An easy way to give your small business some payment flexibility is to set up a petty cash fund. This fund lets you and your employees quickly access funds to make quicker purchases or address minor emergencies. Although a petty cash fund shouldn’t replace your full-scale vendor payment process, it’s an alternative payment method that’s easy to set up and use.
Reasons to Use Petty Cash Fund
A petty cash fund is created for convenience. It should be used in place of your company’s standard payment process when the need arises. You may come across situations where you don’t know the final price of a good but you need to purchase it immediately. In these cases, you can simply take cash out of your petty cash fund, pay for the good now, and account for it later. For example, if you suddenly need to buy a USB flash drive, you can easily run to a local office supply store but you don’t know in advance how much you’ll spend. It also doesn’t make sense to write a vendor a cheque or create vouchers for immaterial items. If you need to spend $5 to take a client out for coffee, it may just be easiest to pay with some petty cash.
How to Set Up a Petty Cash Fund
To set up a petty cash fund, simply draw some money out of your bank account. Pull smaller denominations of cash to put into a secure location. This location should be physically secured with a lock, be easily transportable (like a lockbox), and should not be left unattended. The amount of petty cash should not exceed a few hundred dollars, and it may even be much smaller based on the size of your company and your expected need It’s important to keep this money separate from the rest of your money because you’ll want to track it over time. Make sure to post a journal entry to book the establishment of your petty cash fund so you can perform reconciliations in the future.
You must make sure your petty cash fund is physically secured to guard it against theft and misuse. A specific employee should be designated as the petty cash custodian. This person is responsible for safeguarding your petty cash, releasing money as it’s requested, and collecting change and receipts when the purchase is complete. As your employees request funds, they should be required to sign, date, and explain the reason for the withdrawal. You should frequently review the petty cash withdrawal log as well as the expenses that are being paid for. You should also perform periodic reconciliations of the fund whether or not you need to replenish your petty cash.
Setting Up Use Policy
Setting up the physical petty cash fund should be paired with a policy to oversee how funds are spent. Your policy should outline who should handle the petty cash, when it’s okay to use it, what information is required after it has been used, and how often it gets counted. You should get guidelines on the dollar amount that is allowed and the frequency it can be used. Without this information, your petty cash fund is more likely to be misused, unaccounted for, and not utilized to its full potential. Take the proper steps when setting up your petty cash fund: Protect the fund in a secure location, designate a custodian, and establish a policy to reap all of the benefits it can offer.