts, when accumulated, can lead to significant financial loss.

• Missing receipts or invoices: One of the most common challenges in managing incidental expenses is the difficulty of maintaining proper documentation. It is not uncommon for receipts or invoices for minor purchases to go missing, especially when the expenditure is perceived as insignificant. This lack of documentation can complicate your accounting processes and lead to issues during audits.
• Difficulty in tracking: Tracking incidental expenses can be a challenge, particularly when they occur frequently and involve small amounts. Monitoring numerous small transactions daily can quickly become overwhelming for your finance team, leading to errors and inefficiencies.
• Unplanned expenses: Incidental costs often arise unexpectedly, disrupting both short-term and long-term financial planning. When such expenses are not anticipated, they can strain your budget and necessitate reallocations from another area.
• Issues with budget allocation: Unpredictable incidental expenses can complicate budget allocation, particularly when there is inadequate provision for such costs. These unforeseen expenses can strain your budget, leading to potential overspending or the need to cut back in other areas.
• Incorrect expense reports: Manual reporting of expenses can lead to errors, such as missing out on noting the expenses or entering incorrect amounts. This can lead to incorrect financial reports and poor financial decision-making.
• Claiming input VAT credit: Reclaiming VAT on incidental expenses can be particularly challenging, especially when documentation is incomplete or incorrect. The lack of proper receipts or invoices can hinder your ability to claim input VAT credit, leading to financial losses.

Tips for managing incidental expenses

Here are some actionable tips that can help you streamline the process and keep your incidental expenses in check.

Well-defined expense policy

One of the most important steps you can take is to establish a well-defined expense policy. Establish clear guidelines on what qualifies as an incidental expense, along with the procedures for making claims. When creating your policy, consider including specific limits on spending, mandatory documentation requirements, and clear approval processes. This can help you prevent fraudulent claims and make sure that every expense is correctly accounted for.

Use corporate cards

Assigning corporate cards to employees for all incidental expenses will prove beneficial for your business. Corporate cards offer a clear and traceable record of all transactions to simplify expense tracking and eliminate the process of reimbursements altogether. By using corporate cards, you can also enforce smart spending controls like monthly spending limits and category controls and automate approvals to keep the incidental costs under control.

Automate expense tracking

Consider adopting an advanced expense management software to automate incidental expense monitoring. These solutions can capture business expenses in real time, categorise them correctly, and alert your finance team to any discrepancies or policy violations. This helps reduce the administrative burden and also ensures that all expenses are tracked accurately. Automation can also help you avoid the common pitfalls of manual tracking, such as data entry errors and missed expenses.

Educate and train employees

Educating and training your employees on different aspects of your expense policy is essential for effective management. When employees are well-informed about the guidelines and the importance of compliance, they are more likely to follow the procedures correctly. Regular training sessions can also be a good chance to address any questions, ensuring that everyone understands the policy. This can help you minimise errors and reduce the risk of non-compliant expense claims.

Create a dedicated fund

Establishing a dedicated fund for incidental expenses might be a practical solution for managing these costs effectively. A specific fund can provide you with a clear budget for incidental expenses, making it easier to monitor and control spending. This approach also helps in avoiding disruptions to your main budget, as all incidental costs are managed separately. You can regularly review the fund to make sure that it is in line with your financial goals and adjust it as needed.

Establish processes

Having structured processes for expense reporting and approval can greatly improve the management of incidental expenses. A formal process ensures that all expenses are reviewed and approved before they are recorded, reducing the risk of errors or fraudulent claims. You might find it beneficial to implement a standardised reporting format and set clear timelines for submission and approval. This structured approach can lead to more accurate and timely financial reporting, helping you maintain better control over your expenses.

How can corporate cards streamline your incidental expense management?

Let's understand how corporate cards can help you streamline your incidental expense management.

• Real-time Tracking: With corporate cards, you can monitor transactions as they happen, providing immediate insight into your expenses. This is particularly beneficial for managing incidental expenses, as it allows for close monitoring of spending and timely adjustments as needed. Access to current information helps prevent overspending and ensures expenses stay within budget.
• Expense Categorisation: A significant advantage of corporate cards is the automatic sorting of expenses into predefined categories. This makes it easier to analyse spending patterns and identify areas for cost optimisation. For example, you might discover a large portion of your incidental expenses are spent on specific purchases like travel or office supplies. With this information, you can look for different ways to cut costs or negotiate better terms with suppliers.
• Fraud Prevention: Corporate cards come equipped with robust fraud prevention features that minimise the risk of unauthorised spending. Each transaction leaves a clear, auditable trail, making it hard for incorrect claims to slip through unnoticed. Furthermore, corporate cards often include advanced security features such as category controls, transaction alerts, and the ability to block or freeze cards instantly. These measures help prevent unauthorised transactions and ensure spending aligns with company policies.

• Policy Enforcement: Corporate cards can automate policy enforcement by allowing you to set specific spending limits and restrictions on card usage. For instance, you can set maximum amounts for certain types of expenses or restrict card usage to approved vendors. This ensures employees adhere to the company's expense policies without the need for constant manual oversight.
• Integration with Accounting Systems: Many corporate cards include spend management software that integrates with accounting systems, simplifying expense tracking and reporting. This integration removes the requirement for manual data entry, lowering the chances of errors and ensuring all expenses are accurately recorded. It provides the flexibility to generate detailed reports quickly and draw actionable insights for your expense management processes.

Optimise your incidental expense management with Alaan

At Alaan, we understand the challenges your business faces while handling incidental expenses. To address this, we have designed our corporate cards with smart control features to simplify your expense management processes. You can set limits on categories, merchants, and spending for each card. This ensures adherence to your budget and prevents unauthorised transactions, allowing you to eliminate the employee expense reimbursement process and completely do away with petty cash issues.

Every transaction made with an Alaan corporate card offers up to 2% unlimited cashback. This makes it a cost-effective solution for managing your incidental expenses. We've also prioritised your security needs, with multi-factor authentication and tokenisation ensuring that all account and card details are encrypted.

Alongside the corporate cards, we also offer a mobile app that allows your finance team to track employee spending in real time. They will receive instant notifications on their corporate cards for all transactions made by employees. You can view your card details and freeze and unfreeze your cards, all within the app. 

One of the standout features of our app is the receipt scanning feature, powered by OCR technology. Your employees simply need to scan the receipt for an incidental expense, and our AI-powered mobile app will identify and extract all necessary information, including the TRN number, VAT amount, and merchant details.

This information is then shared with our spend management software, which integrates seamlessly with accounting solutions like Xero and Intuit Quickbooks. This allows you to track all your spending, ensure accurate VAT calculation, and comply with Federal Tax Authority (FTA) regulations.

To learn more about how Alaan can optimise your incidental expense management, get in touch with our experts today.

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