Petty cash is a small amount of money that businesses keep on their premises and used to describe small company transactions. It’s essential so that you don’t need to make expenses from your own pockets and also so there isn’t a mismatch in balance sheets. Here are even more reasons why it’s important and how to keep track of petty cash.
Why is Petty Cash Important?
Every business needs petty cash to make small transactions on a daily or weekly basis. Think of it as a small amount of money that you have on hand for these ‘petty’ expenses rather than always having to use a cheque.
Just because these amounts are small, it doesn’t mean they’re not important to track. Over time, they can add up and you might not usually think about tracking these tiny amounts. However, there are important reasons why petty cash and knowing how to track it is essential.
Petty cash transactions can quickly add up. Not documenting them and tracking your small purchases can mean a lot of your potential business expenses might be left unclaimed. You’d practically be throwing money away.
Let’s say somebody has a small team of five people and once a month, they’re treated to a pizza which costs £50 each time. That’s £600 a year and not keeping a record of this petty cash outlay means £600 in lost profit. This can apply to any scenario from office supplies to flowers and taxi fares to small repairs.
Petty cash is also important because having small amounts of cash-on-hand for business expenses means you don’t have to dip into your own pockets. Instead, you can handle urgent needs relatively easily.
Most importantly, though, the chances of leakage are very high with regular small expenses. This means there’s a potential risk of a significant mismatch in balance sheets.
How to Keep Track of Petty Cash
Now that you know why petty cash is so important, here are some important steps you can follow right away to keep track of petty cash for your business.
Step #1 - Purchase a Lock Box
It’s quite easy to head to an office supply store and buy a metal lockbox. This will hold the cash you have available to use. It’s also a great place to store the receipts too.
Look for a small metal box that can fit inside a drawer or easily in a small area. Make sure it’s secure as well, such as having a combination lock or a key lock - anything which makes it difficult to tamper with.
Step #2 - Assign Responsibility
If you’re self-employed and a one-person team, then the responsibility for the petty cash fund is yours. If you have a small team, then you need to assign an individual in charge of the petty cash box and account.
If you go with the second option, make sure the person assigned is available to every individual who might need to use the petty cash. It’s an important job, as whoever is in charge of guarding this box needs to disburse petty cash funds, store the written receipts, replenish the cash in the fund and record the items that are purchased.
Step #3 - Store the Petty Cash Box and Set a Limit
Your petty cash box should be kept out of sight and in a closed drawer. But it should still be easily accessible, so you don’t spend too much time trying to get it out. If you want to be extra secure, keep your petty cash box in a locked drawer for another layer of protection.
Then set a withdrawal limit. Petty cash isn’t designed to replace or avoid accounting control of expenses. It’s all about making it convenient to make small purchases where you don’t need to write cheques. So, establish a maximum transaction amount to be handled through the petty cash system - like £25.
This way, any transaction above the limit can be handled through the normal purchasing process as an account payable.
Step #3 - Deposit Cash into the Petty Fund
Once you’ve completed the basics, it’s time to stick some money into the petty cash box. Establish the fund by making sure you’re putting enough in to handle most cash purchases for the time period you choose. It’s no good putting in £10 for the week when you know the petty expenses will be a lot more.
It’s a good idea to mix up how much you have stored in the box. Include some £20, £10 and £5 notes as well as coins. This makes it even easier to reimburse petty cash payments.
Step #5 - Create a Transaction Log
When you first dip into the petty cash fund, you should start a log of the transactions that go through the box. It can be a simple handwritten accounting log, an online spreadsheet or using a pre-made template that you’ve downloaded to save time.
Place every transaction in this log. You should also split it into different columns to make tracking even easier. An example might be:
- Describe the reason for the transaction, such as purchasing office supplies.
- The amount spent from the petty cash fund.
- The name of the person spending the petty cash.
- Require that person to bring back any receipts.
- Updating the amount left in the fund after each transaction.
Step #6 - Track the Petty Cash Fund on the Accounting Records of Your Business
Cash and petty cash accounts are both asset accounts. When you open the petty cash fund, the money can be transferred between the accounts with no effect on the balance of your assets. Once the petty cash fund becomes its own entity, then you need to keep track of it as a separate account.
To make sure there aren’t any mistakes in your balance sheets, make sure you regularly track the petty cash fund to avoid any possible HMRC headaches.
Step #7 - Account For Petty Cash Transactions
Once you have a list of transactions, make sure that a receipt is present for every purchase. This is what will help keep the balance sheet in order. It’s also a good idea to sort each receipt into the appropriate expense category and get the total expenditure for each one.
For example, you might split it between postage, office supplies and transport. It’s also important to check that the reimbursement figure equals the total of receipts which should bring the petty cash fund back to its original balance.
By tracking and logging every petty cash transaction, your books will remain in order and you’ll no longer have to use funds from your own pockets. Keeping track of petty cash is just as important as all of the other financial bits and pieces you need to manage.
While petty cash might seem like a small job, it’s quite important. You still need to decide who gets access, specify what it can be spent on and even evaluate your spending every month. We know it can be tricky, but to help you get started, we’ve created a bunch of free templates that you can sue right away - including a petty cash log.
Start Logging Your Small Expenses With a Petty Cash Log Template
If you want to avoid wasting time setting up a transaction log and find an easy way to track your petty cash transactions, then make sure you download our free petty cash log template below.
It’s one of the many templates we’ve put together in a useful pack that will help you better manage your business, such as profit and loss, cash flow and much more.
To get your free templates, use the link below.