Petty cash might seem like a practice from the past in the age of digital transactions, but it remains a critical tool for business operations. When used correctly, petty cash can ease the flow of everyday expenses without the hassle of requisitions and reimbursements. However, if mishandled, it can be a source of financial leaks and operational confusion. Here are ten best practices that every business owner should follow to ensure their petty cash management is in top-notch order.

1. Establish a Clear Petty Cash Policy

Clarity is key in all aspects of business management, and petty cash is no exception. Start by creating a comprehensive petty cash policy. Outline what the petty cash fund can be used for, who can access it, and the maximum amount that can be withdrawn. Communicate this policy effectively to all staff members to set clear expectations and avoid misunderstandings.

2. Determine an Appropriate Float

The “float” is the total value of money held in the petty cash fund. It’s important to establish an appropriate float that is neither excessive nor too limited. Consider your business’s size and the typical usage of petty cash to determine this amount. A good rule of thumb is to base the float on the average monthly expenses that the fund will cover.

3. Keep Petty Cash Secure

Petty cash should be kept in a secure location, such as a locked drawer or cash box within another secure area. Only authorized personnel should have access to this key or code, and each withdrawal should be logged to maintain accountability. Regular checks on the fund’s security measures are also recommended.

4. Create a Documentation System

Accurate documentation is vital for tracking petty cash transactions. Each time a withdrawal or deposit is made, a receipt should be issued and signed by both the recipient and the custodian of the petty cash. These receipts should then be filed and organized for easy retrieval during audits or when the fund requires replenishment.

5. Implement Tight Controls

To prevent misuse, tight controls need to be in place. For example, ensure that any petty cash withdrawal requires multi-level approvals, and that no single individual holds the responsibility for both approving and disbursing the funds. Regular spot checks and audits can help in detecting any irregularities.

6. Set Spending Limits

Within the petty cash policy, establish spending limits for different types of expenses. This ensures that larger, more significant purchases are not made through petty cash. Employees should be aware of these limits and encouraged to find alternative methods for purchasing high-ticket items.

7. The Importance of Original Receipts

Original receipts, not photocopies, are the currency of the petty cash system. They are the evidence that a purchase or expense has been made for legitimate business purposes. Insist that all receipts are physically attached to the reconciliation form, and implement a policy requiring explanation for any missing receipts.

8. Regular Reconciliation

Petty cash should be reconciled and replenished on a regular basis, such as monthly or quarterly. This involves comparing the cash balance with the total value of receipts to account for all expenses and ensure that the fund always has the proper amount to cover future transactions. It’s also an opportunity to review the necessity and compliance of all expenditures.

9. Educate and Train Employees

Not everyone is familiar with the responsibilities and procedures of petty cash. It is the duty of the business owner to provide adequate training and resources to employees with access to the petty cash fund. Regular training sessions and updated handbooks should be implemented to keep knowledge current.

10. Adapt and Improve

The dynamics of a business can change over time due to various factors, such as growth, economic fluctuations, or regulatory updates. The petty cash management system must be flexible enough to adapt to these changes. Periodic reviews and subsequent adjustments to the petty cash policy will ensure that the system stays efficient and compliant.

Implementing these petty cash best practices can help business owners avoid headaches and maintain control over small, everyday expenses. Remember, every little detail matters when it comes to protecting the financial integrity of your business. By being organized, vigilant, and communicative, you can ensure your petty cash remains a benefit rather than a burden.

Reach out to our team for assistance with petty cash and other accounting matters for your business. We would be happy to help.