What is petty cash?
Managing your business's petty cash is an important part of dealing with those day-to-day expenses — office supplies, coffee runs, stamps for mailings. While most business expenses can be handled through your regular accounting system, sometimes you need quick access to cash for these minor purchases. Enter petty cash.
This article covers everything you need to know about setting up and managing a petty cash system that works for your business.
What is petty cash?
Petty cash is a small amount of money kept on hand to pay for minor business expenses. Just like you might keep some cash in your personal wallet for small purchases, your business needs the same. Having petty cash available means you won't need to write a check or use a credit card for small amounts, and your employees won't have to use their personal funds and wait for reimbursement.
How much petty cash should you have on hand?
For most small businesses, we typically recommend keeping between $100 to $500 in petty cash, depending on your specific needs. The exact amount should be based on a few key factors:
Your monthly spending patterns: Track how much you typically need for small purchases over a month.
Payment frequency: How often do you plan to replenish the fund (weekly, bi-weekly, or monthly)?
Business type: Retail stores might need more for things like making change or emergency supplies, while service businesses might need less.
That said, you really shouldn't keep more than you'd spend in a single replenishment period. For instance, if you typically spend about $200 on small expenses every two weeks, there's no reason to keep $500 in the fund.
The imprest system
We recommend using what's called the imprest system to manage your petty cash. Don't let the fancy name fool you — it's actually pretty straightforward. Here's how it works:
You start with a fixed amount in your petty cash fund. For example, let's say your petty cash fund is $200. As people spend from the fund, they submit receipts for their purchases. When the fund gets low, you replenish it back to the original amount. The beauty of this system is that at any time, the cash remaining plus the receipts should equal your starting amount.
For example, if you have $75 left in cash and $125 in receipts, that adds up to your original $200. This makes it easy to track spending and spot any discrepancies.
How to managing your petty cash effectively
To keep your petty cash system running smoothly, we suggest implementing these practices:
Assign a custodian. Make one person responsible for managing the petty cash fund. This person should be trustworthy and detail-oriented, as they'll be in charge of distributing cash and collecting receipts.
Keep it secure. Store petty cash in a locked box or drawer, and limit access to only those who need it.
Document everything. Create a log to record every transaction, including the date, amount, purpose, and who received the money. Always get receipts.
Set clear policies for your petty cash
We've seen too many businesses run into petty cash problems because they didn't establish ground rules upfront. Your petty cash policy should specify:
Maximum amount for single purchases
Types of expenses that can be paid from petty cash
Who has authority to approve petty cash expenses
How often the fund will be reconciled
Required documentation for expenses
How to tracking petty cash in your books
Even though we're talking about small amounts, proper accounting for petty cash is crucial. When you initially fund your petty cash account, record it as a debit to the petty cash account and a credit to your cash account. When you replenish the fund, categorize the expenses based on the receipts collected — office supplies, meals and entertainment, postage, etc.
Regular reconciliation is important. We recommend counting the cash and matching it against receipts at least weekly, depending on how frequently you use the fund. This helps catch any discrepancies early and keeps everything running smoothly.
Need help managing your business finances?
Remember, while petty cash might seem like a small detail in your business operations, managing it well is part of building strong financial habits. Need help setting up effective financial systems for your small business? Explore the small business accounting services we provide.