What is petty cash and what is the best way to manage it?

Despite its importance, petty cash remains an area of company finances that receives a minimal amount of attention. And this is what makes it such a potential risk.

Inadequate management of petty cash can leave a business dangerously susceptible to the risks of workplace fraud and compliance breaches. Here’s an overview:

What is petty cash?

The term ‘petty cash’ refers to a fund of money that’s allocated to cover small, everyday office business expenditures. Typical examples would be to cover an employee purchasing some bottles of water for a meeting or who pays for work-related postage costs.

A petty cash fund is usually allocated to a particular office or department, so there may be a number of these funds in operation within a business. The general aim is for them to operate independently, with minimal oversight necessary.

The most common accountancy approach used to manage petty cash is the ‘imprest’ system. This involves an employee being given the role of ‘custodian’ and made responsible for managing the petty cash.

The cash is usually kept in a money box within the office. If a worker needs money to cover a particular business cost, they request cash from the custodian.

Petty cash expenses list

A record is kept whenever money is taken from the petty cash fund with receipts used as proof of purchase. A petty cash expenses list will typically be in paper form or an Excel spreadsheet.

When the fund falls below a certain level, the custodian can request for the fund to be topped up. When new money is added, a check will be made to ‘balance the books’, making sure the amount that has been taken out matches the cash that’s left in.

Cash on hand?

Petty cash is sometimes confused with the term ‘cash on hand’. Cash on hand typically refers to the total amount of cash that a business has access to. So while petty cash may be included within this, it covers a much wider range of finances.

What are the challenges with petty cash management?

In theory, petty cash should be a simple way to manage relatively trivial everyday office expenses. In reality, it’s an area where many finance teams come unstuck. Here are some of the main reasons why:

Lack of attention

Part of the problem is the name. The definition of ‘petty’ is something that’s deemed to be of ‘low importance’ and this is often reflected in the amount of focus it receives within a business.

Petty cash accounts are often left to operate with minimal external monitoring. It’s a lack of scrutiny that makes petty cash so susceptible to errors and even petty cash fraud.

The lack of effective checks and balances means that fraudulent activities can remain undiscovered for extended periods. Even the smallest of losses can become a significant drain on business finances over time, particularly in growing businesses.

Reliance on custodians

The imprest system places a major amount of responsibility on the person or persons who are responsible for managing a particular petty cash fund.

The tendency is for effective management to deteriorate over time. Many of the custodians will have no accountancy training and will be balancing the management of petty cash with their core role.

Without proper monitoring or expense management controls, checks and standards of record-keeping tend to slip. This is a particular problem when custodians are frequently changed.

Paper-based approach

For many businesses, the petty cash fund is one of the few remaining areas of finances which is still being handled manually. Custodians will typically keep track of costs on paper forms or an Excel spreadsheet.

When paper receipts aren’t available, claimants will often leave handwritten notes to cover expenditures. It creates a chaotic and hard-to-manage system.

For a central finance team, it makes it hard to access fast and accurate information on costs. Problems are often only accounted for when external audits are carried out.

How do you improve petty cash management?

The most effective way to improve the management of petty cash is to move into the digital age. There’s no longer any need to rely on handwritten notes and paper forms.

A digital management system such as Webexpenses allows a paperless approach to petty cash, integrating it along with the rest of the employee expenses.

The expenditures are recorded using an online tool that provides a finance team with instant access to office expenditures across a business.

This cloud-based management approach allows any number of petty cash accounts to be centrally managed. It’s equally effective for a small startup or a global corporation.

Automated checks can be carried out to ensure that each petty cash cost is within a defined limit. If a limit is breached, an alert is triggered.

With accurate data and integrated reporting tools, petty cash costs can be monitored over time. Any spikes or unusual spending patterns can be identified and investigated.

It creates a simple and effective way to manage everyday costs and helps to reduce the risks that are posed by a traditional approach to petty cash.

If you're interested in finding out how Webexpenses can help you to best manage how you control petty cash, why not book a demo of the system.