What is petty cash?
Petty cash is a small amount of money kept on the company’s premises for minor expenses, there’s usually no more than a few hundred pounds – unless the company Christmas party is around the corner.
It seems simple enough, but actually cash is often prone to abuse, easy to lose track of, and susceptible to theft.
In modern times, many consider it outdated, with safer and equally convenient alternatives available for small purchases.
Don’t know where you stand? That’s where we come in, we’ve put together this handy blog to help you understand all the challenges, benefits, and best practices when it comes to efficient cash management.
The 3 biggest challenges with petty cash management
1. The cash custodian holds all the power
If your custodian lacks the required accountancy skills or experience, tracking issues may arise
For example, custodians use cash vouchers to record employee expenses, so if your custodian misreads or misplaces these records, cash balances may not align – leading to increased risks of errors or fraud
With a sole custodian handling all your reporting and spending, the lack of a second-level check could result in financial losses for your business.
2. Compliance with your expense policies
Due to the informal nature of cash, spending might become too casual.
If you are not careful, money could be withdrawn without recording expenses or logging receipts.
Without proper documentation, it’s hard to ensure expenses comply with your policies and achieve accurate expense reconciliation.
3. Too much reliance on manual processes
Traditional cash management heavily depends on paperwork, requiring receipts and bills to support expenses.
Manual processes, such as journal entries in general ledgers, are common but susceptible to errors and fraud.
What are the advantages and disadvantages of petty cash?
| Advantages | Disadvantages |
| Convenience: Quick, simple, and an easy way to pay for small, unplanned expenses without the need for reimbursement or out-of-pocket payments. | Security risk: Cash is hard to secure and challenging to track, making it susceptible to fraud, theft, or misuse. |
| Immediately accessible: Handy for impromptu needs like tipping couriers or covering transport for employees working late. | Manual monitoring: Requires ongoing manual effort for maintaining, recording, and reconciling, which can be a burden, especially for small businesses. |
| Handling mundane expenses: Useful for frequent but mundane office expenses such as milk, stamps, or cleaning supplies. | Outdated concept: In an era of cashless transactions with credit cards, debit cards, and electronic payment services, cash is seen as an old-fashioned and outdated concept. |
The top 6 petty cash management best practices in 2024
1. Establish a clear cash policy
To manage cash effectively, start by creating a comprehensive, yet easy to follow policy.
This policy should define the fund’s purpose, identify authorised users, set the maximum cash disbursement, and outline procedures for replenishing the fund.
By having a policy in place, you can ensure consistency and accountability when handling cash.
2. Set a sensible float amount
To maintain good cash flow and avoid having too much unused cash, it’s vital to set the right float amount.
This amount should be determined by looking at past expenses over a specific time. Analyse historical data to figure out the average needed, and update it regularly based on changes in business operations.
3. Implement a system of internal controls
To prevent unauthorised or unwanted access and mitigate the risk of fraud, it is essential to implement a system of internal controls. Some essential control measures include:
- Segregation of duties: Have different people handle cash disbursements and record-keeping to prevent one person from having full control over cash.
- Secure storage: Keep the cash fund in a locked and limited-access box or drawer to prevent theft or misuse by unauthorised individuals.
- Perform regular audits: Perform surprise audits to check cash records, ensuring the actual cash matches the recorded balance. This helps identify discrepancies or fraud early on.
4. Maintain accurate documentation
Maintain transparency and track cash transactions by ensuring accurate documentation. All disbursements should be supported by original receipts or vouchers.
Implement a system where your employees provide a clear description of the purpose, date, and amount of the expense, attaching this documentation to the receipts for future reference.
5. Replenish the petty cash box
Top up the cash box regularly to maintain its effectiveness.
You should also establish a process for submitting reimbursement claims and ensure that all required supporting documents are provided.
6. Provide training and communication
Ensure compliance with petty cash policies by providing proper training and communication.
Educate employees handling cash on accurate record-keeping, guideline adherence, and the consequences of non-compliance.
FAQs
Why is It called petty cash?
“Petty” comes from the French word “petit,” meaning small. In English, it means minor or insignificant. Petty cash is a small amount of money reserved for small purchases, not major expenses.
What is the difference between petty cash and cash?
Cash is money on hand, while petty cash is a predetermined amount set aside for small expenses (where checks or bank transfers may not be suitable)
What are examples of cash?
Cash is usually kept in a drawer, lockbox, or large envelope. Typical expenses covered by cash include:
- Office supplies (pens, erasers, staplers, etc.)
- Catered meals
- Postage
- Parking fees
Why should you have a cash box?
A cash box offers convenience as it provides quick access to cash for small, unplanned business expenses. It’s handy for regular payments and facilitates transactions with non-digital businesses, saving the hassle of frequent trips to the ATM.
What is a cash voucher?
A cash voucher is a small form for documenting payments from a cash fund. It’s called a cash receipt and is available for purchase at office supply stores.
Can I track petty cash in Excel?
Excel has a built-in format for petty cash management, suitable for small funds with few transactions. However, as your business grows, you may need alternative methods for handling cash due to increased volume and reconciliation needs.
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