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Establishing a petty cash process for convenience

Understand the importance of correctly setting up a petty cash fund and how this lockbox system can provide your company flexibility.

4 min read

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 money to make quick 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.

Why do businesses use petty cash funds?

Businesses mainly set up petty cash funds for convenience. Sometimes you need a quick alternative to use in place of your company’s standard payment process. 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 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 to get one, but you don’t know in advance how much it costs. 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 petty cash.

Taking the proper steps when setting up your petty cash fund helps you protect the cash and ensure it’s used correctly. Learn about petty cash reconciliation procedures.

How to establish a petty cash fund

To set up a petty cash fund, you simply need to withdraw money out of your bank account to keep on hand at the office. Pulling smaller denominations of cash makes it easier to manage your petty cash fund easier to use and manage. It’s a good idea to keep your petty cash in a safe location that you can physically secure with a lock. A lock box works well because you can move it if needed. It’s also an effective plan to keep it in a spot where someone can monitor it at all times for security purposes.

The amount of petty cash should not exceed a few hundred pounds, and it may even be much less 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 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 petty cash reconciliations in the future.

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Internal controls

Petty cash becomes particularly susceptible to theft or misuse because it’s in cash form. That makes internal controls important to ensure it stays safe. It’s a good idea to designate a specific employee as the petty cash custodian. This person safeguards your petty cash, releases money as it’s requested and collects change and receipts after purchases. It’s a good idea to have employees sign, date and explain the reason for the withdrawal any time they request petty cash. Reviewing the petty cash withdrawal log and the expenses being paid for from petty cash helps you spot potential misuse or theft. You should also perform periodic petty cash reconciliations of the fund regardless of whether you need to replenish the fund.

Setting up a petty cash procedures policy

As you set up the physical petty cash fund, it’s also a good idea to create a petty cash policy to oversee how employees spend the funds. Your policy might outline who handles the petty cash, when it’s okay to use it, required information before and after using petty cash and how often it gets counted. This policy also gives you a chance to set guidelines on the allowed dollar amount and frequency of use. Without this information, your petty cash fund is more likely to be misused, unaccounted for and not utilised to its full potential.

Taking the proper steps when setting up your petty cash fund helps you protect the cash and ensure it’s used correctly. QuickBooks can help you track your petty cash and other financial aspects of your business. Keep your books accurate and up to date automatically. Change the way you manage your finances now.

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