What Is Petty Cash and How To Manage It Properly

Alongside business payment cards like debit cards and credit cards, mobile payments, and other modern solutions, businesses still rely on cash for day-to-day expenses.

One of the most popular types of funds used by both small businesses and large corporations is petty cash. 

But what does this term represent, why is it important for businesses, and how can you manage petty cash successfully?

In the following sections, we explain the petty cash meaning, explore its common uses, share how it’s managed, and more.

What Is Petty Cash: The Definition

In essence, petty cash refers to actual cash set aside for small expenses. 

Running a business requires spending money on small things on a daily basis. Whether it’s a birthday card or flowers for an employee’s birthday, travel expenses, or coffee for the team, small purchases are on the radar of both large and small companies. 

Instead of writing checks for every expense, companies can take advantage of petty cash – a fund that’s specifically created for unexpected, emergency, or simply insignificant expenses.

However, not all petty cash is the same. There are several different types of petty cash worth being familiar with:

• General petty cash – A cash fund that’s specifically created and set aside for miscellaneous expenses and small transactions. In most cases, it comes in handy for purchasing things like office supplies, postage stamps, minor employee reimbursements, and others.
  
• Imprest petty cash – A fixed amount of money that is regularly renewed. Popular examples of imprest petty cash are expenses related to business travel or cash prepared to reimburse employees.
  
• Discretionary petty cash – An amount of money specifically set aside to be used at the discretion of a manager or a similar employee at a higher position. This type of petty cash is mostly utilised for spending cash on small goods that are not budgeted for.
  
• Emergency petty cash – Money set aside for urgent and unexpected situations like emergency scenarios. For example, it could be required for a broken machine at work, supplies malfunctions, or others. 

Depending on the size of your business, you could have several petty cash funds. While smaller companies usually have a single petty cash fund under the responsibility of a single petty cashier, bigger corporations can have a petty cash fund for every department. 

Common Uses for Petty Cash

In the previous sections, we briefly covered why companies use petty cash in a broad sense. However, there are a few popular scenarios where petty cash is used. 

These include:

• Birthday cards;
• Office supplies;
• Employee reimbursements;
• Postage or mailing expenses;
• Travel or transportation costs;
• Client or employee meals;
• Meeting expenses;
• Gifts, cards, and others.

Most companies use petty cash vouchers purchased from an office supply store to record how the funds were invested and who spent the money. We’ll dive deeper into the process of recording petty cash in the sections below. 

The Importance of Petty Cash in Business Operations

Having a petty cash system plays a vital role in running undisrupted and smooth business operations. It ensures that employees, managers, and others involved parties can gain access to required funds for small, everyday expenses.

This ultimately provides convenience, helps with cost control, supports day-to-day operations, and guarantees flexibility when it comes to small transactions. Most importantly, petty cash offers access to an emergency fund, meaning that you can cover unexpected costs when you most need the money. 

Best of all, petty cash offers transparency (given accurate record-keeping) and helps prevent wasteful spending.

How To Manage Petty Cash

To manage your petty cash account successfully, there are several things to consider.

These include setting up your fund and procedures, allocating a custodian, recording petty cash transactions, and creating a voucher system. 

Below, we take a deep dive into each one of these points.

Establish a Petty Cash Fund

When creating a petty cash fund, first decide on the amount of money that you want to keep in your petty cash drawer. This can be decided based on the average monthly expenses you make. 

All of your transactions will be recorded as accounting entries. Make sure that the petty cash fund is separate from your main cash register balance. This will help you stay organised and avoid confusion when accounting. 

Set Up Petty Cash Procedures

To be able to adequately use your company’s petty cash fund, you’ll need to put in place specific procedures and petty cash policies.

For starters, you’ll need a list of expenses that you can use your petty cash for. As noted above, these mostly include minor costs like postage-related expenses, office costs, parking, meals, coffees, birthday cards and presents, and more. 

Don’t forget to set a spending limit – a maximum amount that people from your organisation can spend per transaction. 

Designate a Petty Cash Custodian

Next, make sure that you notify your whole team who the cash custodian will be. This individual will be responsible for taking care of the distribution of the funds within your petty cash account.

In addition, this person will also be tasked with keeping the petty cash drawer safe and secure at all times. 

Record Petty Cash Transactions

Whether for accounting records or for personal information, accurate petty cash recording is crucial.

When it comes to recording petty cash, you’ll need to consider three core pillars – petty cash vouchers, petty cash spreadsheets, and general ledger records. 

In terms of petty cash vouchers, make a note of the spent money and how it relates to your business. For example, if you reimburse someone from your team, list their name and, if possible, require receipts from them. 

You can work with a petty cash book or spreadsheet to monitor the petty cash balance within the petty fund. If you notice that the remaining balance is too low, you may need to add more cash to the fund. Don’t forget to note all the costs covered with petty cash and any additional cash added to the account.

Finally, note that petty cash receipts are registered as credits for the petty cash account and as debits for other expense accounts. 

Apart from these recording practices, it’s important to understand that petty cash should be reconciled periodically. In most cases, it’s required to reconcile petty cash once the balance is at a preset level. In that case, the custodian is responsible for requesting additional cash from the cashier. 

The reconciliation process consists of receipt calculations, making sure that all receipts are equal to the disbursed funds. Overall, the aim of this process is to prove that what’s left in the fund balance is the same as the difference between the original balance minus costs receipts and invoices costs. 

Create a Petty Cash Voucher System

To create a petty cash system for vouchers, make sure that each voucher contains essential data, like:

• The transaction date;
• The cash disbursed;
• The purpose of the expense;
• The name of the person who has requested the cash;
• Confirmation by the custodian and the person requesting the cash.

Every time cash is requested, a voucher should be filled out. 

Petty Cash Security Measures

One of the common concerns related to petty cash is security.

To keep the funds available in your petty cash drawer safe, there are a few safety measures that you can implement. For example, appointing a single cashier who is in charge of the funds can increase security. It’s recommended that the selected individual is a trusted member of your team, like an accountant or manager.

In addition, you can further secure the petty cash fund via a lockbox with a key or access code. 

Moreover, setting clear usage limits can prevent employees from taking advantage of the available funds and overspending. 

Petty Cash Policies and Guidelines

When it comes to keeping your funds safe and secure, it’s also vital to implement a petty cash policy system as part of your company’s internal policies. This will help you stay in control, monitor expenses, and avoid misuse.

To achieve this, it’s advisable to put in place a petty cash policy that clearly outlines what types of costs are allowed. As part of your policies, you should also set a maximum amount for the petty cash fund. 

Make sure to require documentation per every transaction and ensure regular reconciliation. 

Accept card payments and grow your business with myPOS Go 2

Learn more

Auditing Petty Cash

Perhaps one of the most important aspects of auditing petty cash is petty cash accounting.

For most businesses, petty cash may seem like an insignificant part of finances. However, misuse or errors can potentially lead to serious discrepancies that can influence your overall financial statements. 

By regularly and accurately auditing petty cash, you can ensure that your finance team has the ability to accurately report petty cash accounting in their financial statements. 

To do so, make sure to:

• Confirm the starting balance; 
• Verify all provided documentation;
• Confirm the accuracy of expense entries (these should be categorised into the correct expense accounts);
• Reconcile the petty fund.

By taking all of these steps, you can rest assured that you’ve audited your finances properly for accounting purposes. 

Technology and Tools for Petty Cash Management

The good news is that there are plenty of petty cash management tools and solutions that companies can rely on. By making use of the available technology, you can eliminate risks of manual errors, achieve time savings, and ensure accuracy throughout every step of the way.

One of the most popular examples of such solutions is Happay – a reliable choice for companies with more than one branch and multiple store locations.

Common Mistakes to Avoid

Although petty cash offers opportunities for companies to efficiently handle small expenses, there are several common mistakes to avoid.

One of them is underestimating the power of documentation. Failing to collect receipts of vouchers for petty cash transactions can make it extremely difficult to track and verify spending.

Another mistake is not replenishing the fund regularly. Waiting too long can mean running out of cash in your drawer, possibly disrupting daily activities and potentially creating confusion around the amounts being spent.

A third mistake to avoid is mixing petty cash with other business funds, like your cash register. This can dramatically complicate accounting entries and make tracking impossible.

Conclusion

Although the use of cash is gradually diminishing as digital payments prevail, it is still used in different parts of the world. As such, being aware of petty cash and all that it can offer for your business is key.

By properly setting up your petty cash system and accurately tracking every expense, you can enjoy peace of mind that your small daily costs are always covered. 

Frequently Asked Questions

How is petty cash different from cash on hand?

While petty cash represents cash prepared for minor expenses, cash on hand can feature the entire amount of a company’s cash and liquid assets, such as bank accounts and funds in cash registers

Why is it called petty cash?

In French, the word petit means “small”. In a similar manner, petty represents something small and insignificant.

How much petty cash is someone allowed to carry?

The permitted amount of petty cash varies based on a company’s internal guidelines. This limit is established according to the scale and regularity of transactions.