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January 22, 2020

The Benefits of Using Petty Cash in your Small Business

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Fora Financial

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There are a few procedures small businesses can follow to ensure they’re managing petty cash expenses correctly. By following these steps, you can take full advantage of this handy asset. 

What Is Petty Cash?

Petty cash, which is kept in a petty cash fund, is a small amount of money you can use to pay for expenses. Having a petty cash account allows you to avoid the inconvenience of writing a check. Petty cash covers costs like small office supply purchases, employee lunches, and postage and delivery fees.  The amount of petty cash you should have depends on your company's size. A typical range for small businesses is between $50 and $300. The fund should include enough money that it doesn’t need to be replenished constantly.  Businesses often track petty cash usage in their general ledger. Per the IRS, you should fill out a petty cash slip or voucher every time you use the fund. Using a petty cash log helps you avoid overspending and abuse. It’s also wise to obtain a receipt for every purchase made with petty cash, no matter how small. While petty cash is convenient, it can become a problem if you’re not keeping track of it and using it for the right reasons. Keep reading to learn about the benefits of petty cash and how to ensure that you’re managing it correctly. 

How to Manage Petty Cash Use

It’s all too easy for petty cash use to spiral out of control if you’re not using it carefully. Failing to track usage can lead to wasted money and more serious consequences, like issues with the IRS.  Luckily, there are some methods for tracking your spending. Following these methods will also ensure you take advantage of the benefits of having this cash on hand.

1. Use a Standard Operating Procedure

One of the best ways to manage petty cash is to have a procedure in place for using it. A Standard Operating Procedure (SOP) ensures that all employees understand what petty cash should and shouldn’t be used for.  Topics you should cover in your SOP include your budget, reconciliation schedule, and security measures. Also, determine when you plan to replenish the fund. You may want to replenish it monthly or when the balance falls below a specific amount.  Determine who has access to the fund and who has the authorization to disburse funds from it. Your SOP should include steps for tracking this authorization, such as having a manager sign off on petty cash vouchers.

2. Set Up Budgets Ahead Of Time

Determine your petty cash budget before you begin using it. Setting a total amount will help you and your employees avoid impulse spending.  To determine an appropriate amount, look at your spending over the previous six months. Consider how often employees made small purchases and what amounts they spent.  Over time, you may find that the set amount was too low. If it is, replenishing the fund happens too often, becoming an inconvenience. Also, you should avoid having too much cash in the fund. The higher the amount, the higher the risk for problems if abuse occurs. 

3. Keep Records and Receipts

Use a petty cash slip or voucher each time you use the fund for a purchase. The voucher should include a description of the payment along with the date and amount. Record the employee's name, the merchant or vendor, and the person who approved the disbursement.  Make sure employees get a receipt for each purchase and attach it to the voucher and hold onto them for when you reconcile the fund. You should keep receipts until tax time, as many petty cash purchases are tax-deductible.  Keep track of ongoing petty cash use in a spreadsheet or accounting software. Many businesses include an account titled Petty Cash in their general ledger. Set Up Budgets Ahead Of Time

4. Maintain Regular Reconciliation Schedules

Regularly reconciling petty cash helps you avoid unauthorized use and inefficiencies. Monthly reconciliation works well for many businesses.  To reconcile petty cash, track the amount you have remaining in the fund. Subtract this amount from the starting balance to determine the withdrawn amount.  Add up the spent amount based on your slips or vouchers. If you haven’t done so already, compare the vouchers to employees’ submitted receipts. There should be a matching receipt for each voucher.  The withdrawn amount and the spent amount should match. If they don’t, you’ll need to do some research to determine the reason. If there are ongoing discrepancies, you may want to begin reconciling more often. 

5. Security, Security, Security

Proper security is crucial when dealing with petty cash. Assign a specific person or people to manage petty cash. A petty cash manager, or custodian, should be the only person who has physical access to the money. When they aren't disbursing money or counting it during reconciliation, keep it in a safe or locked cabinet.  When setting your petty cash budget, keep the amount as low as is practical. That way, if theft or fraud does occur, the impact won’t be as severe. Following your SOP and paying careful attention during reconciliation will help you avoid both fraud and waste.

The Benefits of Petty Cash for Small Business Owners

When appropriately managed, petty cash offers significant benefits. It’s convenient, simple to use, and doesn’t require much oversight. These reasons are why so many businesses of all sizes continue to use it. 

1. More Convenient For Smaller Purchases

Petty cash is a convenient option for small purchases and minor emergencies. Aside from creating an SOP and physically securing the cash, no setup is required.  Cash is more suitable than a check if an employee needs to make a purchase but doesn’t know the amount ahead of time. It’s also more appropriate for situations such as taking a client out for lunch or a cup of coffee.  In addition, employees often prefer petty cash to using their own money and waiting for reimbursement.  Not all merchants take checks, and some don’t take credit cards, especially for small purchases. Cash is the best option for these scenarios. 

2. Simple Alternative to Corporate Cards At Times

Setting up employees with corporate cards can be a hassle. With cash, an employee can’t inadvertently spend more than the approved amount. They may also be less likely to give in to the temptation to use company funds for personal purchases.  Also, you won't have to worry about paying credit card bills on time. Late credit card payments can damage your business’s credit rating, and your personal rating if you’re a sole proprietor. 

3. Less Stringent Tracking and Oversight

It's essential to manage and track petty cash use. That said, using petty cash may require less oversight than other options. Ideally, the custodian assigned to the petty cash fund can manage its day-to-day use with little supervision. Following a standard operating procedure will ensure that the fund runs smoothly.  Workers may find petty cash easier to manage than other options. All they have to do is fill out a voucher when cash is disbursed and submit it with a receipt. They don’t have to complete an expense report, submit it, and wait to be reimbursed.  Less Stringent Tracking and Oversight

Potential Disadvantages of Petty Cash

There are some disadvantages to using petty cash. These concerns are enough to make some small business owners decide not to use it at all. They prefer to use checks or corporate credit or debit cards instead.

1. Inefficient and Outdated

The process of filling out a voucher for each disbursement and reconciling them later can be inefficient. Especially for companies that have many small expenses, the time spent on these tasks adds up.  The petty cash custodian will need to balance managing the fund with their other responsibilities. The person chosen for the role is often not formally trained. These factors can result in inadvertent errors and mismanagement.  By using cash instead of a corporate card, you may miss out on certain benefits. Many business credit cards offer rewards like cash back, signup bonuses, or travel points. 

2. Unrealistic for Larger Expenses

The purpose of petty cash is to cover miscellaneous small expenses. Using it for large purchases defeats its purpose. Larger expenses should follow a formal purchasing process. The money should come from a designated place within your budget. For example, you should allocate money for purchases such as equipment and materials.  Using a check or corporate card for large transactions is safer than using cash.

3. Far More Susceptible To Abuse

With a business credit card, the card issuer usually covers fraudulent charges up to a certain amount. Fraudulent cash use is harder to detect and resolve. If your cash isn’t properly secured, an employee or customer can pocket it when no one is looking.  Employees may be tempted to use cash for purchases that aren’t business-related. This risk is why it’s vital to obtain a receipt for every purchase. Unfortunately, if an employee misplaces a receipt, there’s no credit card bill to confirm where the money was spent.  It’s also possible for a thief to create a fake receipt. Managers should review receipts carefully to ensure they are legitimate. 

Is Petty Cash Right For Your Business?

There are pros and cons to using petty cash. Many small businesses use it, but others consider it inefficient and prefer options such as corporate cards. The key to success with petty cash is to manage it correctly. By doing so, you reduce the risk of overspending and other misuses. Some businesses use prepaid cards to balance the benefits of petty cash with those of corporate cards. If you’re concerned about the potential for theft, for example, prepaid cards are a good option to explore.  Small business owners like you make tough decisions every day about how to manage your finances. For more money tips, sign up for Fora Financial’s newsletter today. [cta-newsletter]