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Four Best Practices for Streamlining Expense Allocation Policy

A clear and well-thought-out expense allocation policy is essential for any manager. It helps establish financial control and ensures the expense allocation process is fair and consistent.

Expense allocation policies define the rules, methodologies, and guidelines for distributing and assigning expenses across funds or legal entities, cost centers, departments, or projects. The primary purpose of expense allocation policy is to ensure fairness, transparency, and regulatory compliance in the allocation of expenses to various funds. Expense allocation policy prevents cross-subsidization, in which one fund bears a disproportionate share of expenses. Expense allocation policy also promotes uniform and precise expense allocation across the organization, which in turn helps prevent fraud. Finally, expense allocation policy controls costs by establishing restrictions for certain types of expenses.

While expense allocation is critical, it can also get complicated and time-consuming. Here are four tips for streamlining an expense allocation policy that makes your job hassle free.

  1. Expense Categorization

Categorizing all expenses improves consistency by clearly defining various expense types. It not only helps avoid confusion but also makes expense tracking and reporting easier. Common expense categories include operational (administrative costs, employee salaries, etc.) and T&E (business travel, meals, etc.). Categorized expenses enhance expense allocation policy by providing a clear, structured framework for allocation. Distinct categories make it easier to apply well-defined rules and allocation methodologies without taking the time to consider each expense individually.

  1. Rules and Limits

Rules and limits play a very important role in expense allocation. Rules outline the criteria and methodologies for how to allocate expenses while limits create the threshold for each type of expense. Expense allocation policy acts as an overarching framework for how these rules and limits are applied. Additionally, limits prevent inappropriate allocation.

For proper control over expenses, an expense allocation policy can incorporate two types of limits:

  • Hard limits: Under the hard limit, a strict threshold is set within the expense allocation policy that restricts the allocation of expenses absolutely. Beyond the limit, expenses cannot be allocated without the approval of compliance group members. If the expense is allocated without this approval, it may result in reallocation, which means the management company must bear the cost.
  • Soft limits: Under the soft limit, a flexible threshold is set within the expense allocation policy that allows a degree of discretion when allocating expenses. In other words, expenses can be allocated beyond the set threshold after informing the compliance department. Compliance has the responsibility to establish proper justification for deviating from the recommended threshold. This helps the organization strike a balance between flexibility and control over expense allocation.

Overall, an expense allocation policy with rules and limits promotes consistency and transparency while adhering to compliance in expense allocation throughout the organization.

  1. Accommodating Multiple Scenarios

Expense allocation policy can be customized to accommodate multiple scenarios as per the asset management agreement with investors. For example, consider a scenario where an asset manager oversees a mixed portfolio of equities, bonds, and alternative assets for an investor. The expense allocation policy can seamlessly allocate costs across these asset classes in a way that reflects their varying levels of management complexity and associated expenses. In case of market volatility, the policy might dynamically adjust allocations to ensure the burden of increased analysis and risk management is shared equitably between investor and asset manager. In fact, the policy can be designed to make flexible adjustments based on the investor’s evolving preferences and the asset manager’s evolving capabilities.

  1. Compliance and Audit

Expense allocation policy should comply with regulatory and legal requirements. In other words, it must include guidelines and procedures to follow that eliminate guesswork and ensure compliance. The expense allocation policy should also include monitoring of these practices through internal audits, self-assessment, and periodic reviews to evaluate how well the guidelines are achieving compliance. This helps discover any deviation proactively and ensure prompt resolution, maintaining the integrity and accuracy of the expense allocation process. Overall, expense allocation policy should promote a culture of accountability and responsibility.

How IVP can help optimize expense allocation policy

The IVP Expense Allocation Solution can help you streamline and enhance expense allocation. Specifically, this automated solution helps private equity and hedge funds ensure transparency, efficiency, and regulatory compliance by:

  • Setting dollar limits (hard and soft) for funds or management companies based on expense types or invoice categories
  • Streamlining approvals to ensure alignment with the company’s policies
  • Generating comprehensive invoice audit reports and maintaining an accurate audit trail
  • Enforcing policies that are locked by the admin team and followed for the entire financial year
  • Adapting to handle various scenarios of expense allocation policy
  • Facilitating efficient contract management and secure storage of limited partnership agreement (LPA) contracts, ensuring effective data management
  • Managing vendors and tracking associated agreements, renewals, and expirations

Learn more about the IVP Expense Allocation Solution or contact us at to set up a live or online demo.

Expense Allocation Solution

This expense allocation solution helps asset managers improve accuracy and efficiency, reduce the risk of errors, and guarantee compliance. It ensures that in-house teams can process most allocations swiftly, allowing them to focus more on exception handling. Accounts payable and expense allocations are also tracked by the platform through customizable reports. Additionally, it offers easy-to-set-up invoice approvals and maintains a detailed audit trail for approvals, rejections, and changes.

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