What is petty cash & how to manage it: the ultimate guide

Petty cash—a seemingly simple concept—can become a complex operational headache if not managed effectively. In today's fast-paced business environment, from bustling retail stores to expanding midsized businesses, the ability to handle minor expenses efficiently is crucial. In this article, we'll provide a comprehensive understanding of petty cash management, accounting, and modern alternatives to better handle this expense.

What is petty cash?

At its core, petty cash refers to a small, readily available fund of actual cash money used to cover minor, incidental expenses. This petty cash definition, however, barely scratches the surface. It's a system designed for operational efficiency, ensuring that day operations aren't hindered by the need for formal payment processes for every small expenditure.

Why petty cash expenses matter

The physical nature of cash makes it ideal for immediate, low-value transactions. Unlike credit card or debit card payments, petty cash offers instant access, crucial in unforeseen circumstances. This liquid fund ensures business continuity for minor business expenses, preventing delays and maintaining smooth operations.

Petty cash examples

• Purchasing office supplies
• Paying for minor repairs
• Reimbursing employees for transportation costs
• Buying birthday cards or a birthday cake
• Paying for office lunches
• Paying cab fares
• Minor business to business purchases

Advantages and disadvantages of petty cash

Understanding the advantages and disadvantages of petty cash is essential for making informed decisions.

Advantages: convenience and flexibility

• Convenience for minor payments such as tail-end spend
• Flexibility for unexpected costs
• Quick access to funds for day operations

Disadvantages: risks and inefficiencies

• Risk of fraud and errors
• Time-consuming manual record-keeping
• Potential for cash shortages
• Security risks
• Lack of real-time tracking

Step-by-step guide to managing petty cash effectively

Properly managed, petty cash is a valuable tool for handling small, everyday expenses quickly and efficiently. However, without a clear system in place, petty cash can easily become a source of confusion, errors, and even fraud. Here are 7 steps to managing your petty cash effectively:

1. Establishing clear policies and procedures

Before you even think about putting cash in a box, you need a solid framework. This isn't just about throwing some loose bills into a drawer. It's about setting up a formal system with documented policies and procedures. These policies should outline who can access the fund, what it can be used for, and how transactions are recorded. Without this foundation, you're setting yourself up for potential errors and discrepancies down the line.

2. Getting started right

The first practical step is to create the actual petty cash fund. This involves determining the right amount of cash to keep on hand. Look at your historical data to see how much petty cash you typically use each month. Once you've decided on an amount, you'll need to make a journal entry to record the transfer of funds from your bank account to your petty cash account. Finally, and crucially, you need a secure place to store the cash. A locked petty cash box or a secure file cabinet is essential to prevent theft or unauthorised access.

3. Designating a petty cash custodian

You can't just leave the petty cash to anyone. You need a dedicated custodian, someone who is responsible and trustworthy. This person will be in charge of disbursing cash for authorised expenses, collecting receipts for every transaction, and keeping accurate records of all activity. They'll also be responsible for the secure storage of the fund and performing regular reconciliations to ensure the cash on hand matches the records.

4. Documenting petty cash transactions

Every single petty cash transaction must be meticulously documented. This is non-negotiable. For each disbursement, you'll need a petty cash slip or voucher that includes the date, a clear description of the expense (e.g., "office supplies," not just "miscellaneous"), the exact amount of the disbursement, and the signature of the person who received the cash. In addition to these slips, you'll need to maintain a detailed petty cash log or book. This log should record all transactions, providing a complete and auditable history of your petty cash usage.

5. Understanding petty cash accounting

Petty cash isn't just about cash; it's also about accounting. Every time you make a disbursement or replenish the fund, you'll need to record the appropriate journal entries. These entries ensure that your financial statements accurately reflect the petty cash balance. Remember, petty cash is classified as a current asset on your balance sheet, highlighting its liquid nature.

6. Regular reconciliation and audits

Regular reconciliation and audits are critical for maintaining financial accuracy and preventing fraud. The reconciliation process involves comparing the actual cash in the petty cash box with the balance recorded in your petty cash log. Any discrepancies should be investigated immediately and resolved. Regular audits, whether internal or external, will help ensure that your petty cash policies and procedures are being followed and will identify any potential weaknesses in your internal controls.

7. Building strong internal control petty cash management processes

Finally, you need to implement strong internal controls to mitigate the risks associated with petty cash. This includes separating the duties of the petty cash custodian and the person responsible for reconciliation. This separation of duties helps prevent fraud. You should also implement approval workflows for expenses, ensuring that all disbursements are properly authorised. And don't forget about training. Regular training sessions for the petty cash custodian and other relevant personnel will ensure that everyone understands the policies and procedures and knows how to follow them.

Modernising petty cash: embracing digital solutions

In today's digital age, traditional petty cash systems are increasingly being replaced by modern expense management solutions. Digital platforms offer real-time tracking, improved efficiency, and enhanced security. They eliminate the need for physical cash and automate many of the manual processes associated with petty cash.

Features of modern expense management software

• Real-time expense tracking
• Integration with your accounting software
• Simplified reconciliation
• Approval workflows
• Cloud-based storage
• Prepaid virtual cards
• Detailed reporting

Embracing digital solutions with Weel

For businesses seeking to enhance control, improve efficiency, and mitigate risks, modern expense management solutions offers a compelling alternative to traditional petty cash systems. Solutions like Weel, provide a single platform to manage spend, and provide features that are superior to traditional cash based systems.

For example, Weel offers real-time tracking of company funds, boosts efficiency with custom workflows, and ensures world-class security through VISA, Apple Pay, and Google Pay. It also eliminates the need for physical cash and automates many of the manual processes tied to petty cash.

Other key Weel features include:

• Data-entry integrations: Eliminate manual data entry and generate accurate, timely report directly into your existing accounting software such as Xero, QuickBooks and MYOB.
• Simplified reconciliation: Streamline the process of matching expenses to transactions, reducing errors and saving time.
• Approval workflows: Implement customised approval processes to ensure that all expenses are properly authorised.
• Cloud-based storage: Access your financial data from anywhere, at any time, with secure cloud storage.
• Virtual and physical cards: Issue company cards with specific spending limits and controls.
• Detailed reporting and analytics: Gain insights into spending patterns and identify areas for cost optimisation.

For businesses seeking to enhance control, improve efficiency, and mitigate risks, Weel's expense management solution offers a compelling alternative to traditional petty cash systems. Weel provides a single platform to manage spend, and provides features that are superior to traditional cash-based systems, enhancing financial control and operational efficiency.

Conclusion

Petty cash, while seemingly simple, demands meticulous management to ensure financial accuracy and prevent fraud. By understanding the intricacies of petty cash accounting, implementing robust internal controls, and embracing modern digital solutions like Weel, businesses can transform their expense management processes.

Weel's platform offers a seamless, efficient, and secure way to manage company spending, eliminating the risks and inefficiencies associated with traditional petty cash systems. By automating processes, providing real-time visibility, and enhancing control, Weel empowers businesses to focus on their core objectives.

Ready to revolutionise your expense management? Discover how Weel can help your business streamline processes, enhance control, and improve financial accuracy. Take the product tour or book a demo with our team today.

Frequently Asked Questions (FAQs)

What are the drawbacks of manual branch petty cash management?

Manual petty cash management, particularly for businesses with multiple branches, can be fraught with challenges:

• Increased risk of fraud and errors: Manual processes are prone to human error and can be more easily manipulated.  
• Time-consuming and inefficient: Manual record-keeping, reconciliation, and reporting take up valuable time and resources.  
• Lack of real-time visibility and control: It's difficult to track spending as it happens, leading to potential overspending or misuse.  
• Difficult to audit: Paper-based systems can be cumbersome to audit, increasing the complexity of financial reviews.

Is petty cash an asset?

Yes, petty cash is considered a current asset on a company's balance sheet. It represents a readily available source of funds for minor expenses.  

What is petty cash used for?

Petty cash is used for small, everyday expenses where using other payment methods, like company credit cards or cheques, would be impractical or inefficient. Examples include office supplies, minor repairs, employee reimbursements, and transportation costs.  

What type of account is petty cash?

Petty cash is a current asset account. It's typically classified as a sub-account within the broader cash and cash equivalents category.  

Is petty cash revenue or an expense?

Petty cash itself is an asset. The expenditures made from the petty cash fund are recorded as expenses.  

What is the rule for petty cash?

The primary rule for petty cash is to maintain accurate records of all transactions and to replenish the fund regularly to its original balance. This ensures proper accounting and control.  

What is the difference between petty cash and cash on hand?

Petty cash is a specific fund designated for small expenses, while cash on hand refers to all the cash a business has available, including petty cash, cash in bank accounts, and any other readily available funds.

Why is it called 'petty cash?'

"Petty" refers to the small or insignificant nature of the expenses it covers. These are typically minor, everyday costs that don't warrant more formal payment methods.  

What is an example of petty cash?

Common examples include buying office supplies like stationery, paying for minor repairs like fixing a broken chair, reimbursing employees for travel expenses, or purchasing refreshments for meetings.  

Is petty cash a cash equivalent?

Yes, petty cash is considered a cash equivalent because it's readily available and can be easily converted into cash.  

How do you balance petty cash in accounting?

Balancing petty cash involves reconciling the physical cash on hand with the recorded transactions in the petty cash log. Any discrepancies are investigated and corrected, and the fund is replenished to its original amount. This ensures that the petty cash account accurately reflects the available funds.