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LEARN MOREA 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.
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.
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:
Overall, an expense allocation policy with rules and limits promotes consistency and transparency while adhering to compliance in expense allocation throughout the organization.
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.
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:
Learn more about the IVP Expense Allocation Solution or contact us at sales@ivp.in to set up a live or online demo.
The Expense Allocation System enhances accuracy and efficiency, reduces errors, ensures compliance, and enables in-house teams to process allocations swiftly.
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