Not keeping a check of petty cash funds is a major problem. Many businesses do not keep a track of petty cash expenditure and often take amounts out of the cash float without recording them. If petty cash expenditure is not monitored and controlled accurately by a bookkeeper this may lead to a business not claiming all of its business expenditure and thus it may end up paying more in business tax.
If you handle petty cash for your employer, or help clients set up a petty cash system, you know that if anything goes wrong, you will be blamed. Petty cash funds are not a way to get around cash disbursement controls. They enhance efficiency by providing cash quickly in the following situations:
- When the formal system is too costly. Surprisingly, producing a check can cost as much as $2.50 or more. A $25 purchase is not worth it.
- When the formal system is too slow. It often requires 1-5 days to process a voucher and produce a check, too long for a $25 item needed right away.
- For special situations, such as cashing employee paychecks or providing advances for travel and conferences (some firms don't allow this).
Controls: Generally, one custodian is responsible for petty cash and decides who can get petty cash, requires an i.d. for each disbursement, authorizes petty cash payments only for acceptable purposes, observes authorized payout limits and requests reimbursements. But if the custodian is at a doctor's appointment, no one gets cash, so consider having two or three custodians who coordinate their schedules. A different employee should book reimbursements, and still another should review distributions, and amounts.
Shortages: Petty cash funds often run out. To determine how much to keep in the fund, check last year's replenishments. Were they weekly? monthly? quarterly? Here are some guidelines:
- Determine the ideal number of days between replenishment dates. Every 10 days? 20 days? 30 days? The less frequently you replenish, the more cash the fund needs.
- Know how long replenishment takes. Is it same day? 3 days? a week?
- Decide how many funds to have.
Security: Keep petty cash in a fireproof, locked, limited access safe, locked metal box, or vault, depending on the fund's size. Do not leave safes and boxes unattended. Limit access to only the petty cash custodian(s).
Reimbursement: Set dollar limits and make sure the custodian observes them. Have clear rules on what can be reimbursed. Prohibit accepting employee IOUs in exchange for cash for personal use.
Replenishment: Replenish before funds run low. Require that all completed petty cash vouchers be in numerical order and in ink (not pencil) with receipts attached. Replenish at least monthly.
Permanent change in the petty cash amount: Firms often overlook the need to change the amount because it is not systematically reviewed. At least yearly, review the amount as follows: Compare the replenishment each month to the monthly balance. If the amounts replenished are close to the fund balance (within 10%), increase the amount. If the replenishments (especially in peak months) are 30% less than balance, decrease the amount. Investigate whether employees with legitimate needs were denied petty cash during the year, and adjust decisions on permanent changes accordingly.
A well-run petty cash fund includes:
- set dollar limits on petty cash disbursements;
- reimbursement limits based on type of outlay;
- reimbursements only for valid business expenses;
- restriction of petty cash only to certain employees;
- lists of reimbursable miscellaneous expenses;
- requiring completed, sequentially numbered vouchers to account for each disbursement;
- requiring receipts for all vouchers when possible;
- periodic reconciliation of cash and vouchers;
- prohibition of disbursements for personal checks; and
- distribution of petty cash policies to employees.
Need a better set-up for your Petty Cash Fund? Call us at 877-966-4441 or email us.