What is petty cash?
Petty cash is a control around cash. It consists of cash and receipts kept in a box. Petty cash then has rules about how to manage what goes in and out of that box. Petty cash exists to fund small expenses in an office or other incidentals. It is an alternative to formal purchase orders or staff paying the expenses themselves and then submitting an expense report.
Managing petty cash
Petty cash is not a “free for all”. These funds are the property of the organization. It follows that you need proper controls over these funds. The most common approach is to use the imprest system. Here are some tips for managing your petty cash:
1 Establish a “float”
Establish an authorized amount for petty cash. This amount is called the float. When setting up a new cash box, the amount taken from bank is the float.
The float should be sufficient that it lasts a few weeks, but it should not last more than a month.
2 Define an upper limit on petty cash transactions
Define an upper limit for transactions allowable for petty cash. Petty cash is not for substantial purchases. It is only for incidentals
3 Use Purchase Orders
Regular purchases, such as office stationary for example, can be purchased using purchase orders. This can avoid using petty cash for many expected, regular transactions.
4 Secure the petty cash box
Ensure that the physical box containing cash and receipts is physically secured. The box should be lockable, because cash is easy to steal. Consider bolting the box itself to the draw inside the draw cabinet.
5 Appoint a custodian
Have a designated person responsible for managing the box. This person is called the custodian. They are responsible for the cash
6 Cash for receipts
Whenever cash is issued from the box, it must be for a receipt.
Your custodian can issue cash in advance of a purchase from the petty cash box, however they write an “advance receipt” for the cash issued. This receipt should record who received the cash. Have both that person and the custodian sign the advance receipt. Once the recipient has purchased the intended items, they return the actual receipt and any change. The custodian then takes the advance receipt from the box. Next, they destroy the advance receipt in the presence of the person who purchased the items. Finally, the custodian takes the purchase receipt and any change from that person and place them into the box.
Make sure receipts are written in pen.
7 Test the float
“Test” the float on a regular basis, at least once a month. Have accounts staff count the contents of the box. The total of cash, purchase receipts and any advance receipts must equal the float. You should perform these tests on a surprised, unannounced basis.
If the total of the contents of the box is less than the float, write a receipt for the difference. This represents missing cash could be an expense. You can then consider if you need to discuss with the custodian how this difference arose and if any action is necessary. If the missing cash is represented by an undocumented advanced made to a staff member, then remind the custodian that they need to create an advance receipt when issuing cash when items are yet to be purchased.
8 Topping up petty cash
When cash in the petty cash box runs low, recharge or replenish the box by creating a purchase order. This purchase order is documented by the receipts taken from the petty cash box. The purchase order is to authorize a cash withdraw from bank. This cash is then placed in the box. Think of a replenishment as replacing receipts for cash. Receipts out, cash in.
Place a copy of the purchase order in the petty cash box, so the float can still be tested during the time during purchase order issue and the new cash physically being placed in the box. Remove this purchase order once the cash is received.
9 Training and compliance
Your new custodian is likely to need training to understand standard petty cash procedures. Train them when introducing petty cash systems. If you detect any shortfalls in the float, then train again.You can also put a laminated card containing a summary of procedures in the petty cash box.
Can you avoid petty cash?
Petty Cash tends to be a lot of work for only a small amount of cash. If you can avoid it, great!
- Issue company cards (debit or credit) to some key staff and have them use it for small expenses
- Restrict certain expenses like parking tickets and fines from being paid from petty cash. If you require your staff to claim these expenses through purchase orders or staff expense reports, then they are less likely to fly under radar
Petty cash is a control risk because it is easy for cash to walk. If you implement the above nine management tips, you should be able to keep petty cash under control. Establish an authorized float. Set it just under a month of expenses. Appoint a custodian to control physical access to the box. Finally, have the custodian ensure that cash and receipts total the float.