Petty cash is the operational pocket money for your business – a little sum of cash readily available to cover everyday expenses. It’s the go-to fund for small purchases, like buying office supplies and snacks or covering minor unexpected costs. If your business has a petty cash fund, you could grab a $10 bill from the cash drawer, run to the convenience store and purchase a card.

The purpose of a petty cash fund is to provide business units with sufficient cash to cover minor expenditures. The intent is to simplify the reimbursement of staff members and visitors for small expenses that generally do not Exceed $25.00, such as taxi fares, postage, office supplies, etc. Credit cards, debit cards, and online transactions all automatically register in a neat summary. This avoids the major pitfalls of petty cash funds and gives you more visibility over company spend.

Internal Controls

A petty cash fund is a type of imprest account, which means that it contains a fixed amount of cash that is replaced as it is spent in order to maintain a set balance. A designated employee, known as the custodian, is responsible for managing and safeguarding this fund. Establishing a clear petty cash policy helps set the purpose and use of the petty cash fund, and lists allowable expenses. A typical petty cash transaction involves small, incidental expenses that arise in the daily operations of a business. These can include items such as office supplies, postage, coffee, or employee reimbursements for small purchases. The amounts usually do not exceed a predetermined limit set by the company.

Your data is securely stored in the cloud, allowing seamless transitions. Enter Invoicera, a user-friendly tool designed to streamline your petty cash management. Include details like the date, amount, purpose, and the person receiving the cash. Invoicera’s automated approval workflows empower businesses to set spending limits, ensuring why do businesses use petty cash funds? only authorized expenses are covered. Utilizing Invoicera’s expense management feature ensures efficient categorization, facilitating a clearer analysis of how petty cash is utilized. Petty cash is usually kept in a secure place within the office, making it convenient for employees to access it for small, immediate needs.

What is a petty cash fund?

Alternatives to petty cash funds are vital for businesses concerned with how to save time and capital. As discussed above, dealing with petty cash is an antiquated practice and most businesses benefit from using other methods. This person is responsible for determining when it is appropriate to use the petty cash fund. They are also in charge of collecting receipts and making sure the cash log is up-to-date. Note that having a petty cash fund is not the same as having a cash register or other cash system where large volumes of money is transacted. In theory, petty cash funds do not amount to a significant amount of company spend.

Entries are needed to (1) establish the fund, (2) increase or decrease the balance of the fund (replenish the fund as cash is used), and (3) adjust for overages and shortages of cash. For example, for Jane to get reimbursed for the donuts she purchased for the meeting, she needs to provide a receipt. The receipt will be used later as back up for recording the petty cash transaction as an expense in your general ledger. Many small businesses don’t have a formal system for petty cash—owners will simply pay out of pocket for small expenses and hope nothing goes wrong. It sure would be nice to have some spare cash around to pay for these small business expenses, wouldn’t it?

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Having enough petty cash funds helped the employees make instant decisions and meet the business’s emergency needs. Custodians are responsible for maintaining and overseeing the petty cash funds. Certain internal control procedures are also implemented to ensure that petty cash fund abuse is not prevalent. Every purchase using petty cash must be documented in the same way as other business income and expenses. Using a petty cash log or petty cash slips will help capture these expenses so they can be used to offset income for business tax purposes. No matter how large the balance is, it is important for companies to set up a good internal control system that keeps track of all cash inflows and outflows from the petty cash account.

It allows your employees to go straight to the store, cash in hand, buy what’s needed, and return with the change and receipt for the bookkeepers. They won’t have to wait a few days for approval on that $10 purchase from multiple people, check cutting, signing out the company card, etc. Your available cash should always match the amount recorded in your petty cash log.