All businesses, no matter their size, will occasionally have to make small unexpected purchases. This could be simple items like office supplies, or just reimbursing an employee for gas expenses.
It’s important to keep around at least a small amount of money in order to cover these expenses, as going through the process of writing a check for them would be far too much trouble. That’s where a petty cash fund comes in handy.
In this guide, we’ll explain what petty cash is, the difference between cash on hand and petty cash and how to manage your petty cash fund.
What Is Petty Cash?
The term petty cash account or petty cash fund refers to small amounts of money available for paying small expenses without writing checks. Additionally, petty cash is the title of the current asset account in the general ledger that displays the company's petty cash balance.
Typically, petty cash funds are kept on hand to cover minor or incidental expenses, such as employee reimbursements or office supplies.
In cases where issuing a check or a corporate credit card is unreasonable or unacceptable, petty cash is a convenient alternative. It will vary from company to company how much money is considered petty, but most companies keep between AED500 and AED1000 in petty cash. Petty cash funds are used for a variety of transactions, such as:
- Supply items for the office;
- Catering a small group of employees' lunch;
- Fuel expenses;
- The reimbursement of a small work-related expense by an employer;
Petty cash funds are administered by custodians. It is the custodian's responsibility to enforce petty cash regulations, request replenishments, and disburse funds according to the rules.
There will be periodic reconciliations of petty cash funds, with transactions also being recorded on the financial statements. A petty cash fund may exist for each department within a large corporation.
Petty Cash Vs. Cash on Hand
The term cash on hand refers to any accessible cash, whether it's in your pocket or in your bank account.
'Cash on hand' can be interpreted in two ways. Literally, it means the money you have available to spend, including your petty cash fund.
However, the same term refers not only to physical cash but also to all liquid funds your business has saved and borrowed, including money in the bank and large bills in your safe.
While you may not have physical cash, "cash on hand" is a term that distinguishes it from assets that aren't actually available, such as accounts receivable or the balance sheet asset column, which represents amounts you're still waiting for your customers to pay. When calculating your cash on hand, you can usually include investments that can be converted to cash within 90 days.
It is important to distinguish between cash on hand and your petty cash account. Petty cash is money you keep on hand to make small payments when you do not want to use a check or credit card, whereas cash on hand is any accessible cash. As an example, if an employee spends AED 50 on office pens, you can pay the employee from your petty cash account instead of issuing a check.
The amount of cash your company has on hand can also determine whether you are able to compete with your competitors for contracts or if you are at the top of your industry. Microsoft vs. Apple was one of the most high profile examples of this. Microsoft had more than AED 180 billion in cash on hand over several years. However several stock buybacks, research costs, and dividends reduced its cash flow to approximately AED 85 billion.
At the same time that Microsoft's cash was falling, Apple's cash on hand increased to almost AED 70 billion. Microsoft once had the ability to purchase competitors outright without issue in order to remain the leader of the computer industry. As Apple's cash on hand increased, it became a head-to-head competitor with Microsoft.
As such, having a healthy amount of cash on hand is crucial for your business. Petty cash, however, probably won't have any effect on the financial health of your company.
When preparing financial statements, some businesses treat petty cash as just a box of bills that they can grab when needed.
Financial statements generally don't require you to report your petty cash; however, the money in your petty cash is included in your cash on hand. In order to generate a cash flow statement, you must know how much cash you have on hand.
For new businesses, this is the most important financial statement. The cash flow statement is used by lenders to determine the financial worth of your company. Insufficient cash inflows may leave you unable to pay your liabilities if your cash on hand drops.
Petty Cash Examples
The most common uses of petty cash in small businesses are:
- Snacks and coffee
- Gifts or other small items
- Fares for taxis and cars
- Office supplies such as pens, erasers, staplers, etc.
- Food orders
- Fees for postage
- Minor travel expenses
- Small expenses reimbursed to employees
How To Manage Petty Cash?
The potential for mismanagement and outright fraud with petty cash funds is obvious.
Companies can ensure that petty cash is used appropriately and transaction records are accurately maintained by using a petty cash management system. By putting such a system in place, the business can be protected from theft and fraud, as well as support general ledger reconciliation.
In financial accounting, the imprest system is commonly used to handle your petty cash fund. It consists of reserving a fixed amount and replenishing it after money has been spent. The replenishment will come from another account.
In order to establish a petty cash management system, you will need a designated custodian who will manage the account, a source of funding, policies and procedures for managing expenses, and accounting procedures for reconciling expenses.
Define Your Petty Cash Policy
Petty cash funds should also be administered and spent according to a set of company policies. These policies define the kinds of transactions that qualify as petty cash expenses, and they establish guidelines for documenting these expenses.
Appoint a Custodian
In order to use the imprest system, you must first appoint a petty cash custodian. Managing petty cash will be the primary responsibility of the custodian. Through the designation of a custodian, the incidence of error or fraud is reduced since fewer employees have access to the fund's cash.
Fund the Account
A predetermined balance is also set for the petty cash fund under the imprest system. The company's checking account is used to allocate cash to the fund, and the balance is maintained as purchases are made.
Petty cash balances should be adequate to support the amount of activity expected in the account, and will often reflect the size of the company. The amount in petty cash funds will differ from small businesses to large corporations, but both have them.
Secure the Funds
As soon as the petty cash fund is full, the cash needs to be secured, most likely in a lock box, safe, drawer, or file cabinet. There are only a few people who may possess the key, such as the custodian and the chief financial officer (CFO). In this way, accountability can be ensured and fraud can be prevented.
Replenish Funds When Low
It is important to replenish petty cash to support more purchases after active spending diminishes. In this case, the custodian will request a new check from the company's bank account in an amount equal to the original balance.
Before replenishing funds, receipts and expenditures should be reconciled.
Reporting Petty Cash
It is important to monitor all of the above closely. By regularly tallying the funds, verifying receipts and vouchers, and reconciling expenditures, company policies will be followed and discrepancies will be minimized. Make sure to keep track of your petty cash receipts.
For proper segregation of duties, this is typically done by someone other than the custodian.
Petty Cash Reconciliation
Verifying petty cash transactions is called petty cash reconciliation. The purpose of this check is to ensure that funds are being used appropriately. It plays an important role in fraud prevention.
As well as a log, your company's policies should require receipts for all purchases. These receipts will include detailed information about the item or service purchased, the date, and the amount.
Additionally, petty cash vouchers should provide additional information, such as the purpose of the expense, the account, and the person responsible for making the purchase.
A log of all disbursements should be maintained by the custodian for proper administration and accounting of the petty cash account. When financial statements are prepared at the end of the reporting period, the log will allow for a proper reconciliation of the account.
Do all the tips and rules listed above seem like too much? Rightfully so. Imagine how much time of your day it will take to adhere to them all, now add to it all the time your employees with spend with related tasks.
Pluto allows you to issue virtual cards and physical cards, and just like that the whole petty cash problem is solved. Below, we will dive into details of how Pluto will help with petty cash management.
Petty Cash and Taxes
At year-end, you will likely be able to deduct most petty cash purchases from your business's taxes.
Tax deductions are available for many business expenses, including purchases made with petty cash. If you keep proper expense records, you can deduct most expenses that require the use of your petty cash fund.
For this reason, it’s important to keep all receipts and records of your expenses related to the petty cash fund.
In order to deduct your business expenses from taxes, you have to document each expense. Petty cash purchases cannot be deducted from your business taxes if you don't document them.
Petty Cash Management Software
In order to understand and improve cash flow, improve liquidity, and increase financial profitability, proper cash management involves obtaining a comprehensive view of cash inflows and outflows.
The finance teams of today are looking for comprehensive and flexible solutions. The implementation of a good cash management solution, allows a company to automate, centralize, and streamline payments and cash management within its business units and across its entire organization. This applies to petty cash accounts as well.
When setting up a cash management solution, consider these aspects
Improve cash transparency with powerful data visualization capabilities.
Automate end-to-end cash management processes, from cash positioning to reconciliation to reporting, to eliminate time-consuming manual processes.
The solution is scalable, so you can analyze and retain more and more data as your organization grows.
Key Features of Pluto Spend Manager
A robust cash management software should have the following features:
- Centralized statement reporting in real-time and intraday
- Integration of external systems and data transformation
- Monitoring and auditing the activities of users and payment processors
- Cash transactions are segmented
- Issue cards for individuals, departments, vendors or even services
- Real-time data about the card usage
- Setting card limits on the go
- Employee can immediately reconcile by taking a picture of the receipt and uploading it to Pluto, all through their phone
Forecasting and analytics
- Use current and historical cash transaction data to forecast cash flow (by period, account, region, entity).
- Forecasting of short- and long-term liquidity.
- Analyzing cash and liquidity ratios using current scenarios and what-if scenarios.
Dashboards and reports
- Reports on ad hoc and scheduled basis
- Real-time drill-down reports
Compliance and security
- Access control based on roles.
- Encrypting data.
- Detailed audit trail for every cash transaction.
- Petty cash funds are just a practical solution to covering minor expenditures that are too small to merit writing a check.
- If your business tends to incur these types of small purchases, setting up a petty cash account and creating policies for its use will come in handy.
- Manually managing your petty cash is a big bottleneck that may result in loss of documentation or even fraud.
- Pluto allows you seamlessly manage your petty cash and make sure that everything is under control.
- You can scale up or down depending on the immediate need and monitor everything in real-time.
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