Why Do Businesses Use Petty Cash Funds?

Businesses manage various financial transactions, from large vendor payments to minor, day-to-day expenditures. Petty cash is a small, designated amount of cash kept on hand to cover immediate, minor costs. It offers a convenient and efficient method for handling small-scale financial needs. This fund streamlines transactions impractical to manage through traditional payment methods.

The Primary Purpose of Petty Cash

Businesses establish petty cash funds primarily for convenience in handling small, immediate, and unexpected expenses. Processing every minor purchase through checks, credit cards, or electronic transfers is impractical and inefficient, involving extensive approval processes and administrative overhead. Petty cash allows for instant payments when speed is necessary.

The fund is intended for items of minor value, such as last-minute office supplies or urgent postage stamps. This approach streamlines payment for low-cost items, avoiding complex approval chains associated with larger expenditures. Common uses include reimbursing employees for minor out-of-pocket costs, purchasing coffee or snacks for meetings, or covering small equipment repair costs. Petty cash ensures operations continue smoothly without delay for these smaller, recurring needs.

Establishing and Maintaining a Petty Cash Fund

Setting up a petty cash fund begins by designating a specific amount of cash, drawn from the business’s main checking account. This initial amount, ranging from $50 to $500, is then physically set aside. A specific individual, the petty cash custodian, is assigned responsibility for managing this fund.

When cash is needed for an approved expense, the custodian disburses the amount. For every disbursement, obtain a receipt or complete a petty cash voucher detailing the expense, amount, and recipient. These documents serve as proof of payment and are collected by the custodian. When the fund runs low, a replenishment process is initiated by cashing a check made out to the custodian for the disbursed funds, restoring the fund to its original balance.

Ensuring Accountability and Control

Maintaining strong internal controls safeguards petty cash and ensures its proper use. A key control involves segregating duties, where the individual holding the cash is separate from the person who approves expenses or replenishes the fund. This separation helps prevent misuse and maintains financial integrity.

Regular reconciliation of the petty cash fund is a standard practice. This involves periodically counting cash on hand and adding it to the total value of all receipts and vouchers for disbursed funds. The sum should equal the original designated fund amount, confirming accuracy and identifying discrepancies promptly. Businesses implement spending limits, such as $50 or $100 per transaction, to restrict the maximum amount disbursed for a single petty cash expense.

Petty cash should be kept in a secure location, such as a locked drawer or small safe, to prevent theft or unauthorized access. Management reviews and approves all petty cash expenses and replenishment requests to maintain oversight. Comprehensive documentation through detailed receipts and vouchers creates a clear audit trail and supports accurate expense tracking.