Petty Cash Part One: Setting Up a System

Most business transactions are automated for ease and efficiency. Having these transactions electronic in nature by using apps, accounting software, online banking etc. produces  accurate, organized records with little effort. There are times however when checks and cash are necessary for business.

Petty cash can be defined as an accessible store of money kept by an organization for expenditure on small items. This store of money is sometimes used for small purchases such as office supplies, or shipping charges. Writing checks for such items can become time consuming and expensive.

 

Most business owners operate with a small amount of petty cash and may have little knowledge of how to track it. It should be a priority to install a system that tracks the cash kept on hand and what it is being used for. We have discussed the importance of systems in previous posts. The more thorough you are with a system from the beginning, the better the system will work for you and the less work it will be to maintain.  There are a few steps to get the petty cash system up and running.

  1. Purchase necessary tools. The first tool you will need is a lock box. You can find these boxes at office supply stores. Make sure it is small enough to easily fit in a desk drawer for storage, as well as large enough to hold the necessary amount of cash. The lock can be either a combination lock or a key, whichever works best for your business. Make sure it is secure and not easy to tamper with.

  2. Name a keeper of the fund.  This person is usually called the custodian of the petty cash fund. Whoever is chosen, besides being trustworthy, should also be easily accessible to employees. Their responsibilities include: reimbursing cash in return for receipts, recording all transactions and replenishing cash from time to time.

  3. Find a place out of sight for the box. Once the lock box has been purchased and the custodian has been chosen, there should be a specific location chosen for this box. It should be out of sight, preferably in a desk drawer. This drawer could also be locked for added security. The key for the lock box should not be stored in the same drawer. It should be in a different location, possibly on the key chain of the custodian.

  4. Determine withdrawal amount. The petty cash system is not meant to replace the accounting system for your business.  As I said before, it is meant for small purchases. While setting up a system, determine the maximum amount allowed to be handled with petty cash. Purchases over this set amount should be handled through other purchasing procedures.

  5. Fund the Fund. Once these basics have been set up, it’s now time to put money into the box. A check should be written to the custodian.  The check is  then cashed and the cash placed in the box. There are several factors to consider when determining what money to put in the box. You will need enough to cover typical expenses but not too much as to tie cash up from the business or encourage theft.  Normally the amount is between $100 and $500. Be sure to keep a range of denominations of bills in the lock box. You will need a few 20’s and 10’s and plenty of 5’s and 1’s. Also include coins to be able to give exact change with little hassle.

  6. Keep track of transactions. Once the cash is in the box, it is necessary to set up a log to record all transactions that occur. This can be a simple hand written chart, or a spreadsheet. There should be a column for a description of the transaction (office supplies, stamps, etc) a column for the amount spent, a column for who used the petty cash, and a column for the date. Also include a place to record deposits into the account. The first deposit should be recorded as a petty cash deposit and all withdrawals will be deducted from that amount. Each time funds are replenished, a new log should be started.

  7. Work with the accountant to get this account on the books. The petty cash account is funded through the cash account. Both are considered assets for the company. To set up the fund, simply transfer funds from the cash account to the petty cash account. This transfer will have no effect on the balance of assets. The petty cash account will become like all other accounts and should be tracked as one.

  8. ...And go. Once the business has cash in the box, employees can begin using the cash for small expenses. Every time funds are disbursed from the petty cash account, the custodian should require a receipt. The receipt should include the date of the purchase as well as the name of the purchaser and should be stored in the box. The purchaser should then receive the exact amount of the purchase back from the custodian.

Hopefully you will take time to set up a system that will work well for your business. The petty cash system can be a wonderful addition to your financial management. In the next post we will continue talking about petty cash. We will go deeper into managing the expenditures in this account.