Keeping a small amount of cash in your office or at your store makes it much easier for office managers, bookkeepers, and supervisors to cover occasional small purchases or expenses.
But first, what is petty cash exactly? Petty cash is a small amount of money for small expenses. Most people use petty cash for things like buying office supplies, paying for postage, and so on. Petty cash is a common form of imprest system (I.E. financial accounting system), and is a pre-designated amount that’s built into the budget and replenished after a set period of time or when it runs out.
While petty cash is a relatively small amount of money, it can be easily stolen or abused if you don’t handle it right.
So, is it worth having petty cash on hand? Or are you better off finding a different method?
The dos and don’ts of petty cash
As mentioned, petty cash can make things nice and convenient but does carry certain risks. The bad news is that there will always be risks with petty cash. The good news? If you follow some best practices, you can reduce the risks that come with petty cash, and protect yourself and your employees. Here are some dos and don’ts to help you cover your bases.
Do: designate a reasonable dollar amount
Establish a starting dollar balance for the petty cash fund. This should be small enough that employees won’t be tempted to steal it but large enough that you don’t have to replenish it too often. Pick a dollar amount you think will cover small office expenses for a month or so. A petty cash fund between $100 and $500 is sufficient for many small businesses.
Do: specify what it can be spent on
In his article for the Institute of Internal Auditors, bank auditor Umair Danka notes that there’s a significant risk of petty cash being spent on non-business activities. To combat this, make sure your employees understand upfront what petty cash can and can’t be spent on.
Petty cash is often used to make change for customers and pay for small, erratic expenses that pop up. These expenses could be things like office supplies, a small repair, and so on.
Put your petty cash policy in writing and offer some examples of appropriate expenses. For example, petty cash may be used to purchase additional postage, paper towels, coffee, or other basic office supplies. You can also mandate that all petty cash transactions be under a certain dollar amount, like $25.
Do: require employees to account for expenses
Petty cash isn’t usually a significant expense for your business. However, failing to hold employees accountable for petty cash may encourage theft or inappropriate use of company resources.
Require that employees maintain a running petty cash log for every transaction, including receipts. Each entry in the petty cash book should include the date, the amount, and what was purchased with the petty cash. Review your petty cash register before you replenish the petty cash fund.
Furthermore, keep a Microsoft Excel doc or other spreadsheets that tracks who spent what, when it was spent, and the total amount of spending for both the month and year to date. Not only will this help you hold employees accountable, it will also ensure you’re more prepared at tax time.
If you need help getting a petty cash log started, look up some free petty cash log templates to do some of the work for you.
Don’t: give all employees petty cash access
If every employee has access to petty cash, bad or nonexistent record keeping usually results. Instead, designate one employee to be responsible for the petty cash fund. That person, generally known as a petty cash custodian or petty cashier, will determine if an expense is appropriate, hand out the cash to employees who need it, and ensure the expense log is kept up-to-date.
If your company is larger, you may need to have more than one fund custodian. No matter what, ensure anyone with that title and responsibility is trustworthy and loyal to the company.
Ideally, people in this role will be comfortable handling business expenses and have experience with financial statements. Those with prior financial accounting experience are especially great with this, but anyone that’s handled expense accounts should be fine.
Don’t: leave the cash unsupervised
Petty cash is a highly liquid asset, which means that it’s easily stolen. Even if you trust your employees, cash left out on a table or desk could be stolen by an office visitor or a customer. To combat this risk, keep the petty cash in a locked filing cabinet or cash box. Only you and the employee designated to oversee the fund should have the keys.
Don’t: leave petty cash off your books
Petty cash is a small amount of money, but it adds up quickly as it’s replenished. To track the cash, create a petty cash account in the asset section of your chart of accounts. When you’re ready to replenish the fund, record the expenses in your accounting software based on the petty cash expense log. Then, record the replenishment by debiting the petty cash account and crediting the bank account you used to refill the fund.
If you’re running a proper log as mentioned above, you’ll also be able to easily gather up your petty cash vouchers and cross-reference them with your books to ensure things are accurate. This will set you up for success, not a petty cash accounting nightmare.
Don’t: continue replenishing your petty fund without evaluating spending
If you find yourself regularly replenishing your petty fund there could be a larger problem at hand. Every time you replenish your fund, look over the spending log to see where the money’s going. If there are any odd transactions or the numbers don’t add up, you could be looking at theft. In this case, you might want to consider installing a camera or taking away access until you figure out who’s stealing.
If everything adds up and you’re simply burning through petty cash regularly, evaluate your spending and look for areas to cut. For example, if you’re buying tons of office supplies week after week, maybe you should look into bulk ordering the supplies to cut down on spending.
No more problems with petty cash
Properly tracking petty expenses and ensuring you have a healthy, accurate cash balance isn’t so bad when you follow the tips above. If you find you almost never make cash payments, you could also consider opening a business credit card that’s specifically for petty-level expenses, but again, consult with an accountant first to ensure your score won’t take a hit.
Remember: maintain a balance sheet, track all petty cash expenditures, and never think a payment is too small to be tracked. Follow all of these steps, and you can become the petty cash payment master in no time.