Managing Petty Cash: How to Establish Structure to Mitigate Risk

Covering expenses around the office can be a pain, but to minimize risks and maintain internal controls you need to jump through some hoops. Only certain people can approve those expense payments and it can take time to process them. 

So what happens when you order food for a working lunch and need to tip the food delivery driver? Or when you need to send someone down to the store to replenish a much-needed office staple (like staples, perhaps?) that runs out between scheduled resupplies? This is where petty cash comes in.

What is Petty Cash? 

A petty cash account is quite simple and can save a lot of time and trouble when you need to pay a small office expense. Petty cash is a small amount of cash kept in the office to cover expenses without the need to go through the full payment approval process.

Even though petty cash bypasses some of your existing payables processes, there are some standards you need to establish to make sure petty cash runs smoothly. Otherwise, it can quickly become a source of frustration for your bookkeepers and accountants and possibly at risk for employee theft.

Managing Petty Cash

Managing petty cash starts with deciding what’s right for your company. The amount of money kept in your petty cash account will depend on the size of the company, the number of expenses you expect to pay each month, and how many people will need to utilize the account. 

The typical balance for petty cash may be between $100 and $500. Again, this depends on your needs and the size of your company. If your business is spread across multiple departments — especially if they are on different floors or in different buildings — it may be more practical to have more than one petty cash fund so the money is quickly accessible when it’s needed.

Another decision you need to make is what purchases are appropriate for petty cash. In order for the holder of the petty cash fund to disperse money appropriately, they need to know what it will be spent on and they need to know which purchases are approved. You’ll need to determine ahead of time what types of things can be bought with petty cash, the maximum dollar amount for a single purchase, and whether or not a receipt is required after the purchase.

Using Petty Cash Funds

When it comes time to make a withdrawal from petty cash, it’s important to follow the right process. This not only prevents theft or inappropriate purchases but also protects everyone on the team from suspicion. One person should be in charge of handling petty cash. Typically, the cash will be kept in a lockbox, safe, or a locking file cabinet or desk drawer. Along with the cash will be kept a petty cash journal. This journal is often little more than a notebook where your cash withdrawals are recorded to be transferred into the general ledger at the end of the month. When someone needs to make a withdrawal from petty cash, the key holder will document how much was removed, to whom it was given (often with signature), and what it was used for (ofter with a receipt).

The employee making a purchase will return change and the receipt afterwards to be placed back in the petty cash box. In this way, all receipts and the remaining balance will reconcile with the opening balance of petty cash. If not, you‘ll know exactly who had access to the funds during that month. 

Recording Petty Cash in the Ledger

At the end of the month, petty cash needs to be recorded into the general ledger. The remaining balance will be reconciled against the opening balance and purchases in the petty cash ledger, supported by receipts. This balance can be entered into the ledger with a journal entry marked for petty cash.  

At the same time, the petty cash fund needs to be refilled. You’ll issue a check to cash and bring the fund back to the predetermined monthly balance. 

Petty Cash Risks and Alternatives

Anytime cash is kept on hand and used for purchases, there is a potential risk of theft or misappropriation. Even with the safety measures mentioned above, it can be hard to know exactly how funds were spent. However, the convenience of petty cash has historically outweighed the risks.

With digital technology and online banking, it’s now easier than ever to avoid petty cash altogether. While you may not want to hand out the company credit card to whoever is running out for coffee, there are other options. 

Reloadable, prepaid debit cards can be a secure option. They’ll leave a trail showing you exactly where they were swiped and for how much without giving too much access to the employees that use them. In most cases, they can also be used to make online purchases — paying through an app or website — and never even need to leave the hand of a petty cash key holder. For example, ordering drinks or food for the office through a delivery service, or office supplies through a service like Instacart.

Conclusion

Petty cash can save a lot of headaches when it comes to small, unexpected purchases. As long as you follow the steps above you’ll minimize any risks and make your bookkeeping as simple as possible. In some cases, you may be able to achieve the same convenience in an easier way using electronic payments instead of cash.