Petty cash is a small amount of cash kept on hand by a business to cover minor, day-to-day expenses that are impractical to pay by check or credit card. Keeping track of such expenditures is likely to be easily overlooked. For organizations aiming to ensure financial oversight and accountability in their daily operations, implementing a policy on petty cash is essential.
This blog will guide you through the process of establishing a petty cash policy, inform you about the risks your organization faces without one, and show you a smarter solution for effective expense management.
What is a Petty Cash Policy?
A petty cash policy is a set of guidelines and procedures that an organization establishes for the management and use of petty cash funds. The petty cash policy outlines how the petty cash fund is established, who is responsible for it, and how it should be used and replenished.
Discover the reasons behind the necessity for businesses to implement a petty cash policy in the following section.
Example of a Petty Cash Policy in Action
The following is a detailed example scenario illustrating a petty cash policy in action.
Policy Implementation:
- Petty cash fund: Established at $150.
- Custodian: Sarah, the office administrator, is designated as the petty cash custodian.
- Allowed expenses: Office supplies, postage, courier fees, and small employee reimbursements (up to $20).
- Documentation: Sarah maintains a detailed petty cash log in a dedicated notebook.
- Reimbursement: When the fund drops below $50, Sarah submits a reimbursement request to the finance department with detailed receipts.
- Security: The petty cash is kept in a locked drawer in Sarah’s desk.
- Accountability: Regular reviews of the petty cash log are conducted by the finance manager.
Example Scenario:
Sarah needs to buy stamps for the office, so she takes $10 from the petty cash box and purchases the stamps at the local post office. She logs the transaction in the petty cash record as follows:
- Date: April 5
- Amount: $10
- Payee: Post Office
- Purpose: Stamps
- Receipt number: PO12345
She attaches the receipt to the log. At the end of the month, Sarah notices the petty cash balance is under $50. She prepares a reimbursement request including all receipts from the month. The finance department reviews approves the request, and reimburses Sarah with a check.
Why Do You Need a Petty Cash Policy?
A petty cash policy is indispensable for organizations trying to maintain their financial control and accountability in their day-to-day operations. This set of guidelines plays a crucial role in preventing misuse and ensuring that small, routine expenses are managed with transparency and accuracy.
Establishment of financial control
One primary benefit is the establishment of financial control. By clearly defining how the petty cash fund is to be used and managed, the petty cash policy reduces the risk of unauthorized expenditure and promotes responsible financial management.
Accountability
Another important aspect is accountability. Individuals who access money from the petty cash fund must document their expenses and submit receipts.
Transparency
By using a policy, the organization also demands transparency within the company. This transparency not only helps with internal administration but also facilitates external audits as it gives stakeholders a clear picture of how cash is handled within the organization.
It is now quite evident why companies need to set up a petty cash policy. You will find out more about the benefits of having one in the following section.
Benefits of Having a Petty Cash Policy
A robust petty cash policy offers numerous advantages, such as:
- Streamlining of reimbursement processes
- Reliable tracking tool
- Improved accountability,
- Ensures transparency
- Enhances overall financial oversight
Here are some additional benefits to consider:
Cash management
Petty cash policies facilitate effective oversight of cash flow by providing control and monitoring mechanisms for small amounts of cash used in daily expenses. This helps maintain financial stability and predictability.
Risk reduction
With clear guidelines and procedures inherent in petty cash policies, the risk of fraud and misuse of funds is significantly reduced. This ensures the integrity of financial operations and protects the organization’s assets.
Enhanced accountability
Mandating detailed records of transactions and receipts promotes accountability and transparency among employees. It fosters a culture of responsibility and ensures that funds are used for their intended purposes.
Improved accuracy
By ensuring comprehensive documentation and accounting of all expenses, petty cash policies enhance the accuracy of financial reports. This enables informed decision-making and facilitates strategic planning for future expenditures.
Time-saving
Petty cash policies streamline the process of accessing funds, reducing the need for frequent reimbursement requests. This saves time for both employees and administrative staff, allowing them to focus on more critical tasks.
Understanding the benefits of an established petty cash policy underscores the importance of implementing one within any organization. Without such policies in place, companies face increased risks and inefficiencies in managing their cash resources.
The Risks of Not Using a Petty Cash Policy
Without a reliable petty cash policy in place, a variety of issues may arise, spanning from the mishandling of funds to outright excessive spending. Here are some more examples of what might happen if there is no petty cash policy:
Reduced security
Without a well-defined petty cash policy, it is more difficult to detect any intentional theft or inadvertent loss of funds.
Abuse of funds
Without clearly outlined procedures, the policy can’t act as a barrier against the inappropriate use of funds, reducing the likelihood of petty cash being diverted for personal expenses.
Lack of fund maintenance
Reimbursement procedures established within the policy contribute to the consistent maintenance of the petty cash fund. Without them, it can’t be ensured that the fund remains at its designated amount, ready to cover future legitimate business expenses.
Following the exploration of the potential risks of not implementing a petty cash policy, the subsequent section will guide you through the process of establishing your own petty cash system for businesses.
How to Make Your Own Petty Cash Policy
To establish a thorough and efficient petty cash policy that guarantees proper documentation of expenses, secure fund management, and adherence to accounting standards, adhere to the following steps:
Step 1: Determine rules
The finance stakeholders of a company are expected to establish preferences for managing the petty cash fund, as these preferences can differ among companies. The identified preferences are then consolidated and translated into rules.
Examples of some rules are:
- Repetitive or recurring expenses should not be covered using petty cash
- Petty cash is not intended for mileage reimbursements
- Expenses exceeding 50 € or 100 € should not be reimbursed through petty cash
- Ensure that all receipts are exclusively stored in the designated and secure location as specified
- In the event of missing cash, promptly report the discrepancy to the cash custodian and follow the established procedures
Step 2: Appoint a petty cash custodian
The number of cash custodians and the responsibilities they have should be discussed. Once a custodian is appointed, the relevant information is communicated internally.
Step 3: Take safety measures
The inclusion of safety rules and regulations is crucial in the petty cash policy. For example, employers need to make sure that the key for the petty cash storage box is securely in place. Another safety measure to consider is ensuring that no information about it is disclosed externally.
Additionally, there must be a discussion about the maximum amount of cash that can be kept on hand.
Let’s now take a look at the best practices for cash policies.
Best practices for petty cash policies
Petty cash policies help to ensure that your assets are not misappropriated and that employees are held accountable.
Here are some petty cash management best practices:
- Clear and explicit guidelines: Make sure your policy defines the objective of the petty cash fund, who is responsible for it, how expenses must be recorded, and the approval process.
- Set spending limits: Determine how much each employee can spend from the fund and for what.
- Cash receipts or other supporting evidence should be made mandatory.
- Control access: Restrict entry to the petty cash fund only to designated individuals (such as a petty cash fund custodian) and guarantee its secure storage in a designated location.
- Internal reviews: Regularly audits the fund to verify proper expense accounting and ensure that the total funds align with the recorded expenses.
- Document expenditures: Ensure that your staff logs petty cash transactions promptly in the system to avoid delays, and mandate the submission of precise documentation including purchase date, account number, and other relevant details.
In the end, it is advisable to contemplate the utilization of specialized petty cash software or expense management systems. These tools can automate processes and enhance the efficiency of your petty cash system.
A Smarter Way to Manage Expenses
All these addressed measures, ensuring a secure and accurate petty cash system involves numerous steps, demanding considerable time and human resources. Klippa’s SpendControl, an expense management solution, offers a modern alternative to manual petty cash tracking.
This solution introduces a fully automated and digital method for submitting, approving, and managing expenses through both its web and mobile applications, resolving these challenges effectively.
This guarantees the prevention of lost or duplicated receipts. Additionally, the use of petty cash cards, integrated with the expense management system, eliminates employers’ need for upfront payments and provides a designated budget for business expenses.
If you are ready to simplify your expense management, don’t hesitate to book a free demo below!