Petty cash might seem like a minor detail–but it plays a big role in keeping a business running smoothly. it’s essentially a small fund of cash that’s kept for minor expenses. You’d use it to cover small, day-to-day costs involved in running a business, without extra delays or paperwork. But unless you have a clear system, it can get tricky to keep track of where the expenses are coming from.
This guide will make it clear what petty cash is exactly and walk you through how to properly manage a petty cash fund, from setting up clear guidelines to logging every transaction.
What is petty cash?
Petty cash is a small amount of money that businesses keep on hand for quick, everyday expenses. These costs might pop up unexpectedly, but they usually don’t require writing a check or even using the company credit card. Most businesses that aren’t large enough to issue company credit cards also still use cash to pay for all the little things they need at the workplace.
Examples of these include:
- Drinks and snacks
- Office supplies
- Postage for letters and packages
- Gas and parking fees for business errands
- Other unpredictable small expenses
How does a petty cash system work?
Even though petty cash might seem minor, you still need a proper organizing and record-keeping system, with a clear audit trail of every expense.
You’d typically set aside a certain amount of cash as the “petty cash fund,” around $100 to $200, then keep it in a secure location like a locked drawer or a safe. When an employee needs to make a minor purchase–say, a box of pens or postage for a client letter–they take what’s needed from the fund.
There’s usually a petty cash custodian who’s responsible for managing the amount. Either the employee or the petty cash custodian would then record the amount spent on a petty cash log, along with details like the date, amount, and purpose of the expense.
Every now and then, the petty cash custodian will reconcile the cash on hand against the transaction log. When the balance gets low, the custodian will replenish the fund by writing a check or withdrawing cash from the main business account.
Of course, to prevent fraud or overspending, you should have clear rules in place, covering:
- Types of expenses – What can you spend petty cash on?
- Spending limits – The maximum amount that can be withdrawn at any one time
- Approval process – What employees must do to access petty cash
- Documentation – Employees should give a receipt or proof of purchase
- Replenishment procedures – How and when the petty cash fund will be replenished–for example, the custodian might have to submit an expense report or receipts
By setting these guidelines, you can avoid misunderstandings or misuse, and your petty cash system keeps expenses quick to resolve and easy to track.
What is a petty cash log for?
A petty cash log book lets you keep track of all the small expenses made at your office. This way, you can keep personal and business expenses entirely separate. You might think it’s too much trouble to list every dollar that goes out of your office. Maybe it seems easy to just dig into your personal wallet for tiny business expenses, but think about it. Let’s say you spend $5 a day on miscellaneous stuff. At around 260 working days a year, that adds up to $1300! And those expenses are tax-deductible!
With a petty cash log sheet, you’ll have an itemized list that you can put on your tax return. Even better, you’ll be able to keep track of those little things that can add up so fast. Are you spending too much money on office cappuccinos? Without a petty cash log, there’s no real way to tell. At least, not without issuing office credit cards. But if you have a smaller business, you might not need those yet.
Petty cash logs help stop fraud
The Association of Certified Fraud Examiners reports that organizations lose an average of about 5% of their revenue every year to employee fraud. And most of it is small-time stuff – padding expense reports, stealing inventory and office supplies, or misappropriating cash. A petty cash log book can help keep temptation away from your employees. The honor system can be great under the right circumstances, but it’s much safer if all your cash is locked away in one place and accounted for.
If you’re worried about employees pilfering the petty cash, research has shown that encouraging them to keep photos of loved ones around might help stop this problem. According to the Harvard Business Review, study subjects were significantly more honest on self-reported tests when they could see a picture of loved ones. The theory is that seeing those photos encourages people to behave more ethically.
How do I keep a petty cash log?
Keeping a petty cash log doesn’t have to be complicated. Just follow these best practices and you’ll have it down in no time:
Let’s go over these tips in more detail:
1. Decide how much petty cash you need
How much cash should you keep on hand? Many businesses consider $100 to $200 to be a good amount, but it depends on you. Do you often take small deliveries that you need to pay for? Treat your employees to pizza on Fridays? What about office supplies, printer ink, and so forth? Do you order it all in bulk, or just buy what you need when you run out?
Try keeping track of all your small expenses for a week. That should give you an idea of how much petty cash you need. While you’re doing this, it’s a good idea to decide what expenses qualify for petty cash disbursement. Maybe you treat your employees to pizza Fridays, but you probably don’t want to pay for their daily lunches.
Consider these too:
- How often do you want to replenish your petty cash fund?
- How low does it need to go before you replenish it?
- Will you set a withdrawal limit? How much should it be?
2. Appoint a petty cash custodian
It’s a good idea to severely limit the number of people who have access to your petty cash. Choosing one or two people is ideal. Allowing everyone access to the petty cash will just lead to chaos. Depending on your situation, you might need a cash register or lockbox. An envelope in your office administrator’s desk drawer might work, too. But it would help if you had a designated spot to keep your cash and petty cash log – preferably one that can be locked.
Depending on how much control you need, you can get petty cash vouchers and appoint two petty cash custodians. One to hold the cash and one to approve requests and sign vouchers. The vouchers should list the following:
- The date
- The voucher number
- The amount of petty cash required
- The reason for the disbursement
- The name and signature of the person approving the payment
- The name and signature of the person receiving the cash
This voucher should then be kept with the petty cash log sheet, along with the receipts for those purchases. This way, you’ll have everything sorted out at the end of the month or quarter when it’s time to do your taxes.
3. Get the cash
Go to the ATM or write a check to petty cash. Record this expense in your accounting log so you can keep track of it.
4. Teach everyone how to use your new petty cash system
If you’ve decided to get petty cash vouchers, you can show everyone where those are kept and how to fill them out. Tell them who they need to go to in order to get their requests approved and disbursed. Acquaint your employees with the guidelines you’ve set up. Explain what expenses are suitable for petty cash and how much the limits are.
5. Start your petty cash log
Keeping a petty cash log sheet is easy. The petty cash custodian just needs to remember to log every expense as soon as possible. If they wait too long, they’ll probably forget, which defeats the whole purpose. A voucher system makes everything much easier here since there is already a record of each expense.
You can use any of these petty cash form templates that we’ve curated. A petty cash log can be as simple as six columns:
- Date
- Petty cash disbursement number
- Description of expense
- Cash in
- Cash out
- Balance
If your petty cash system is electronic, your petty cash log sheet practically keeps itself. Your cash custodian won’t have to do any math. All they need to do is enter in the information, and the app will do everything else for you.
Switch to digital petty cash logs
Using a petty cash book is critical to ensuring that petty cash is sufficient and properly spent. Although paper-based petty cash books may be sufficient for certain transactions, digital petty cash books offer many advantages. For example, the conversion increases security, minimizes the risk of loss and damage, and prevents unauthorized spending.
Lumiform is a digital checklist and workflow automation tool. It allows digitizing the entire petty cash process. Automatically create monthly reports and analyze the evolution of your expenses. Take advantage of Lumiform for your petty cash log by using the following:
- Get started digitally right away by using one of our templates from Lumiform’s library.
- Adapt the downloaded template to your company’s specifications in a few steps using the drag-and-drop form builder, or create a custom template from scratch.
- Simply capture the required data on the go with the app on your smartphone or tablet – this is also possible offline.
- Create a report on your petty cash as needed and send it immediately to other responsible parties.
- Analyze the collected data via the dashboard and develop actions to reduce your expenses.
- All data is automatically uploaded to secure cloud storage to ensure that no information is lost or accessible to unauthorized parties.