Establishing a Petty Cash Fund for Your Business

To fulfill its daily cash needs, a business should set-up a petty cash system. Generally this is done by allocating a certain fixed amount of cash to petty cash fund which is then used for cash expenses.

Whenever possible, a business organization should try to make a majority of financial transactions through banks and other electronic payment sources, because it provides a record of financial history and chances of error and fraud are reduced. Doing this for every transaction is not possible and businesses will need cash for small bills. Paying for office air fresheners, a bag of sugar for pantry or a change of company vehicle’s air filter at a garage are all instances where writing a check may not be an ideal situation and the company would need to use cash.

How much should be in the petty cash fund?

The amount to be set depends on the frequency of smaller cash bills received by a company. The amount should generally be of a size which does not alter the cash and bank amount of the company by a big margin.

If the monthly expenses of a company amount to let’s say $100,000, the company would generally be able to settle about 85% of the expenses through banking and other online channels (e.g. rent, utilities, fuel, wages etc.) for the rest of the 15% comprising of very small bills compounded together, a petty cash fund can be created and used.
So setting the amount of petty cash is based on a realistic estimate of smaller bills received on a weekly or monthly basis.

Should I make a separate asset account for petty cash?

In order to trace out all the bills pinned under petty cash, it is important to create a separate petty cash ledger account. This allows separation of cash and petty cash accounts to make these funds easier to track and to replenish petty cash.

How do I keep our petty cash from disappearing?

Generally a petty cash custodian is assigned by an organization who is responsible for withdrawing, safekeeping, disbursing and replenishing the petty cash. A safe is usually provided for cash security with the access only being given to the custodian.

When do we replenish our petty cash?

After the petty cash system is set up and smaller office expenses are being paid through petty cash, the cash levels will gradually start dropping. A time may come when there is no cash and the company needs to pay a bill urgently. To avoid this situation, a minimum cash level is set and cash is replenished at that level.
For example, a business has a petty cash fund of $15,000 with minimum cash level set to $1,000 and after paying for smaller bills the petty cash custodian is left with $995. He/she at that point will make a cash reimbursement request of $14,005 to reset the cash level at $15,000.

How do we monitor petty cash for irregularities?

In the cash reimbursement example above, the cash replenishment request will be accompanied by all the paid bills to be vouched by the person in charge of authorizing cash disbursement. This creates a control system and allows monitoring of cash expense to find any irregularities.

How does a petty cash imprest system work?

A Petty cash imprest system is that same petty cash fund system as explained above, with the only difference here being the fact that the petty cash account always shows a full balance of petty cash.

Let’s assume if a company has set a petty cash amount of $8,000, the petty cash ledger account will always show the same balance. So what happens here is that the petty cash custodian keeps spending cash and keeps collecting the bills. When the total of bills settled reaches a certain minimum account, the custodian then generates a cash replenishment request which is processed through the company’s normal cash or bank account. This transaction does not affect the petty cash ledger account so the balance never changes.

Although the trend of electronic transactions is on the rise, cash is still being used for many small and infrequent transactions. Establishing a petty cash system for your business allows recording of cash flow and provides financial and operational control over petty cash transactions.

Get our FREE Accounting Spreadsheets Now!