Having Trouble Keeping Track of the Small Expenses? Here is a Simple Guide to Controlling Your Petty Cash
If you are having trouble keeping in check your small business expenses, this guide is definitely for you. I am going to show you a very simple way of taming the petty expenses which cumulatively could be substantial expenses. Examples of such tiny expenses include paying for snacks delivered to a business meeting or paying for the bouquet of flowers meant for the front office desk.
Just to be on the same page, the word ‘Petty’ comes from a French word ‘petit’ meaning small. By definition it means trivial or of little importance. It is the small sums of money that are used to make incidental or tiny expenses easily rather than issuing a company cheque. This amount is also known as cash-on-hand.
What I have discovered is that in most small businesses, keeping track of the tiny payments is a major problem. I had the privilege of assessing the petty cash situation for 5 startup companies and none of them had any sort of records to show the usage of petty cash even though the business owners knew that money was being spent on certain expenses. They could not ascertain how much was being spent on these trivial payments.
Obviously by the sound of it, it sounds immaterial, but cumulatively over a long period of time, these amounts could become significant sums of money and can cause headaches.
It is also good to keep proper track of this expenses as they will help you reduce your tax burden / tax payments in future. This is because you are allowed to deduct business expenses from the revenue generated thereby reducing the taxable profits.
Below are simple steps you can follow to control the usage of petty cash in your business. Best practice refers to these steps as the imprest system of managing petty cash.
1) Develop a Petty Cash Policy
A petty cash policy is a written down document that provides the rules and guidelines on petty cash management. The policy should be able to address the common questions of What, Who, How and Why with regards to petty cash.
- What can and cannot be paid out of the petty cash?
- Who is responsible for payments and who authorises such payments?
- Why is the petty cash required? Reasons have to be clearly stated.
- How is the petty cash usage going to be recorded?
- Who needs to know the policy?
2) Set up the Relevant Systems
i) Identify the person who is going to be responsible for handling petty cash in the business
This will be the ‘petty cash custodian’. This person will be in charge of issuing petty cash to various staff members who need it and accounting for the usage of the petty cash on a periodic basis.
ii) Determine the Petty Cash Fund
This is the amount that the business deems appropriate to pay for small day to day transactions. The amount varies from organisation to organisation. It could range between $50 to an upper limit set by the company. When the petty cash fund is used up to a certain predetermined low level, the custodian will request for replenishment to boost the fund to the predetermined upper limit after accounting for the money used.
iii) Establish the rules of accounting
It is the duty of the custodian to determine whether amounts should be paid out of petty cash or not depending on the petty cash policy.
The custodian has to record all petty cash issued and ensure that all the petty cash expenditure is supported by original receipts.
The records should show:
- the date of the expenditure;
- the individual receiving the money;
- the vendor used;
- the purpose of the purchase and
- the amount spent.
Note: When using copies of original documents, it is possible to make several claims against one document fraudulently without anybody noticing. As such, it is recommended that all accounting documents are original.
3) Address security issues around petty cash
The petty cash fund must be in the control of the petty cash custodian and the amounts should be stored in a safe or a lockable drawer in a secure area. Only the custodian should have access to the fund.
Other security measures that can be put in place include use of guards at the entrance to the business premises to ensure that unauthorised people don’t gain access to the offices, CCTV, biometric controls and so forth.
4) Periodically review the petty cash system to ensure the controls are working as expected
It important to periodically evaluate the petty cash management system to ensure it is working properly. Trusting your employees is important but verifying that the controls are working properly is a no brainer. Put on the auditor’s hat and perform surprise cash counts and compare to what the records indicate to see if the system is really working as it should.
“An ounce of prevention is worth a pound of cure.