Petty cash management: streamlining procedures for a smooth month-end

When it comes to petty cash, your company needs a full-blown, step-by-step process to help your business and its people handle, track and manage all those notes and coins.

It needs to protect the petty cash box, allow access to the funds when necessary, and make the all-important maths easy as pie. Not to mention, transparent so that people aren’t forced into trial and error-ing the spending rules.

Without a proper petty cash system, small expenses end up getting lost and it can be absolute chaos for external auditors who will end up wasting hours and hours on figuring out where that £5 went.

Here are some petty cash management procedures you can implement today that won’t derail your month-end.

Why having a good petty cash management system in place is important

There are endless benefits to introducing a petty cash procedure, including:

• Better internal controls
• Smoother external audits 
• Healthier preparation for tax season

When you don’t have a good petty cash management system in place, spending gets messy.

Messy spending refers to all the transactions that are unauthorised or above the maximum petty cash value when the petty cash vouchers are not submitted after purchases are made.  A proper management system enables your petty cash custodian (aka the person in charge of the petty cash jar)  to confidently follow a step-by-step guide to prevent this from happening. 

When everything is recorded properly, outside parties can come in to perform their checks without friction. Whether your finance team uses paper or digital records, working with a petty cash management system means the archives are easy to track from month-to-month. 

Leading to zero unwanted surprises on audit week.

Having an accurate reading on them from the start makes an enormous difference to your finance team when it comes to calculating taxes. So when your people are gathering info on company revenue, salaries, subscriptions, transport costs and more, this is one job that’s already done.

Who can benefit from proper petty cash management? 

Actually, almost every business – whether you are a sole trader or a huge multinational.

Sole traders tend to be so busy with income-generating tasks that they neglect most of the expense tracking. While passing it over to an accountant is what most tend to do, the petty cash still requires involvement because you must collect the receipts.

On the flipside, petty cash tends to get lost in blackholes at larger companies. Without proper petty cash management procedures, either the petty cash becomes inaccessible and never gets used, or worse, opens the door to fraud.

Whether you’re an entrepreneur going it alone or a huge multinational enterprise, it never hurts to create a system to manage your petty cash. Since it’s one of the easiest assets to lose, everyone could benefit from putting in the effort to plan, organise and establish proper petty cash management guidelines from the start. 

8 steps for petty cash management 

By now, we all know why it’s important to enforce a petty cash management system. Now, we’ll run through the exact steps you’ll need to take to implement a new procedure to help manage your petty cash.  

1. Set the imprest amount 

First things first, your finance team will decide on how much money should be allocated to petty cash spending. Known as the imprest amount, it does not vary from month-to-month.

But, the petty cash jar will get topped up back to the original amount (to offset any spending) when the new month begins.

Most businesses choose between £100-£200 for the petty cash fund, since this value is enough to make off-hand smaller purchases but a fairly negligible amount in the grand scheme of things. 

2. Appoint a petty cash custodian

Your petty cash manager or custodian is assigned to ensure that your new petty cash management procedures are followed. They’re often not a member of finance, but instead somebody on another team keen to take on some responsibility.

3. Fund (and secure) your petty cash

Now it’s time to credit the imprest amount to the petty cash tin. The cash is simply debited from your general expenses account and credited to your petty cash jar. Securing this box is about making sure there’s a lock and key function (which  actually works), as well as placing the petty cash box out of plain sight.

4. Establish spending policies

To control spending, a petty cash policy is a must. It outlines which categories of spending are A-OK, and which ones are not.

For example, your spending policy may declare that purchases under £10 do not need prior approval. It may also say that office stationery purchases are allowed, whereas food and drinks are not.

The purpose of this step is to make sure the rules around your petty cash are clear to create an environment where your petty cash custodian is respected. 

5. Issue vouchers & collect receipts

When an employee needs to buy something with petty cash, there are two ways they can go about it.

The first is by receiving a petty cash voucher which (if approved) grants them the money from the petty cash fund to go to the shops and make the purchase right away.

Some businesses choose to work retroactively – where the purchase is approved and the employee pays out of their own pocket, before being reimbursed by the petty cash box when they submit a receipt. 

6. Log those transactions

As soon as transactions are made, they need be recorded in the petty cash log book. This involves noting down the amount, what was purchased, by whom and who signed off on it.

The purpose of keeping a petty cash log is to provide insight and transparency for your bookkeeper or accountant who comes in later during the petty cash management process.  

7. Time to reconcile that petty cash

Reconcile your payments by matching the recorded purchases with their associated receipts and petty cash vouchers. You’ll also need the following calculation to verify the overall dealings:

Imprest amount - total sum of petty cash transactions = remaining petty cash

Unfortunately, this is the stage where many companies notice an issue. When things add up as they should, it’s job done. Otherwise, you’ll need to take another look. 

8. Replenish the funds

After your imprest amount has been spent, it needs to be replaced at the beginning of each new month. Whether only £30 was spent or the full £100, you’ll need to top up the petty cash box so that it’s back to the original amount.

To do this, assign last month’s payments to the categories of your budget. For example, the £15 spent on staff birthdays may be categorised into ‘gifts’. Then, simply debit the associated purchase amounts from your budget and credit them to the petty cash fund.

That’s £15 debited from the gifts account and credited to petty cash. 

Challenges with traditional petty cash management methods

The first challenge associated with old-school methods for petty cash management is the paperwork. Manual recording is slow and inefficient, not to mention the countless numbers of teams who leave post-it notes for the custodian when they dip into the petty cash jar.

But can you really say that working this way is secure? Reliance on sticky notes is a risky way to conduct business.

Even the custodians who protect the petty cash are exposed to common errors (we’re only human after all!). Without an “editor” to double-check their work, petty cash managers rely on their own training to get the job done.

The solution? Petty cash software

Your petty cash account doesn’t have to be hard to secure or difficult to manage. But with traditional paper methods, it is. 

Plus, some petty cash software allows you to automate spend management by setting controls, so that each purchase follows the petty cash policy without relying on your busy finance team to approve or deny every single request.

Transforming petty cash management from paper to digital creates a safety net and makes sure someone (or something) has the custodian’s back. So, even if they make a mistake here and there, it won’t lie undiscovered at the back of the log book until tax season rolls around.

Take back control of your petty cash account using Pleo’s petty cash app to bring your petty cash management system into the modern age.

Your team can easily track records through electronic submissions, waving goodbye to those pesky post-it notes.

So stop writing off petty cash transactions as company losses, and start managing them properly through an expenses process. Because when it comes to smart petty cash management, sticky notes just don’t quite cut it.