What Is Petty Cash? How Should My Business Use It?
The world is moving toward a cashless society. And with the rise of fintech—mobile apps, digital wallets, and various electronic payment methods—some economists would argue that it is already here.
As a business owner witnessing this transition to the digital economy, you may rightfully wonder, “Should I still keep a petty cash reserve?”
The answer to that is a resounding yes. Even if cash is no longer the unquestioned king, maintaining a petty cash fund is still incredibly important.
But what is petty cash, why does it matter, and how should you use it for your business?
What Is Petty Cash and Why Does It Matter
Petty cash is a reserve of cash that businesses keep on hand for small, discretionary outlays. The term petty comes from the French word “petite,” which means small.
How it works is simple: a business pulls from the fund occasionally (and then replenishes it later) for last-minute, everyday office expenses that may be too insignificant to be worthy of a check.
Think of it like shoebox money or a rainy day fund that allows you to:
- Pay for small purchases that require cash
- Make change for customers
- Handle employee reimbursements immediately
Want to cover postage? Use petty cash. Need to purchase coffee for a client meeting? Pull from the petty cash reserve. Paying for an employee’s gas when they use their personal vehicle on work-related errands? You know where we are going with this…
While there are several benefits to maintaining a petty cash reserve, three stand out:
- Convenience – Many businesses rightfully have stringent oversight and procedures for employee-made purchases. A petty cash fund allows an employee to secure small funds without a drawn-out approval process.
- Less stringent tracking – One of the advantages of having cold hard cash is that workers can manage it with little to no oversight. They do not have to file a lengthy expense report for a $3 coffee. Instead, they simply log the funds removed and provide a receipt.
- A substitute for corporate cards – Corporate cards typically have much higher cash limits. So, even though there may be restrictions and oversight on card purchases, they are still vulnerable to employees misappropriating the funds or spending too much.
How Should My Business Use Petty Cash?
Petty cash is most commonly used for small, office-related expenditures. Typical examples of petty cash purchases may include stamps, coffees, supplies, snacks, or parking fees.
But how do you specifically incorporate the usage of petty cash into your business?
Follow these steps:
Step #1: Set Aside the Cash Reserve
How much cash do you want to have on hand?
Your first task is to identify and then set your cash reserve limits. Most businesses will opt for a petty cash fund that sits between $100 to $200.
Once you have determined the ideal amount, stow the money in a lock box or locked drawer.
Step #2: Establish a Replenishment Point
At what point will you refresh the fund?
Typically, the ideal replenishment point is 10% of the original amount. So, if you have a $200 petty cash fund, the replenishment point would trigger when you drop beneath $20.
Over time, you can analyze how frequently you reach this line and then adjust the petty cash fund limit accordingly.
Step #3: Nominate a Petty Cash Custodian
Even though it is a small amount, businesses of all sizes must practice robust petty cash management because unaccounted dollars and cents can add up quickly.
Electing a person to take charge of this fund is one essential way you can protect your business. The right manager can help you:
- Prevent theft and fraud
- Ensure that the funds are being used appropriately
- Monitor replenishment point
Step #4: Create a Petty Cash Log
To maintain a chain of accountability, you need to know three pieces of transactional information:
- Who withdrew the money?
- How much was withdrawn?
- When was the withdrawal made?
This is what a petty cash log should answer.
A properly maintained log will document every petty cash transaction, whether an employee pulled cash directly out of the fund or if they used their own money to pay for an item and now seek reimbursement. Aside from the information above, this log can also include transaction details, the cash in and out, the current fund balance, and reimbursement receipts.
Step #5: Perform Reconciliation
Whether you have a million dollars or a hundred, recommended accounting practices remain the same. You must perform reconciliation by comparing the two sets of records (the log and the physical cash reserve) to verify that the books are accurate.
Reconciliation is typically recorded in your business’s general ledger.
Once the process is complete, the available cash amount should always align with the amount recorded in your petty cash log. If that is not the case, you need to determine why.
Step #6: Review Your Petty Cash Use
It is a wise fiscal practice to periodically review your petty cash utilization.
Depending on the business, you may need to increase or decrease the limit. Or, you may burn through your petty cash so quickly and often that it requires setting a higher replenishment point to ensure you do not run out at a vital point in the future.
Control Your Finances with Help from CFO Hub
Petty cash funds allow employees to make small, authorized purchases without the hassle of filing an expense report. This, in turn, reduces bookkeeping tasks, prevents employees from paying out of pocket, and creates internal efficiencies for a company.
If you plan on establishing a petty cash fund, it’s essential to implement the policies detailed above. Taking such precautions can help prevent fraud, theft, and accidental misuse of your company’s funds.
Do you need guidance on petty cash management or other accounting best practices?
At CFO Hub, we offer outsourced financial services. Whether you require the expertise of a single financial expert or wish to outsource your entire accounting department, we can pair you with a person or team built specifically for the unique needs of your business.
Reach out today to learn more about our accounting, month-end close, and back-office support.