How do you respond to sudden and unexpected expenses for your business? Maybe you notice the office is out of coffee and decide to go on a quick supply run, or you need to grab food so people can stay late to finish a project. Small businesses typically don’t have expense accounts that employees can charge these purchases to, so how do you deal with these costs?
This is where having extra money on hand, also known as “petty cash” is helpful. Learn what petty cash is, what it’s used for, and how to set up a petty cash fund for your business.
What Is Petty Cash?
Petty cash is physical money your business keeps around to pay for small and unplanned expenses. The amount of money kept on hand varies by organization, but most businesses establish a petty cash fund between $50 and $500. This money is typically kept in a secure location within the office, such as a locked drawer or cash register, and the business will use a system to keep track of deposits and withdrawals.
What Is Petty Cash Used For?
Petty cash is used for small expenses such as:
- Office supplies
- Office snacks and meals
- Mail services
- Parking fees
- Employee reimbursement for expenses
These expenses are typically labeled as petty cash expenses in the budget, but classifications will vary by organization. For example, some organizations may restock office snacks after running out and classify the cost as a petty cash expense, but others may have a dedicated snack budget that is used to restock the office every month.
Break down your budget and look at what random expenses occur most frequently to help determine what should be allocated for and what should be classified as a petty cash expense.
What Is a Petty Cash Fund?
Collecting and keeping track of employee receipts can be challenging for businesses of any size. As your company grows, so will the amount and frequency of random expenses. A petty cash fund provides an easy way for your employees to cover these costs and using a formal system helps with bookkeeping.
A petty cash fund is the formal system businesses use to pay for and track small, unplanned expenses. The two parts of a petty cash fund are:
A petty cash fund is a physical stash of money that comes from a portion of the budget dedicated to random expenses. Think about how much petty cash you’ll need for your business and how often this will need to be replenished.
Larger businesses may want to set up a petty cash fund for each department with varying amounts based on need, whereas small businesses may be able to use a single petty cash fund for the entire office.
Decide where you’ll want to put this cash fund, how you want to secure it (lockbox, cabinet, etc.), and who should have access to the money. You may want to put one person in charge of managing the petty cash fund, such as an office manager who distributes the money and tracks the expenses as needed.
Tracking withdrawals and deposits to the petty cash fund is crucial for bookkeeping purposes, so use a records spreadsheet or accounting software to manage this information.
Download our petty cash record spreadsheet or try making your own with the following items:
- Starting petty cash fund balance
- Date of the expense
- Who incurred the expense
- What the expense was
- Amount spent
- Remaining petty cash fund balance
Download your own free petty cash tracking spreadsheet.
How to Set Up a Petty Cash Fund
Step One: Set a Budget
Look at the past six months of random expenses to figure out how much money to put into your petty cash fund. Examine the frequency, amount, and source of expenses during this period to determine if it makes sense to split up your petty cash fund by department. If you notice certain items appear often (snacks, parking, etc.), consider allocating a specific amount for these expenses in your company’s formal budget.
Decide when to replenish this fund by using a time metric (ex. once a month) or a balance threshold (ex. when the remaining balance falls below $100).
Step Two: Make a Record
Track petty cash expenses using a records spreadsheet or accounting software. Make sure expenses are marked as they are incurred and document all relevant information. In addition to the record, ask employees to take pictures of receipts to verify the details of petty expenses.
Reconcile the record to ensure the fund’s balance is correct before replenishing it. In the case of discrepancies, speak to the employee who made that expense and figure out the source of the error.
Step Three: Assign Access
Choose which employees will be able to use this fund, then assign one person to oversee the distribution of money and tracking of expenses. The assigned employee in charge should be the only person with direct access to the fund on a daily basis. Have other employees go through this person when money is needed.
Create a list of employees who are likely to use this fund frequently and grant them access to use the fund as needed. For everyone else, establish a ticket system that requires manager approval before money can be distributed.
Step Four: Secure the Petty Cash Fund
Secure the money and record using a lock box or cabinet that can only be opened by the petty fund manager. Store the petty cash fund at the assigned manager’s desk and make copies of records in case of accidental disposal or deletion.
Take the Guess Work out of Expense Tracking
Don’t leave tracking random expenses to someone unfamiliar with bookkeeping best practices. Learn how ScaleFactor can automate this process and integrate petty cash expenses into your formal budget with our easy to use accounting software. Request a demo today.
And don’t forget to download your own petty cash record spreadsheet!