Petty cash is a small amount of money kept on hand by organisations to pay for minor, day-to-day expenses that are too small or urgent to warrant writing a cheque or using other formal payment methods. It provides immediate access to cash for small purchases and incidental expenses that occur in normal business operations.

Purpose and uses of petty cash

Common expenses

• Office supplies: Emergency purchases of pens, paper, staples, or other small office items needed immediately.
• Refreshments: Coffee, tea, milk, sugar, or light refreshments for meetings, client visits, or staff breaks.
• Postage and courier: Stamps, express mail services, or urgent courier deliveries when accounts aren’t established.
• Transportation: Taxi fares, parking fees, or public transport costs for business errands when reimbursement isn’t practical.
• Minor repairs: Small maintenance items like light bulbs, batteries, or basic hardware for immediate fixes.
• Emergency supplies: First aid items, cleaning supplies, or other necessities that can’t wait for regular ordering.
• Client services: Small expenses related to customer service such as refreshments or minor hospitality costs.

Petty cash management system

Initial setup

• Fund establishment: Determine appropriate fund size based on organisation needs, depending on business size and requirements.
• Custodian assignment: Designate a responsible employee as petty cash custodian who will manage the fund, make disbursements, and maintain records.
• Security arrangements: Establish secure storage location such as locked cash box, safe, or restricted access drawer with limited key access.
• Documentation system: Set up voucher system, receipt requirements, and record-keeping procedures for all transactions.
• Approval limits: Define spending limits per transaction and total monthly limits to maintain appropriate control.

Daily operations

Disbursement process:

1. Employee requests cash for approved expense
2. Custodian reviews request for appropriateness
3. Cash provided in exchange for completed petty cash voucher
4. Employee submits receipt upon return for record completion
5. Transaction recorded in petty cash log

Voucher documentation: Each disbursement requires completed voucher including date, amount, purpose, recipient, and authorisation signatures.

Receipt collection: All expenditures must be supported by receipts or invoices showing vendor, amount, date, and business purpose.

Running balance: Continuous tracking of remaining cash balance to monitor fund status and identify when replenishment is needed.

Replenishment process

• Reconciliation: Regular counting of remaining cash plus total vouchers should equal original fund amount.
• Reimbursement request: Submit vouchers and receipts to accounting for review and approval of fund replenishment.
• Journal entries: Accounting records individual expense categories and restores petty cash fund to original amount.
• Cash restoration: Fund custodian receives cash to restore fund to predetermined level.
• Record reset: New cycle begins with fresh voucher tracking and updated balance records.

Best practices for using petty cash

Policy development

• Written procedures: Comprehensive petty cash policy documenting all procedures, limits, responsibilities, and requirements.
• Clear guidelines: Specific examples of appropriate and inappropriate uses with spending limits and approval requirements.
• Training requirements: Mandatory training for custodians and frequent users on proper procedures and compliance expectations.
• Regular updates: Periodic review and updating of policies to reflect changing business needs and best practices.

Operational excellence

• Appropriate fund size: Right-sized fund that meets needs without being excessive or creating unnecessary risk.
• Prompt reconciliation: Regular, timely reconciliation to identify and resolve issues quickly.
• Proper documentation: Complete, accurate vouchers and receipts for all transactions without exception.
• Limited access: Minimal number of people with fund access to maintain security and accountability.

Technology integration

• Digital vouchers: Electronic petty cash management systems that track disbursements and generate reports.
• Receipt scanning: Digital storage of receipts and vouchers for better record keeping and audit trails.
• Automated reporting: Systems that generate reconciliation reports and expense summaries automatically.
• Integration with accounting: Petty cash systems that interface with general accounting software for streamlined processing.

Petty cash in industry variations

Retail operations

• Higher volume: More frequent small purchases for supplies, repairs, and customer service needs.
• Cash handling: Integration with existing cash management procedures and security protocols.
• Multiple locations: Separate petty cash funds for different stores or departments with centralised oversight.

Healthcare organisations

• Emergency needs: Medical supplies, patient comfort items, or urgent equipment repairs.
• Regulatory compliance: Additional documentation and approval requirements for medical-related expenses.
• Department-specific: Separate funds for different units (nursing, administration, maintenance) with specialised needs.

Educational institutions

• Classroom supplies: Emergency purchases for teaching materials, supplies, or student needs.
• Event expenses: Small costs related to school events, meetings, or activities.
• Multiple funds: Separate petty cash for different departments, programmes, or activities.

Alternatives to petty cash

Corporate credit cards

• Advantages: Better documentation, spending controls, and elimination of cash handling risks.
• Considerations: Approval processes, credit limits, and monthly reconciliation requirements.

Prepaid cards

• Benefits: Controlled spending limits, detailed transaction records, and reduced security risks.
• Features: Reloadable cards with spending restrictions and real-time monitoring capabilities.

Digital payment systems

• Options: Mobile payment apps, digital wallets, or online payment platforms for small purchases.
• Advantages: Automatic record keeping, reduced cash handling, and improved security.

Purchase order systems

• Application: Formal purchasing processes with approved vendors for recurring small items.
• Benefits: Better vendor relationships, bulk pricing, and improved procurement control.

Regulatory and compliance considerations

Tax implications

• Expense deductibility: Proper documentation required for business expense deductions and tax compliance.
• Record retention: Maintaining receipts and vouchers for required periods to support tax filings.
• Audit preparation: Organised petty cash records facilitate tax audits and regulatory reviews.

Financial controls

• Corporate governance: Public companies must maintain adequate internal controls over financial reporting including petty cash.
• Audit requirements: External auditors review petty cash controls and procedures as part of financial statement audits.
• Internal controls: Board-level oversight of financial controls including cash management policies and procedures.

Future trends for utilising petty cash

Digital transformation

Movement towards electronic payment systems and reduced reliance on physical cash.

Mobile solutions

Smartphone apps for petty cash management, receipt capture, and expense reporting.

Automated controls

AI-powered systems for expense categorisation, policy compliance monitoring, and fraud detection.

Integration

Better integration between petty cash systems and enterprise resource planning (ERP) platforms.

Sustainability

Paperless voucher systems and digital receipt management for environmental benefits.

Petty cash remains an important operational tool for many organisations despite the trend towards digital payments. Effective management requires balancing convenience with appropriate controls to ensure funds are used properly and securely.