what is petty cash and why is it bad for your business 3

Why Petty Cash Is Important to Small Businesses

And for larger expenses — travel, in particular — it’s hopelessly inefficient. Handing employees money rather than a credit card with access to a credit line might seem like a better option – but both solutions are fraught with difficulty. Unfortunately, the more petty cash transactions you have outside the office, the less petty (or insignificant) — and less manageable — it becomes.

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Close monitoring involves regular tallies, verification of receipts, and reconciliation by a separate entity to uphold the segregation of duties and ensure compliance with company policies. The automated accounting system updates the general ledger, if not the accounting team. They note that cash has been taken out of the bank account and added to the petty cash fund, and they also record the petty cash receipts to the correct expense accounts.

This individual is responsible for overseeing disbursements, maintaining records, and ensuring the fund’s security. Because it’s a liquid asset, there is a lack of control over how the money is spent, as employees only need to fill up the petty cash book and produce a receipt as proof of transaction. This loophole in the system makes it easy for employees to misappropriate funds and spend them on personal reasons.

Before you start using petty cash, add a petty cash policy section to your employee policies and procedures manual. Include these items in the policy, and consider how you can reduce the risk of employee or customer theft. If you use the petty cash account to make change for customers, you will need to do a mini-audit at the end of each day. Start with beginning balance, cash in, cash out compared to transactions, and ending cash. With a prepaid business card, you can fund expenses by individual employee function, by customer, by location, or by time of day.

Broader term that refers to all physical cash a business has available at a given time—including petty cash, cash in tills, or undeposited funds. While often used interchangeably, petty cash and cash on hand serve different purposes in accounting. This blog explores what petty cash is, why it matters for your business finances, how to manage it step by step, and real-world examples to guide you. Petty cash is a small amount of money kept on hand to cover minor, day-to-day business expenses. With a PEX Visa® Prepaid Card, you can fund expenses by individual employee function, customer, location, or time of day. Petty cash is a store of money kept in an office to be used on various employee expenditures, typically small items, and logs need to be maintained.

• They make sure it’s used for the right reasons and keep track of how much is spent.
• Its impact on daily transactions, employee morale, and financial integrity cannot be overstated, making it a cornerstone of restricted cash flow management.
• Depending on how your business operates and the specific needs of different teams, you might use different types of petty cash systems.
• In layman’s terms, petty cash is a small amount for impromptu small expenses.

How Do I Set Up A Proper Petty Cash System?

For starters, it eliminates the need for incessant record-keeping and writing checks for small purchases, thus saving valuable time. Petty cash might seem like a minor detail–but it plays a big role in keeping a business running smoothly. It’s essentially a small fund of cash that’s kept for minor expenses.

• These errors manifest as discrepancies between your sales and cash receipts when reconciling the accounts at the end of the month.
• We believe financial help shouldn’t cost you more, which is why our platform stands out as a truly user-friendly option.
• Your accountant will track this as cash flow in the system by designating it to a general ledger account called “petty cash.”
• Producing precise and transparent reports for petty cash transactions poses challenges, particularly in manual accounting systems.
• Anomaly management identifies errors and omissions, enhancing accuracy.
• Errors can disrupt reconciliation, impacting the system’s effectiveness.

Cash on hand

With a petty cash log sheet, you’ll have an itemized list that you can put on your tax return. Even better, you’ll be able to keep track of those little things that can add up so fast. Petty cash is a small amount of money that businesses keep on hand for quick, everyday expenses. These costs might pop up unexpectedly, but they usually don’t require writing a check or even using the company credit card. Most businesses that aren’t large enough to issue company credit cards also still use cash to pay for all the little things they need at the workplace. Petty cash rules entail designating a custodian responsible for fund management, setting a limit for disbursements, requiring receipts for all expenses, and conducting regular reconciliations.

Processing

The utility of petty cash lies in its ability to facilitate immediate transactions without the bureaucratic delays that often accompany formal accounting processes. From office supplies to emergency repairs, petty cash serves as a readily accessible financial resource that empowers employees to address small-scale needs promptly. Every transaction made with petty cash should be documented carefully. This means keeping receipts, recording the amount spent, and noting what the purchase was for. Requiring signatures from employees when they take money from the what is petty cash and why is it bad for your business petty cash fund is another good practice to ensure accountability.

A petty cash fund offers flexibility, ensuring businesses can address minor needs without delays, regardless of the payment method required. Typically stored securely in a cash register or lockbox, petty cash provides businesses with flexibility and ensures that daily operations continue smoothly without unnecessary delays. The petty cash balance is present on the company balance sheet with cash in the bank and cash on hand.

Using a petty cash log or petty cash slips will help capture these expenses so they can be used to offset income for business tax purposes. It streamlines spending, supports cash flow management, contributes to fiscal forecasting, and above all, reinforces good financial governance. The petty cash custodian just needs to remember to log every expense as soon as possible. If they wait too long, they’ll probably forget, which defeats the whole purpose.

This guide will make it clear what petty cash is exactly and walk you through how to properly manage a petty cash fund, from setting up clear guidelines to logging every transaction. General Petty Cash covers miscellaneous expenses like office supplies. Safeguarding petty cash, segregating duties, and monthly reconciliation are crucial controls for effective management. Additionally, it is pivotal in supporting the broader general ledger reconciliation process, contributing to overall financial accuracy and integrity. With controls and transparent transaction documentation, businesses can uphold financial accountability and safeguard their assets efficiently and systematically.

The amount you keep in your petty cash account will depend on the size and nature of your business. Small businesses might keep as little as $50 on hand while a larger company with various outgoings should consider having at least $150. With a solid policy, proper oversight, and the right technology, you can manage petty cash with confidence and control. These small but necessary expenses can add up, and petty cash ensures they’re handled quickly—without disrupting your workflow or involving formal approval processes.

He previously served as the editor-in-chief of a small daily newspaper and worked as a health-care statistician. Williams earned a Bachelor of Journalism degree from the University of Missouri. Petty cash procedures incur costs for secure storage, insurance, and potential losses from theft or accidents. Petty cash enables employees to make decisions for immediate expenditures promptly. That’s why it’s important to automate management which will save you time and increase accuracy. This step ensures accuracy and helps identify any discrepancies early.