A-Z of Petty Cash Management for Your Small Business

Venkat

March 22nd, 2019 Expense Management  

For something called petty cash, it’s management is no trivial feat. Petty cash refers to the physical money businesses use to cover small expenses like office supplies, employee reimbursements, and tips. Most businesses use a secure location or a locked box to keep the funds.

While it may seem pretty straightforward, managing petty cash is crucial to cut back on unnecessary expenses. It needs to be controlled and documented properly into a log or an accounting software as you would with your bank account.

What is petty cash management?

Petty cash management is a recordkeeping system to track the use of petty cash that businesses use to handle small expenses that arise over the course of the daily operations. Petty cash management systems are usually imprest systems; they start with a fixed amount and are replenished as the funds diminish.

How is petty cash handled in SMBs?

Small businesses generally use one of the following to keep track of their petty cash:

  • Pen and paper–SMBs use paper logs and receipts to keep track of petty cash
  • Spreadsheets–Some businesses use spreadsheets as a digital equivalent of paper logs
  • Accounting Software–Most business record petty cash expenses as regular expenses and use petty cash as the mode of payment

The handling of the physical cash and its accounting methods, however, broadly fall into the below steps:

1. Set up a petty cash account

Add a petty cash account to the chart of accounts in your accounting tool. Petty cash is an asset on your balance sheet. Every time you add funds to it, the account is debited and when it’s used for expenses, the account is credited.

2. Assign a custodian

If you’re a one-person business, you can control petty cash yourselves. However, you’re run an SMB or a business with multiple branches, you need to assign a petty cash custodian to handle cash disbursements, refilling the funds, and expense tracking.

3. Establish a petty cash policy

It’s important to establish a clear set of guidelines and procedures for your staff to manage the petty cash funds. Decide on the float, which is the starting amount and the minimum balance before you refill the funds. Also, establish the maximum amount up to which petty cash can be used.

4. Keeping track of funds and reconciliation

There’s a petty cash custodian who controls the access and records every deposit and withdrawal from the fund using a log. Every time someone requires a small amount of cash, the custodian handles the cash disbursement and makes a journal entry. Likewise, when the cash on hand gets depleted, the custodian refills the petty cash funds before making an entry in the log.

At the end of the day (or week or month depending on how cash-reliant your business is), the closing balance is noted. This has to match with the actual cash in the fund. This reconciliation is required to ensure that every transaction is accounted for. When discrepancies occur, it’s important to investigate missing receipts and undocumented deposits

How does petty cash management software work?

Businesses have come a long way from using a cash register because of the widespread use of credit and debit cards. Even though petty cash is indispensable, its usage has come down drastically. The role of petty cash management software has shifted from mere expense tracking.

These tools provide each location with a pre-paid card that can be loaded with funds when required. They offer a unified interface from where the headquarters can monitor and control the petty cash of all the branches. They can set maximum limits and get a consolidated, real-time report of the petty cash expenses. Every time there’s a cash withdrawal, journal entries are automatically made ensuring that there’s no chance of cash leakage.

How can Kissflow help?

With Kissflow, you can build a tailor-made app to review and approve petty cash requests. It’s a visual editor with simple drag-and-drop functionalities.

The petty cash custodian or the finance team can request additional petty cash or ask for the funds to be replenished. Necessary details like the required amount, purpose, and other details. The branch manager reviews and approves it before the request moves to the headquarters. Once approved, the funds are released. You can even connect Kissflow with your finance software so that appropriate entries are made.

Start your free 14-day trial today.