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Petty cash is an amount of cash that is kept on hand so that it’s available to employees to make smaller purchases. Usually, it’s not a lot of cash, but just enough for workers to make non-recurring business-related purchases. The goal of having petty cash available is to allow for small purchases quickly. Additionally, it reduces the need to complete all the paperwork to make a purchase order, etc. It’s usually used for items like office supplies.

Petty cash management is a system that is designed to ensure petty cash funds are used appropriately. It is an internal control designed to protect the asset of petty cash. The company is vulnerable to theft without a management system for handling petty cash transactions. It ensures oversight of how petty cash is handled within the company.

It’s not difficult to set up a petty cash management system. Company officials will designate a person who will control petty cash disbursement. They will record who gets cash as well as keep the receipts in order. 

What is Petty Cash Management?

Petty cash management is a system a company puts in place and implements to ensure the petty cash funds are used appropriately. It is basically an internal control designed to protect the asset. A company that doesn’t have a system for managing and handling petty cash is open to theft. 

A well-designed petty cash management system provides oversight of how the monies are handled. This makes it easier for the bookkeeper to properly enter those business expenses. Even though the dollar amounts that pass through petty cash funds are small, they do add up over time. Since they can often be classified as deductions on financial statements, most businesses don’t want to lose them. They need to see where those resources are being put to use. 

What is the Importance of Petty Cash Management?

Keeping track of petty cash using a management system is important, even if you are not dealing with large amounts of money. Petty cash is kept on hand on the premises and used to take care of small expenses. It’s necessary to manage it properly so that the cash doesn’t come out of an employee’s own pocket and to ensure the balance sheets are evenly balanced. 

How to Create a Petty Cash Management System

Listed below are ways to create a petty cash management system.

  1. Make a custodian appointment: Appoint someone who can be trusted with overseeing cash funds. They may be a reliable employee or a supervisor.
  2. Contribute to the account: Determine how much you want in the petty cash account. Add the funds.
  3. Protect funds: Place cash funds in a safe place. They should be locked in a drawer or cabinet with limited access.
  4. Create policies: Determine how your petty cash will be managed. Write the procedures and policies out so they are clear and easy to follow.
  5. Keep track of disbursement: A record should be kept of every disbursement. The custodian is responsible for recording each disbursement.
  6. Request receipts: Receipts are necessary to keep track of how petty cash funds are used. Anyone who receives money from petty cash should be required to provide a receipt.
  7. Boost funds when low: Monitor the funds closely. Add enough money to keep it at the predetermined amount.
  8. Track your spending: All spending should be carefully tracked. This person provides oversight of the custodian.

Managing a petty cash fund is a process that is often referred to as an imprest system. It is a type of financial accounting with the primary characteristic of a fixed amount of money that is reserved for small expenses. As the money is spent, the account is replenished. The replenishment comes from a different account. Creating a petty cash management system includes a number of important steps that need to be performed in a specific order.

1. Make a Custodian appointment

The first step in creating a petty cash management system is to appoint a custodian to oversee it. This person is the main one responsible for managing the petty cash account and cash flow. A designated custodian should have an established rapport and be proven to be reliable. By selecting a custodian, there is accountability which will reduce the chances of fraud or error. It also limits the number of employees with access to the funds.

2. Contribute to the Account

Each business must determine the right amount of petty cash for its funds. The cash for the petty cash fund will be allocated from the company’s checking account. The balance will be replenished as purchases occur by writing a company check. The amount in the petty cash fund should be enough to support the expected activities. This amount can be different depending on the size and needs of the company.

3. Protect the Funds

Once the cash is ready to be placed in the petty cash fund, it needs to be secured. It is usually kept in a lockbox, locked drawer, or file cabinet. The custodian and any other designated individuals are the only ones who can access the funds. 

4. Create Policies

Each company will need to create a set of policies governing how the petty cash funds will be spent. These policies are important for helping to identify which transactions qualify as petty cash expenses. It also helps to establish how to document these types of business expenses.

5. Keep Track of Disbursements

The custodian must keep an accurate track of disbursements. The record allows for the proper reconciliation by accountants. At the end of the reporting period, it will be reconciled as part of preparing financial statements.

6. Request receipts

Along with recording each disbursement, the custodian of the petty cash account must require receipts for each purchase made. The receipts provide information about the vendor or retailer and what was purchased with the cash. These details are essential for itemizing, recording the purchase date, and how much was spent. Another requirement to document transactions includes petty cash vouchers. They contain information such as the purpose of the expenditure, which account it should come from, and who was responsible for making the purchase. 

7. Boost Funds when Low

An active petty cash account will soon run out of funds. They need to be replenished in order to keep money on hand for future purchases. When funds are low, the custodian requests a new check in the amount that would return the petty cash funds to the original balance. Spending and receipts need to be reconciled previous to replenishing funds.

8. Track Your Spending

Each of these steps is important to closely monitor the petty cash fund. There should be regular tallies, verification of vouchers and receipts, and expenditure reconciliations. These ensure the fund remains in compliance with company policies. They also help reduce discrepancies on the balance sheet. These tasks are the responsibility of someone other than the custodian, just as a means for checks and balances.

Although there are several steps to petty cash management, they are all essential to ensure the funds are handled appropriately. When there is a method for handling cash funds, it is less likely that there will be fraud or theft. When there is a discrepancy, keeping good records can help clear up the issue or find the mistake quickly and easily.

What are the Difficulties of Petty Cash Management?

Even though having a petty cash fund provides benefits for a business, there can be some problems with it. A well-planned petty cash management system will help prevent a lot of problems. However, there are just times when difficulties may arise. 

Here are three of the main things that can cause problems. 

  • Absence of attention: A petty cash fund needs plenty of attention to ensure misappropriation of funds does not occur. The custodian should keep good records to prevent this from happening.
  • Dependence on Custodians: Depending on just the custodian can leave room for error. There should be at least two people involved in monitoring the account.
  • Approach Based on Paper: A paper-based approach is okay as long as funds are well-documented. However, errors can still occur.
  1. Absence of Attention

When petty cash is easily accessible, people may tend to spend the funds freely without the proper guidelines or paying attention to details. Failing to pay attention to where the funds are going specifically can lead to all types of problems. When inadequate attention is paid to the details, it can lead to a missing paper trail or even theft or fraud. To ensure that funds are spent in line with the objectives of the company, expenses should be fully documented.

  1. Dependence on Custodians

Assigning a custodian to manage your petty cash fund provides some accountability. However, it also increases some risks. A custodian needs to have already proven that they are trustworthy and competent.  To ensure that there is no misappropriation of the cash in the petty cash fund, records of disbursements should also be kept by another person.

  1. Approach Based on Paper

It is essential to have a solid process in place to document petty cash transactions. The easiest way is using a paper-based approach. However, this approach has numerous limitations. A credit card purchase has immediate documentation, but petty cash expenditures are not documented instantly. Overlooking an entry or making an error when recording an entry can cause problems. Also, there is a chance that an invoice or receipt may become misplaced or overlooked.

There are a few problems that can occur with a petty cash management system. Custodians can make mistakes, especially in paper-based records. These types of mistakes are often harder to find than they are to fix. Make sure your choice of custodian doesn’t have too much on their plate. They need to be able to manage to keep details straight.

How can Petty Cash Management Be Improved?

There are some ways to improve a petty cash management system. In fact, having a system in place can help prevent some pitfalls and challenges. Here are a few of the ways to improve a petty cash management system.

  1. When to Replenish the Account: A company will need to determine how much they want to keep in their petty cash account. They will also need to decide at what level they want petty cash to be replenished. When funds in an account fall to that level or below, it should be replenished. This helps reduce the risk of having too much or too little cash in a petty cash account.
  2. Demand Receipts: Every purchase and expense must be backed up by a receipt. There can be no exceptions if you want to keep good and accurate records. There may be a few instances when a receipt is not available. In these cases, consider using vouchers, so you can create a paper trail.
  3. Count Cash Periodically: The cash on hand needs to be counted often. Then, the cash should be reconciled to the balance on the account. To use a cash count as an effective control, it should be carried out by someone independent of the custodian and their backup. 

Many of the disadvantages of petty cash accounts can be easily taken care of by using stricter measures. Staying on top of petty cash and its management can help prevent theft and loss. Take these steps to improve your petty cash management system.

What are the Advantages of a Petty Cash System?

A petty cash system offers companies of any size some advantages. It makes it easier to handle small purchases without the need for an invoicing process. It is also easier than trying to make sure employees have a corporate card on hand. Although it takes some oversight and recording, it is not as stringent as other options.