What is Petty Cash Management: A Process Guide - Happay (2024)

Petty cash management

The branch of a major electronic store is experiencing another crazy day of business. The branch head tea and snacks for all the hardworking employees. Cash is handed over to one of the employees. Everyone enjoys a brief break, and it’s back to work soon after.

In all this activity, snacks are recorded as a petty cash transaction, but the tea missed making it to the general ledger as there is no receipt. At the end of the month, the missing entry causes distress as the cash balance does not match the receipts!

After hours of brain-racking, the “small” amount of money is finally written off!

Petty cash may be small amounts of money, but it has the potential to cause enough hassles for you and your finance teams. Let us shed light on the subject as we deconstruct the subject for you.

What is petty cash management?

Petty cash is small amounts of cash that branches or departments reserve for incidental or minor expenses. Petty cash or a petty cash management system is based on the imprest system.

You credit the petty cash fund with an initial starting amount. The branches can then use the fund to pay for incidental expenses. You can replenish the fund when it reaches a pre-set limit.

Generally, most branches and departments maintaining a petty cash fund will set it up in a locked box. A petty cash custodian is responsible for opening, maintaining, and recording petty cash.

Petty cash management helps businesses properly maintain these funds. It ensures that petty cash disbursem*nts are accounted for correctly. Petty cash items may be small, but they can eventually add to a larger one.

Just like other business expenses, you can record petty cash expenses in the regular books of the business. Further, you can reconcile petty cash funds periodically against entries posted in the accounting books.

Precise accounting and tracking the petty cash serve as an internal control to manage and protect the petty cash. Whether it is manual bookkeeping or an automated system, most companies have a unique process of managing their petty cash.

Also, Read: What are Capital Expenses?

Petty cash meaning

Petty cash is often referred to as cash on hand. The term is derived from “petite or small,” and offices, branches, or departments maintain them for several reasons.

• If it is a place of business that sees the presence of customers, then petty cash helps to make change for cash they may pay for products or services offered.
• Reimbursem*nt of expenses when employees spend on behalf of the business
• Some small purchases require cash, and you may use petty cash for such expenses.

A small amount of cash, known as petty cash, is set aside for incidental or minor expenses. Generally, these expenses are small, non-recurring, and may be too small to write a check or swipe a credit card.

Almost all small businesses tend to have petty cash funds. However, large companies and corporations with offices in several locations will have petty cash for each location or department.

Examples of petty cash

There are no pre-defined rules about expenses that would fall into this category. However, the definition of petty cash indicates that you may use the money for incidental expenses. Therefore, small amounts of money used in day-to-day business on behalf of the organization will qualify.

For instance, you may use petty cash for the following expenses

• Branches of the company may have petty cash to purchase office supplies.
• Small costs that employees of the unit may incur for the business- cards/flowers for customers, expenditures on behalf of the customers, etc.
• Branches may cater meals for a small group of employees on occasion.
• A branch employee may travel to deliver a product/service. You may reimburse such travel expenses from the petty cash fund.

Suggested Read: What is a Petty Cash Book?

Why do businesses need petty cash?

1. Some expenses are too small

Imagine requisitioning your company to replace your office supplies or stationery. The first thing is that it is not going to cost much for you to replace the stationary. Secondly, the amount is too tiny to debit a bank account or issue cheques.

In such circ*mstances, it may be easier to use cash. Here, Petty cash provides the perfect answer. Petty cash for such expenses allows branches to function without hiccups. The employee can draw against the petty cash fund and record the transaction in the books. Eventually, the custodian will reconcile the account against the amount available at the beginning of the month.

2. Improves efficiency

If you route every small expense through the main office or department, it may be challenging for branches to work independently. Further, this increases the problems for the main office too.

If proper controls are in place, petty cash works well to ensure that branches or departments are self-sufficient. Further, since they are typically smaller amounts, you can easily track and reconcile petty cash transactions.

How to set up a petty cash management system?

Setting up a petty cash management system for incidental expenses is not very difficult. Here’s how you can approach it.

1. Establish the process and policies for petty cash management

Clear-cut policies and a fast workflow for recording and maintaining petty cash at branches or departments will ensure clarity when handling petty cash. You can start by putting down small details such as what kind of transactions will qualify for a withdrawal, the amount of petty cash, bookkeeping, responsibility, etc.

2. Appoint a petty cash custodian

A petty cash custodian is responsible for the branch’s minor and small cash transactions. Further, they will be responsible for journal entries, record-keeping, and other maintenance of all petty cash transactions.

Petty cash custodians reduce the chance of errors or fraud while promoting accountability across businesses. Also, you have better control over the cash flows at the branches or departments. The burden may be lower or higher depending on the number of petty cash accounts you must maintain.

So, the responsibility may be less if it’s a small business. However, large corporations may have several franchises or branches. This will require a lot more coordination and a hands-on approach. So, the petty cash custodian must be chosen appropriately.

3. Determine the petty cash fund

Generally, you will deposit a predetermined amount into the petty cash amount. However, the amount will depend on the size of the corporation or small business. While the amount may be the same (for large companies or small businesses), what will determine the quantity is the activity of the branch.

For instance, numerous daily cash transactions may determine that a particular department requires more cash than the others.

4. The petty cash must be secure

You must hold the petty cash in a secure place on the premises. For instance, if we are talking about a small branch, you will require a lockbox or a petty cash box in a secure and separate room.

Further, a person (someone from the finance team) may be responsible for holding the keys, opening the lock box, and maintaining the record of the petty cash. Such an arrangement keeps the money safe and improves accountability.

5. Bookkeeping and monitoring the fund

Bookkeeping or maintaining a record of expenses through correct petty cash journal entries is vital. A structured process encourages responsibility in employees and helps in the accounting process.

It is also essential to set an accounting period or a time frame to reconcile such accounts. The time frame must not be lengthy (as it may be too late to fix issues) or too short (which makes the process cumbersome or pointless).

For instance, regular reconciliations will help identify and resolve errors or problems if employee reimbursem*nts are immediate.

Also, Read: Bookkeeping and Accounting

6. Storage of receipts

Employees must provide proof of expense whenever money has been drawn against the petty cash fund. It ensures that employees log valid proof against such expenses and there is an audit trail of such transactions. Also, it helps to reconcile accounts faster and more reliably.

7. Replenishing the petty cash fund

Your petty cash policies must clearly state when you will replenish the petty cash fund. Usually, when the petty cash reaches a certain amount or when a branch or office makes a formal and valid requisition. Such replenishment may be made through checks issued into the branch’s account or a direct transfer into their account.

8. Auditing petty cash

Auditing and monitoring petty cash expenses is essential. While it may seem like a small amount, several such small amounts over a period may add up to a significant number. You must reconcile financial statements and cash registers often and thoroughly to verify expenses against receipts while complying with the company’s policies.

While internal audits are standard in all organizations, verification by external auditors will validate your workflows and identify potential problems.

Quick Read: A Guide to Expense Auditing Procedures

Challenges with petty cash management

Petty cash may be a small amount of money. Still, you must prevent misuse by keeping it secure. Regular reconciliations and a petty cash custodian will strengthen those internal controls. Some of the most significant challenges in petty cash are functionality and discrepancies in the use of petty cash.

Let us look at some of the difficulties in petty cash management.

1. The custodian holds all the cards

Since the custodian is responsible for petty cash management, he holds all the cards. If the person is not very accountable or competent, there may be accountability issues that may be hard to pin down.

For instance, custodians must use petty cash vouchers to record the amount spent by an employee and the reason for such disbursem*nt (along with proof of expenses). Without such records, your cash balances will not match, and there is a higher risk of errors or fraud.

Since they are responsible for most of the reporting and spending, without a second-level check, the business may be looking at a loss of money due to errors or fraud.

Also, Read: 10 Common Types of Financial Frauds and Prevention

2. Compliance with policies

Since it is petty cash, there may be a casualness when it comes to spending. If branches don’t pay attention, money may be drawn without recording expenses (or recording without supporting receipts or bills).

Also, there is no way to tell if the expenses complied with the policies for this purpose. If there is no documentation, proper expense reconciliation is not possible.

3. Heavily reliant on paperwork

One of the biggest problems with traditional petty cash management is the reliance on receipts, bills, and other proof that must be attached to support incidental expenses.

Further, journal entries in general ledgers are common with manual processes. It is also prone to errors and fraud.

Improving the petty cash management process

Expense management software that offers petty cash management can contribute immensely to streamlining your processes. Several challenges are common in the manual processing of petty cash, such as

• Physical distribution of cash
• No centralized control over expenses
• Unorganized reconciliations
• Unpredictability of funds
• Poor budgeting

These issues can be tackled by using Happay’s corporate cards for petty cash. Here’s a look at how Happay’s system works.

Automation and petty cash management

Technology is undoubtedly a game changer when managing petty cash efficiently. Not only will the software eliminate misuse of funds and the number of errors, but it can help create a central repository with access to all relevant documentation.

Once the workflows are automated, reconciliations are quick and smooth. Standardized templates become the norm and naturally lead to a smoother audit process. To ensure complete automation, you can combine petty cash management systems with expense management software.

Kinds of petty cash management software

• You can use software that manages and reconciles petty cash accounts through a centralized system. For instance, businesses can custom-design petty cash management software for their branches, outlets, sites, or store locations.

• The software will create templates so employees can easily record and upload information. Well-designed checklists will also ensure that the petty cash records are standardized across locations. This makes reconciliation quick and easy.

• On the other hand, you could use an innovative prepaid card and petty cash management software to manage the same. For instance, Happay’s Petty Cash Management solution for multi-chain or branch retailers or businesses replaces your cash with Happay cards.

• You can customize them according to your requirements. You can fund the card, increase limits, and track expenses, in real-time (from a central location) from a cloud-based platform.

Advantages of petty cash cards

• With the cards, there is no need to move hard cash or execute bank transfers around locations. A dedicated card for each branch allows you to replenish the card anytime.

• You can arrest cash leakages by setting limits on these cards and restricting their usage at POS, ATMs, or online.

• Branches can file expense reports by merely attaching an image of the receipt. You do not have to remind your branches about sending in those reports. The dashboard shows you the complete transaction detail when the cards are swiped.

• There is greater visibility over the expenses of your branches. Depending on expenses at various branches, you may remove excess cash in one location and fund another that is short on money.

Suggested Read: What Is Global Cash Visibility?

Such digital transformations save you a ton of money on couriering funds (75%) and a 95% reduction in cash leakages.

If you would like to use Happay, Schedule a demo today

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