Petty cash: What is it, and how do you manage it?

With these small expenses, it’s not worth going through the usual lengthy request and approval process that takes an average of nine days to reimburse an employee. It’s easy to see why many choose to dip into the petty cash box to keep things simple.

With that being said, petty cash still requires management – and that’s what we’ll cover below.

What is petty cash?

Petty cash is a readily available sum of money that can be used to pay for nominal expenses, such as lunch or a new set of office pens. It’s a dedicated fund in the business used for day-to-day spending, so it doesn’t require a long process or procurement system.

Even though a petty cash system is (as the name suggests) cash-based, it still requires the full-blown accounting treatment. This means that petty cash undergoes reconciliation periods just like other expenses.

Most businesses set their own maximum rate for expenses that can be paid with the petty cash fund – say, £25. Because this maximum is so low, there are few other safety nets and controls in place when it comes to spending cash, which can unfortunately result in some dishonest practices.

Companies typically tackle the handling of petty cash with a petty cash log book of sorts – maybe an Excel or paper spreadsheet, or a notebook that people tend to doodle in. Essentially, some place to record how much has been removed for purchases. Luckily, there are software alternatives (we’ll get into that later) to avoid things getting lost.

Receipts must also be submitted in order to provide proof of purchase. The same value of cash is then added back into the petty cash jar in order to effectively balance the books, or replace that which was taken.

What is petty cash used for?

Postage and packing supplies, birthday cards and cakes, taxi fares and parking meters – these are just a few examples of what can be found on the average petty cash expense list.

In a pinch, petty cash is also sometimes used to provide change for customers when your tills are out. So it’s really not worth the risk running out of that much-needed spare change.

But what should petty cash not be used for?

Operational costs like staff salaries, utilities and subscriptions should stick to the general expenses – trust us. Petty cash should be saved for small day-to-day costs only.

Petty cash vs cash on hand – what’s the difference?

There might be some confusion between the terms cash on hand and petty cash. While confusing the two can happen, it can have pretty dire consequences for accounting and would make an investor question their decisions – so it’s important to know the difference.

Cash on hand (or cash in hand) is the company’s total liquid assets that are easily convertible to cash. For example, change in the tills, or the money that has not yet been deposited into the bank. Cash on hand refers to any accessible funds within the business and has a completely different internal purpose compared to petty cash.

Petty cash is only the physical coins and notes put aside for small expenses. It’s kept differently from cash on hand and is separate from the rest of the business operations.

All petty cash is considered an asset and counts towards cash on hand – but not all cash on hand is petty.

Why is petty cash important?

The major advantage to having a petty cash box is convenience. A physical jar of cash always within reach makes paying for small, unplanned business purchases really easy. It’s even useful for regular payments, like those office coffees to get you through the Wednesday afternoon slump.

Plus, a petty cash box can help you work with vendors or other businesses that aren’t yet fully digital. When dealing with a cash-only business, and without a petty cash box, you’d have to send someone down to the nearest ATM each time.

Ease and convenience are the main reasons petty cash is important for many businesses. With that being said, however, there are also disadvantages to using petty cash.

Since only small purchases are made, there tends to be a huge lack of attention on it. This makes petty cash susceptible to errors and fraud that could be left undiscovered for months on end.

And when the petty cash custodian (aka your finance team) changes hands, the record-keeping is also likely to change, making it harder for auditors to follow. Without proper accountancy training, key stakeholders are left to their own devices on how to run the petty cash.

Thorough expense reporting has never been more important – and that makes it just as crucial to have a handle on petty cash.

How much petty cash should you carry?

The ‘right amount’ for a petty cash tin will vary depending on the size of your business. A newly formed small business could get away with between £20-£50, while others hold up to £500.

As your business grows, your petty cash box will also have to grow to help your people keep track of their spend. In other words, there’s no ‘one size fits all’ when it comes to how much petty cash your business should carry.

Guide: How to handle and record petty cash

With cash, it’s easy to feel like it disappears in the blink of an eye. With rising costs showing no end in sight, cash can be tough to hang onto for long – not to mention how almost impossible following the trail then becomes.

We’ve put together a quick guide of easy-to-implement steps for handling and recording petty cash. Let’s dive in.

Accounting for petty cash

One or two team members should be in charge of petty cash control. Any time a member of the team needs access, they should first be granted a petty cash voucher. This is an internal document that signifies the request and approval process for petty cash usage. It helps the accounting team track who has spent what and where.

Any time a member of your team takes some petty cash for a purchase, they should record it in the log book with details about how much was taken and the purpose. After the money is spent, a petty cash receipt should always be given to accounting in order to aid the petty cash reconciliation process.

Reconciling petty cash

In theory, accounting for petty cash should be fairly simple, since it’s just about balancing the books – similar to accounting and managing general business expenses.

However, it’s when the actual figures and calculated figures don’t match that issues pop up.

First things first, balance the books by counting how much money is left in your petty cash tin. Calculate the withdrawn amount by simply subtracting what’s left from the starting balance.

Determine the sum of all of the receipts from purchases made in the current accounting period. This should be the exact same figure as the amount withdrawn. If not, it looks like you might need to get the magnifying glass out and do some investigating.

It’s easy to jump to conclusions, but a discrepancy might simply be down to human error – it happens to the best of us. Double-check the maths and the receipts before moving on to more suspicious reasons for missing petty cash.

Read more: 8 steps for petty cash reconciliation

Recording a petty cash purchase without a receipt

It’s best practice to always receive a receipt with your petty cash purchase. But it’s easy to forget – especially when you’re paying in cash.

Depending on where your business is based, there are different rules. For example, in the US the IRS requires all purchases over $75 to come with a receipt to be accepted as a deductible expense.

In the UK, the HMRC sets rates for things like meal and mileage expense claims, but your company may not specify a number. This also means that proper petty cash handling, even without receipts, is important for financial statements in case of an audit.

This is pretty vague, so it’s best to just cover your back and get receipts for everything. In case someone forgets, remind them to fill out the petty cash log book and include the missing receipts in your reconciliation process to avoid spending hours sweating over the calculator screen.

4 best practices for petty cash management

Alongside always getting a receipt, there are several other best practices for petty cash management to protect your business and its assets. Here are 4 of the most important ones:

1. The right amount of control to better pass audit checks

At any given time, the records should show all purchases that have already been made, how much cash has been taken and what the purchases were for. This includes filling out the petty cash vouchers properly.

Making sure that your team frequently reconciles the petty cash is also important. Whether this is once per week or once per month will depend on the number of transactions made with petty cash.

2. Decide who gets access to the petty cash jar

Only a couple of chosen individuals should be key holders to the petty cash, as noted in the petty cash policy that your company might put together.

This isn’t due to a lack of trust in the rest of the team, but simply that these chosen team members will be fully trained in filling out petty cash vouchers, asking for receipts and approving petty cash purchase decisions.

In terms of where the petty cash is kept and how accessible it is, it’s usually best to put it to the side – out of sight, out of mind, right? Ensure that the cash is locked away in a petty cash box that requires a key, or a lockable petty cash jar or tin.

3. Keep your petty cash book tidy

The petty cash book is the physical copy of your records. Petty cash vouchers, receipts and notes about purchases must all go into the book, which can sometimes lead to a mess of documents.

But this is supposed to help the key holders keep track of what is spent where, as well as how much petty cash is available.

The solution?

Make use of a filing system to organise all the documents in your book to keep everything tidy. This way, when you need to double check a receipt or find a petty cash voucher from the past, it won’t take the better part of a week.

4. Use petty cash software to streamline all expenses

Cash is becoming less and less relevant in today’s digital world – but that doesn’t mean petty cash is fully redundant.

By combining your physical petty cash with software, you can form a hybrid between cash and the digital spending elements of your business. And it removes the outdated nature that petty cash is currently associated with.

Recording and tracking your petty cash and credit card spending with the same software will mean that all expenses are centralised under one roof. This makes it much easier for your finance department analysts to spot spending patterns and make a new (and improved) strategy.

Software not only makes petty cash easier to track – it’s also more secure.

You can introduce automation into the expense request and approval system to crack down on personal purchases. Not to mention that when the computers are doing all the maths, human error is out of the picture.

Take your petty cash digital with Pleo

While cash isn’t likely to completely disappear from society, we can’t deny that going digital makes petty cash management a whole lot easier – especially for managing remote team expenses, where employees still need access to petty cash but won’t necessarily have physical access.

For example, a petty cash card for businesses makes each transaction trackable and holds employees accountable for the small expenses they incur. The petty cash custodians no longer have to send a company-wide email wondering when that missing £2.63 was spent, what was purchased and who has the receipt.

With Pleo, digital petty cash is made simple. Replace your physical petty cash with Reimbursements – our feature that allows transactions to be managed in real time, sends notifications for approval and allows employees to reimburse themselves to their own personal cards.

For some companies, cash remains king. But if it’s not working for your business, try our petty cash app instead.