How To Develop A Petty Cash Management System in 2023

Businesses often record petty cash expenses to pay for little general merchandise, mail, flowers, taxi fares, and other small expenses and to repay somebody for dropping in lunch or coffee.

Despite its significance, petty cash is still an aspect of financial affairs that receives minimal emphasis. That’s what renders it such a potential threat.

A petty cash management system assists businesses in ensuring that funds are used correctly and transactions are accurately documented.

Poor petty cash management procedures can expose an organization to employment exploitation and regulatory violations.

Let’s try to understand petty cash management and how to manage petty cash effectively. 

What is Petty Cash Management?

A petty cash management system is a process that assists businesses in ensuring that money is used effectively and transactions are registered accurately. Petty cash refers to the small expense money kept on hand for incidental purchases.

Petty cash management systems are a documentation method organizations employ to monitor petty cash control that arises throughout daily operations. Petty cash management solutions are typically imprest processes; they begin with a set sum and refill when funds deplete.

A petty cash transaction might be utilized for the following transactions:

• Office supplies
• Cards, flowers, and other tiny tokens
• Looking for employees with a modest meal, coffee, or goodies
• Offering reimbursement to an employee for minor work-related expenses
• Fees for couriers or another last-minute shipment

Now that the petty cash management meaning is clear let’s dig into its importance.

Why is Petty Cash Management Important?

Petty cash handling is crucial as it helps as an internal control to safeguard the company from theft and fraud, aiding the larger ledger accounts reconciliation process. But how to manage petty cash in excel?

Take a look at an example to understand better.

Consider requesting that your firm replaces your office equipment or stationery. The first item to emphasize is that replacing the stationary will not be expensive. Second, the sum is minimal to deplete a bank account or issue checks.

In such cases, cash use may be more convenient. Petty cash is the optimal option in this scenario. Petty cash management excel procedures enable branches to operate smoothly.

The employee can draw from the petty cash account and record the activity in the computerized accounting system. The custodian will eventually balance the accounts against the amount available at the start of each month.

A petty cash management system improves the efficiency of businesses as well. If every tiny expense is channeled through the main department or office, it may be difficult for branches to act independently. It further complicates matters for the main office.

Petty cash disbursements guarantee that divisions or sections are self-sufficient if appropriate controls exist.

Furthermore, since they typically involve smaller sums, petty cash transactions are simple to trace and reconcile.

8 Steps To Develop A Petty Cash Management System

Maintaining your petty cash is known as the imprest system. It’s a type of financial accounting in which a fixed amount is cast aside and replenished when money is spent. This resupply will be made from a different account.

A nominated custodian for monitoring the account, a funding source, policies and procedures for managing expenses, and financial accounting for cost reconciliation are all necessary when creating a petty cash management system.

Establishing a petty cash handling system for miscellaneous expenses is not challenging. Here’s how you can go about it.

1. Designate a Custodian

A petty cash custodian is responsible for the branch’s minor and moderate cash transactions. They will also be in charge of all petty cash transactions’ journal and adjusting entries, record-keeping, and other maintenance.

By limiting the number of personnel who have access to the bank’s funds, a custodian establishes responsibility and decreases the likelihood of error or fraud.

2. Regulate the Fund

The petty cash fund has a predetermined amount under the imprest system. Cash is deposited into the company’s checking account to the fund in that amount, and the balance is updated as the purchases are made.

The petty cash balance ought to be enough to keep up the number of transactions planned in the account, typically representing the company’s size. Small firms are equally as likely as huge companies to have a petty cash reserve, although the overall sum in the fund will differ.

 For example, several daily cash payments may indicate that one department needs more cash than another.

3. Secure the Funds

Petty cash must be kept in a secure location. For example, a tiny branch needs a safety deposit box or a petty cash drawer in a safe and discrete room.

The key may be held by only the custodians and other explicitly designated personnel, such as the CFO. This promotes accountability and safeguards from fraud or theft.

4. Develop Policies

Your organization should have rules and regulations governing how to use and administer petty cash funds. These regulations will define the kinds of expenditures that count as petty cash expenditures and create protocols to ensure documenting these business expenses.

5. Documentation of Spendings

The custodian must track all expenditures for efficient accounting and management of the petty cash account. The record will enable accurate account reconciliation after the financial statements are generated after the fiscal quarter.

6. Store Receipts 

Concerning a record, your industry’s regulations should specify that receipts must be produced for all purchases. They will provide complete vendor or cash register receipts that list the item or service purchased and the date and amount.

Petty cash coupons should be asked for further details regarding the transaction, such as the purpose of the spending, the account, and the employee accountable for the purchase.

7. Refill Funds

With active spending, petty cash will inevitably run out, and the money should be renewed to sustain additional purchases. At this time, the custodians will ask for an additional check from the company’s bank account in a sum equal to the initial balance of the fund.

Before replenishing money, receipts and expenditures must be reconciled.

8. Track Expenditures

Everything stated above ought to be closely monitored. Frequent fund counts, receipt and petty cash vouchers verification, and spending reconciliation will ensure that company standards and eliminate balance-sheet anomalies.

This is usually done by a person other than the custodian for effective segregation of jobs.

Typical Petty Cash Management Errors to Avoid

Petty cash accounts can be exploited.

Having money in a safe box raises issues that need an efficient cash collection and management solution. Here are some petty cash management errors to avoid: 

1. Negligence

When petty cash is accessible, there is a higher tendency to spend it impulsively and without regard for detail. This lack of focus might result in a lost or insufficient paper trail and fraud or theft.

Costs should be adequately documented, and policies implemented to follow the company’s goals.

2. Dependency on Custodians

While appointing a custodian to oversee a petty cash account promotes accountability, risks are involved. The custodian needs to be the organization’s reliable and competent employee.

For effective division of responsibilities and to avoid misuse of cash, documents of petty cash payments should be kept by a person besides the custodian or anybody else who has exposure to the fund.

3. Paper-Based Method

While having a detailed procedure for recording petty cash fund activities is critical, a traditional paper-based method has numerous disadvantages.

Simply explained, petty cash expenses do not establish the quick record that a credit card payment does. Incorrect or missed log entries can result in inaccuracies, and supporting documentation, such as invoices and receipts, can be missing or neglected.

Leveraging Technology to Make Petty Cash Management Easier

A company might enhance the oversight of its petty cash fund in numerous ways to avoid some of the drawbacks and challenges associated with a traditional, paper-based strategy.

One option is to purchase petty cash management software.

When it comes to successfully managing petty cash, technology is undeniably a show-stopper. Not only can the software minimize the sum of cash wasted and the errors that occur, but it can also assist in creating a centralized database with accessibility to all important material.

Consolidations are quick and easy once the operations are automated. Standard templates have become the trend, resulting in a more efficient audit process. Petty cash management software can be used with expense management systems to enable complete automation. Expense management software integrated with petty cash management can help you significantly streamline your processes.

Conclusion

Petty cash is a little sum of money held on the premises of a business or firm to cover minor expenses and needs.

While it is simple to grasp and use, petty cash control is susceptible to misuse, is easy to overlook, and is vulnerable to theft. Some argue that the petty cash fund is obsolete in modern society: plenty of safer and more convenient alternatives for modest transactions exist.

Petty cash management software maintains and reconciles all petty cash accounts through a centralized system. The automated software provides templates for recording account data and customizable checklists to ensure that petty cash records are standardized across the organization.

Because of integrated storage, all records may be connected directly to transaction details. This also makes reviewing petty cash records easier for internal auditors.