Making payments and handling expenses

A man is paying his business invoices and expenses

Making payments is a routine part of running a business, but also a critical activity that you need to get right. A secure process is essential to minimise the risk of falling victim to fraud or error. Using the right payment methods avoids unnecessary costs and inefficiencies.

The way you manage payments can also make a big difference to your relationships with suppliers. Similarly, employees will want to be sure that you have a well-managed and fair system for handling expenses.

Your payments process

Decide who is authorised to make payments for the business, and what limits there are on the payments they can make. For example, many businesses allow routine payments to be made by the bookkeeper, but require additional approval for expenditure over a set amount. You might also want to allow other individuals to make small purchases out of petty cash to avoid creating unnecessary bureaucracy.

Set up a process for onboarding new suppliers, to make sure that you have the correct account details for any payments and agree payment terms.

You should also have a process for authorising individual payments. For example, this might involve:

  • issuing a purchase order to the supplier
  • checking the delivery against the purchase order to confirm that the correct supplies have been received
  • dealing with any unusual situations, such as partial deliveries or deliveries of faulty goods
  • approving the invoice to be paid in accordance with your terms of trade
  • making the payment and recording it in your bookkeeping system

A smaller business might have a less formal system, where any invoices received are checked with whoever made the purchase before being approved for payment.

Similar principles apply for other kinds of payments, such as payroll. Again, you need to be sure that you confirm the right payment amounts and account details for each employee, deal with any complications (such as sick leave) and make the right payment on time.

Online bank payments

Using your bank’s online site or mobile app to make payments is a simple way to make payments at low cost.  Most payments are likely to be within the limits your bank sets for individual transactions and for total daily payments. Typical limits for a small business bank account might be £50,000 for an individual transaction and £100,000 per day.

Using your bank’s online site or mobile app to make payments is a simple way to make payments at low cost.  Most payments are likely to be within the limits your bank sets for individual transactions and for total daily payments. Typical limits for a small business bank account might be £50,000 for an individual transaction and £100,000 per day.

Most bank accounts allow you to make payments like this without any additional charge. The payment is made using the Faster Payments System (FPS), which means that it is normally credited to your supplier’s bank account within two hours. Once you have issued the instruction to make an FPS payment, it cannot be cancelled.

Larger payments may need to go through a different banking process and may carry higher fees. For example, if your business is purchasing a property you might need to ask your bank to transfer the amount using a ‘CHAPS’ payment.  The fee for making a CHAPS payment is typically around £25.

Bulk payments

When making individual online payments would be too labour-intensive, you may find it easier to process payments in batches (sometimes referred to as bulk payments).

For example, you might be able to load each employee’s bank account details into your payroll software. At month end, you create a file containing details of all the salary amounts and which accounts they should be paid to. Similarly, your accounting software might allow you to process a batch of invoices for payment.

If you want to use this sort of payment process, you’ll need to check with your bank to see whether your account offers a bulk payments service and what the details are. Some business bank accounts allow you to create bulk payments within the bank’s own online service, while others allow you to use compatible software to create a file which you then upload.

Payments like these are made using a system called BACS Direct Credit. (BACS is also used to handle direct debit payments, automatically collecting recurring payments from customers.) Although BACS payments can take a few days, you can schedule payments in advance so that they reach your suppliers (or employees) on the agreed date.

Banks typically charge a monthly fee (£10-£50) plus a small charge (up to 50p) for each BACS payment you make. Alternatively, under new ‘open banking’ rules, you can use a third party provider such as Comma to manage bulk payments from your business bank account.

Other payment methods

Other bank payment services you may need to use could include:

  • direct debits – allowing a supplier, such as a utility company, to take regular payments from your account
  • standing orders – instructing your bank to make a regular payment, such as rent
  • using a bank debit or credit card – for example, to make an online purchase or pay expenses
  • cash or cheque payments – though there are generally few advantages to using these unless you have to
  • international payments – paying a supplier in another country, or if you need to cover expenses while overseas

You should ensure you understand how to record and control any payments like these, and are aware of the costs involved. International payments in particular can carry high costs, so it may be worth investigating third party providers if you need to make this sort of payment. Alternatives can include:

  • online, international accounts offering multiple currencies, such as Wise and Revolut
  • travel cards such as Currensea.

Managing expenses

Handling business expenses can be a minefield, so it’s worth deciding how best to approach this.

If you (or your employees) only need to cover relatively limited expenses, the simplest system can be to cover these out of your own pocket. The business can then reimburse the expenses using its normal payment systems. Legitimate business expenses can generally be repaid without any tax or National Insurance being due as long as you keep proper records. There are special rules if you pay employees’ company car fuel costs.

This may not be an adequate solution for larger businesses or where individuals have substantial expenses – for example, during business trips. You may want to issue corporate expense cards to employees who need them, from your main business bank, a travel card provider like Currensea or a specialist expenses solution like Pleo.

Whatever approach you take, make sure employees understand what expenses are allowed and what paperwork (or the online equivalent) they are required to provide. Small business accounting software often includes features to make managing expenses easier, such as automatic receipt capture.

Payment security and fraud prevention

Proper security helps minimise the risk of fraud. Ensure that access to your IT systems is protected, and in particular access to your accounting systems and online banking. Make sure employees understand the importance of logging off from systems when away from their desk, not sharing passwords and so on.

Make sure that you have made the proper checks on employees who will deal with payments and accounts. They will also need training so that they understand proper procedures and how to spot potential problems.  Many bank online payment systems now provide Confirmation of Payee to reduce the risk that you pay the wrong person.

Be aware of high risk situations, such as if you are:

  • asked to change a supplier’s bank account details
  • told to make a payment urgently, even by someone within your own business
  • asked to click on a link in an email

Find guidance on protecting your business from fraud from Action Fraud and advice on common scams from Take Five.

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