There are some financial terms in the world of business that might throw managers off a little. Petty cash is a perfect example of this. What is petty cash exactly? We have put together a detailed guide, providing the definition of this important term and what exactly it’s used for.
Anyone who has ever run a small business knows that petty cash always plays an important role. There’s no doubt that most small business owners regularly have to deal with it.
Of course, handling petty cash isn’t always straightforward. Not everyone knows what it’s used for. If small businesses don’t understand how to handle it properly, problems will eventually arise, such as theft.
That’s why we decided to put together a guide to answer what is petty cash and how you and your employees can use it wisely in the future.
What Is Petty Cash Exactly?
To put it as simply as possible, the petty cash definition is: money that’s available for businesses to spend on small but necessary items.
Large purchases might require using a company credit card or writing a check. But for smaller purchases, petty cash funds are available.
Here are some typical situations that petty cash can be used:
- Buying office supplies that are inexpensive and need to be replaced right away to keep the office running.
- Purchasing flowers or small decorations for the office and small gifts or cards for customers.
If an employee has to buy something on their own for business purposes, they will usually be reimbursed in compensation out of the company’s petty cash fund.
Most companies will keep between $100 and $500 in a petty cash fund, making it easy to take care of inexpensive purchases that don’t warrant a credit card. However, larger companies might have petty cash available to individual departments because smaller purchases might be more frequent.
The Pros & Cons Of Petty Cash
There are a number of ways that businesses can benefit (and suffer) from having petty cash at their disposal.
Here are some advantages that come with petty cash:
- It’s easy to make small, quick purchases that are needed to run the business but don’t require high-level approval from a supervisor.
- As long as everyone understands how to use petty cash and doesn’t abuse it, that money can be used quickly and efficiently.
But petty cash isn’t a complete walk in the park. The biggest downside of petty cash is that it can be easy for employees to abuse or misuse. According to the following safety guide, stealing petty cash funds is one of the main kinds of employee theft and fraud.
That means that a good manager or supervisor could be tasked with monitoring petty cash funds, making sure that the account stays balanced, and that the money is only used for business purposes.
Petty Cash VS. Cash On Hand
There are small but important differences between what is petty cash and what is considered “cash on hand.”
- Petty Cash – this is literally cash and coins for employees to pay for things that are easier to pay in cash than writing a check or using a company credit card. When employees need to purchase something, they can take the petty cash that’s kept in the office. Also, if they need to be reimbursed a small amount for a business purchase they made, it’ll usually come out of the petty cash fund rather than the company providing a reimbursement check.
- Cash on hand – this can also mean literal cash that is present in a place of business. The difference is that cash on hand is used in relation to customers. For instance, money in a cash register would be considered cash on hand because it’s used to provide change for transactions with customers. And of course, a good employee would not remove this money from the register and use it to make business purchases.
While the petty cash definition might be simple enough to understand, its use can be a little more complicated.
What Is Required To Use Petty Cash
Just because the term petty cash makes it seem like an insignificant amount doesn’t mean that it’s available to anyone and isn’t monitored. Here are some vital steps that businesses need to take in order to utilize this financial business tool properly:
- The use of petty cash requires a cashier to fund the petty cash account.
- Somewhere along the line, the petty cash cashier will need a check from the business to acquire the literal cash that’s stored in the office.
- The cashier or the petty cash custodian will need to distribute that money, usually after learning from employees why they need the cash.
- If they’re doing their due diligence, the cashier or custodian will ask for receipts every time petty cash is used. This prevents employees from abusing the system or taking more petty cash than they need.
- At the end of the day, the receipts should align perfectly with the amount that’s been removed from the petty cash account.
- When the amount of petty cash available gets down to a certain amount, the cashier will require another check to add funds to the account before the company runs out of petty cash.
While these are main steps that small business owners take to utilize petty cash, there are other processes that should be considered to get the most out of it in the long run.
How To Record Petty Cash
While the amount of money might be small when dealing with petty cash, there should still be a record of every petty cash transaction. The petty cash cashier or custodian should have financial statements, including request forms from employees and receipts for proof of purchase, every time petty cash is used to make a business purchase.
These financial records will be necessary when the cashier or the custodian requests additional funds for the petty cash drawer. This puts the custodian in control of balancing the petty cash account and making sure that petty cash is available for employees who need it.
How To Reconcile Petty Cash
Petty cash funds should be reconciled at regular intervals to double-check that everything is balanced and accurate. This can be looked at as an internal audit of a company’s petty cash.
Reconciling petty cash should be simple enough if every petty cash deposit into the business bank account is the same amount every time. This makes it easier to track how much money should be in the account when compared to the requests for petty cash and the receipts that prove how much money has been spent.
Ideally, the petty cash cashier (in a plumbing company, for example) would need to show past receipts to prove that previous money put into the petty cash account has been taken out.
Occasionally, there will be small discrepancies. But, this reconciliation process can tell companies whether there is a significant shortage or overage of petty cash so that it can be investigated further to discover why there is an imbalance of funds.
How To Set Up Petty Cash Funds
Companies will need to set money aside in their yearly or quarterly budget to build a petty cash fund. Small purchases can quickly add up over time, so it’s best to overshoot the estimate in the budget.
The petty cash custodian needs to follow a few steps to do this successfully:
- Notify a superior or someone in the accounting department if the petty cash fund goes over budget.
- Set up a drawer or box where the physical cash can be stored safely. If a safe is available, that might be the ideal option, but as long as the petty cash funds are under lock and key, they should be safe. This especially applies when it comes to retail store safety.
- Every time money is either added to the petty cash fund from the company or subtracted when somebody needs to use it, keep a record of it, ensuring there is a paper trail for all money that comes in and out of it. Otherwise, there will be no way of tracking if the petty cash fund is under budget or over budget and being used appropriately. This is a great extra (and low budget) responsibility to give an employee looking for extra career development.
Petty Cash Handled
Keep your business up to date with petty cash using easy read-and-sign forms and internal communication
Use Technology To Use Petty Cash Properly
Even though most instances of petty cash use a rather insignificant amount of money, there is a need to monitor it closely because it can add up to a significant amount over time.
Nowadays, software like Connecteam can be key in monitoring the use of petty cash to ensure the practice isn’t misused and that the numbers balance at the end of the day.
Over 10,000 companies from more than 90 industries benefit from Connecteam’s all-in-one app to fill in forms easily, overcome communication problems, and generally help businesses stay on top of their use of petty cash.
Here are some of the features employees can benefit from Connecteam to use petty cash properly:
- Employees can easily fill in forms, providing all relevant information regarding the reason they require petty cash (small business purchases, reimbursement, etc.), including supportive images and other details.
- All forms are automatically documented, filed and organized so petty cash custodians can later respond, and manage petty cash requests when needed.
- It’s possible to create work tasks whenever petty cash is involved, adding another layer of security and assurance to custodians and employees alike.
- There is no need for tedious back and forth between petty cash custodians and employees, as users can easily communicate via the 1:1 chat feature.
The Bottom Line On Petty Cash
When everything is said and done, petty cash isn’t something that needs to confuse business owners and employees. When it all boils down to it, petty cash is simply money that businesses set aside to spend on small things.
There are downsides, especially when it comes to knowing how to use petty cash properly. For example, it is easy for employees to abuse, and it can cost your company money. But there are many advantages that come with having a petty cash fund.
Not only can this money be used quickly and efficiently for various purposes, but it gives employees a bit more freedom when it comes to making smaller business-related payments, without having to seek high-level approval. Not to mention that it reduces business costs in the long run.
And with the latest software, like Connecteam, users will no longer need to manually write down how much petty cash they require. With just a couple of clicks, users can quickly fill in some forms and receive approval in a matter of seconds.
So ditch the pen and paper, switch to a digital solution, and make petty cash management a walk in the park.