Petty cash is anything but. Lack of strict controls over which employees have access to it, what it’s used for and how those expenses are recorded can get your small business into big trouble when it comes time to reconcile your books.
If you’re petty cash system needs an overhaul, here are some tips from CPAs, bookkeeping services and trade groups that work with small businesses:
* Do the math. As the name implies, petty cash is a small amount of money kept on hand for incidentals too minor to write a check for, or for occasions when whoever’s in charge of writing checks or using a credit card isn’t around. The exact amount depends on how much a company spends on deliveries, office supplies or other small purchases in a given week or month. Generally speaking, a business of a couple dozen employees shouldn’t need a petty cash fund of more than $50 or $100, says Kathleen Schneibel, a Minneapolis CPA and former company controller who now does accounting work for sole practitioners and other small businesses. Ken Lewellyn, owner of a Nashville, Tennessee, bookkeeping service for small businesses, says the purchasing department at a small manufacturing company he once owned kept $200 in petty cash because “they bought a lot of small items locally and needed cash” to pay.
* Safety first. Keep petty cash locked in the kind of metal strong box you can find online or at an office supply store. You may trust everyone in your office implicitly, but be careful anyway. Even honest people can be tempted by the prospect of cash that’s kept out in the open, or need to borrow a few dollars for a personal emergency then forget to give it back, Schneibel says. Nip temptation in the bud by keeping the petty cash box locked at all times. After hours stow it inside a locked supply cabinet or safe so it’s doubly secure.
* Two heads are better than one. To minimize risk, put two people in charge: one to mind the box and keep track of money going out and expense receipts coming in, and the other to replenish funds when they get low. At Schneibel’s old office, she put an accounts payable clerk in charge of petty cash disbursements and made someone else responsible for transferring funds from the company’s main bank account into petty cash when funds got low.
* Count on it. Reconcile petty cash funds on a regular basis – daily, weekly or monthly depending on how often you use it. At any given time, cash and receipts in the fund should equal the total you started out with. “Make a list of everything that was spent and give it to the boss to make sure it adds up,” Schneibel says. The reality is busy business owners don’t always do this, but they should, she says. “The fact that they’re looking keeps an honest person honest.”
* Use Excel. If whoever’s maintaining the petty cash box isn’t a computer person they can create a simple tally sheet on paper. But if they are, they can create a simple Excel or Microsoft Works spreadsheet to track cash in and cash out. Lewellyn, the Nashville bookkeeping service owner, says at the manufacturing company he formerly owned, the purchasing department logged expenditures into Excel until their entire $200 petty cash fund was gone, and then submitted the spreadsheets and receipts to collect another allotment.
* Retailers can treat petty cash differently. If you operate a retail store, you can use your cash register instead of a lock box for petty cash fund. “Have a button that records it and put receipts in a slot like you would checks,” Schneibel says.
One more thing: if you find your company paying small amounts out of petty cash week after week to the same places for the same items – shipping, printing, supplies, etc. – “That’s a whole other problem,” Schneider says. It probably means you’re overpaying for those services and should set those vendors up as regular suppliers to take advantage of any kind of volume discounts they offer.
Want more help? Here’s where to learn more about setting up a petty cash system:
- Getting control of petty cash – Article on setting up a petty cash system from the American Institute of Professional Bookkeepers’ Bookkeeping Tips newsletter.
Microsoft Excel petty cash template – Downloadable petty cash form that works with Excel 97 or later.