Petty cash is a great way for small businesses to pay for unexpected expenses without dipping into their main bank account. But despite its importance, petty cash typically gets little attention from business owners – and this can pose a significant risk to small businesses. By overlooking petty cash, you risk exposing your business to employee fraud and compliance breaches.
In this guide, we'll cover everything you need to know about petty cash, from how to set it up to how to record transactions and reconcile your books. Let's get started.
Petty cash, also called a petty cash fund, is a small amount of cash that businesses keep on hand to pay for small, everyday expenses.
The funds are typically kept in a lockbox or safe and are used to reimburse employees for work-related expenses like postage, tips, or small purchases made on behalf of the company.
Some businesses also use petty cash to reimburse employees for business-related travel expenses, like taxis or parking fees.
If your business doesn't have a petty cash fund yet, don't worry -- it's easy to set one up. All you need is a small amount of cash and a safe place to keep it, like a locked drawer or cabinet. Once you have your cash and a safe place to store it, you can follow these steps:
The person in charge of your petty cash fund should be someone you trust to handle money responsibly. and who is familiar with your company’s expenses.
This person will be responsible for depositing receipts and maintaining the account balance. They'll need to have an understanding of your company’s finances and be able to reconcile the petty cash account regularly. They should also have a system for tracking which employees are reimbursed from the petty cash fund.
The amount of money you keep in your petty cash fund should be based on your company’s needs and the frequency with which expenses are incurred. Most businesses keep between $100 and $200 in their petty cash funds.
If you find that you're constantly running low on petty cash, you may need to adjust the account limits or find new ways to reduce expenses.
Your petty cash policy should outline the following:
Once your policy is in place, make sure all of your employees are familiar with it. They should know who is responsible for depositing receipts and how to submit expenses for reimbursement.
If you have a remote team, consider providing them with an instructional video or guide that outlines the petty cash procedures in detail.
Once you’ve selected the person who will manage your petty cash, provide them with a petty cash log or form to complete each time there is a transaction. This will help ensure all transactions are tracked and recorded properly.
The log should include:
If you’re using petty cash to reimburse employees for business-related travel expenses, include additional information such as:
This will help you keep track of business expenses for tax purposes.
When an employee needs to be reimbursed from the petty cash fund, they should submit their receipts along with the completed petty cash log form to the person in charge of the fund. The person managing the fund will then reimburse the employee and update the account balance accordingly.
The person in charge of your petty cash fund should reconcile the account regularly, typically once a month. Reconciling the account means comparing the receipts to the amount of money that was withdrawn from the petty cash fund to ensure they match.
If there is a discrepancy, the person in charge of the fund will need to investigate and determine where the money went.
Once the account is reconciled, your accountant or bookkeeper will update your company’s financial records to reflect the expenses. This will help you stay organized and ensure all expenses are accounted for come tax time.
As your business grows, you may find that your petty cash needs change. For example, you may need to increase the account limit if you find yourself making more small purchases on behalf of the company.
You may also decide to do away with the petty cash fund entirely and opt for a different method of reimbursing employees, such as a direct deposit.
The key is to reassess the petty cash fund periodically and make changes as needed to ensure it best meets the needs of your business.
If you’re not comfortable keeping a petty cash fund, there are other options available to reimburse employees for business expenses.
One option is to set up a corporate credit card for employees to use for business-related expenses. This can help you better track and manage business spending.
Another option is to reimburse employees through direct deposit after they submit their receipts. This method requires a bit more paperwork on the front end, but it can help you avoid having to keep cash on hand.
The safest and most convenient alternative, though, is issuing debit and virtual cards. It’s also cost-effective – Penny Inc cards are free of charge. By giving your employees virtual cards or prepaid debit cards, you minimize the risk of employee fraud and eliminate reimbursement claims.
Now that you know how to set up and use a petty cash fund, you can rest assured knowing that your business has a little extra cushion for unexpected expenses. Petty cash can be a helpful tool for managing day-to-day business expenses, but it’s important to use it wisely and keep tight control over the fund. Use the tips in this article to help you get started.
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