Petty cash refers to the small amounts of cash kept on hand in business. With growing digitization, people are swiping their cards for smaller purchases. This has reduced the use of a petty cash system. However, it's still essential for any business to make sure all small purchases are properly accounted for as business expenses.
Having cash on hand eliminates significant time in writing out and using up cheques. This helps with small payments on account of expenses like stationery, coolie hire, refreshments to guests, etc. which cannot be paid through cheques. Additionally, certain vendors or brands don’t accept debit or credit cards under a certain amount.
Petty cash is indispensable but managing it is time-consuming and cost-inefficient. It is interesting to find that in a survey conducted for a sample of 585 finance professionals, 53% of organizations reported that the biggest pain point related to managing expenses and petty cash is employees losing paper receipts or submitting without receipts.
In this blog, we will explore how a petty cash system works and how it can be managed better.
How a petty cash system works
Petty cash is kept on the imprest system. An amount is fixed, which after a specific period of time or once money is spent, is replenished. This replenishment generally comes from another account source.
The initial amount for setting up the petty cash system comes from the business checking account which determines how much money will be required each day, both to give change to customers and also for small cash payments. This can be done by keeping track of expenditures over a period of time, using an average amount for each week.
Each transaction is documented in the same way as other business income and expenses. This includes the date, amount, payee details and purpose of business expenditure. Using petty cash vouchers or logs will help identify these expenses which can later be used to offset the income for tax purposes.
A custodian is necessary for overseeing the petty cash. This includes checking the account periodically so that the balance doesn't get too low. When the petty cash goes below a pre-set amount, it should be replenished.
An important use of the petty cash drawer is generating change. If this is customary at one’s place of business, it becomes necessary to do a mini-audit at the end of each day. Start with beginning balance, cash in, cash out against transactions and ending cash.
Make sure each of the transactions is documented are as specific as possible, so there is no doubt that the transaction was business-related. At the end of each day, record the final amount. The difference should tally with cash payments and with the total of petty cash expenses paid.
Keeping track of transactions
Having a petty cash policy section within the employee policies and procedures manual will go a long way. Other questions to be considered while using this system are:
- The amount
How much money should be kept in the account?
What is going to be the minimum balance to be maintained before replenishment?
Which account is going to be used to replenish the petty cash?
- The custodian
Who is in charge of recording transactions?
Who replenishes the account?
- The location
Where is the petty cash kept?
- The transactions
How are the petty cash transactions going to be recorded?
Where are the records kept?
Who is responsible for adding the petty cash records to your business accounting system?
As with any cash asset, accounting controls are necessary with the required systems to protect against theft and misuse. Ground rules such as the following will help in mitigating this:
· The person who is recording the transactions should be different from the person entering the transactions into the accounting system.
· Location of the petty cash should be secure
· Occasional surprise audits are required to check the credibility of the transactions.
Petty cash and taxes
One of the most important benefits is using petty cash transactions to offset the tax. The only way to do that is by having perfect records of each transaction. By documenting all petty cash transactions, the records will be very handy to calculate the deductions for those small business expenses. The more one has documented petty cash expenses, the higher are deductions, and the lower is the business tax bill.
Simplify petty cash management with automation
An automated means for managing petty cash accounts minimizes the risk linked with these funds. With standardized templates, consistent management across the firm is now possible.
This further ensures that petty cash reconciliations are being properly deployed. These include:
· Petty cash reconciliation workflow automation
· A comprehensive review of reconciliations followed by approval
· Ensuring relevant allocation of duties
Zaggle Save is an all-in-one business spend management platform that can empower your business to spend smarter and reduce time and effort. With Zaggle Save, data analytics creates a safe and secure mode allowing cash flows to be managed efficiently. This removes the need for time-consuming, labour-intensive paperwork eliminating cases of fraudulent spending.
With real-time expense reporting, smart scan, AI-powered fraud detection & prevention mechanisms, enterprises can effectively handle various facets such as Travel & Expenses, Business Expenses, Petty Cash, Employee Reimbursements and Benefits.
It is often hard to streamline expense management due to time or budgetary constraints. But with free platforms like Zaggle Save, one can quickly gain control and visibility over business expenses of any type.