Setting up a Petty Cash System

When it isn't practical or possible to pay for something by check or credit card, many companies opt to have a petty cash fund. This fund allows the company to have a minimal amount of cash on hand - usually a few hundred dollars for smaller organizations - for when unexpected, small purchases (such as extra office supplies or a pizza for the team) need to be made.

How to Get Started

Setting up a petty cash account is quite easy. First, you need to decide how much cash you want to have available for emergencies or unexpected, but necessary purchases. Let's say, as a small business owner, you decide $300 is the right amount.

Next, you need to appoint a fund custodian of the account - usually someone in the accounting department - to be responsible both for the cash disbursement and reconciliation. Provide the custodian with a locking bag or locked box along with the $300 cash inside.

Next, as requests for petty cash are made, the custodian will hand out the cash in exchange for a petty cash receipt or voucher from the employee, signed by an authorized manager and indicating the amount of petty cash being requested (see our form in the OA Toolbox). In addition, the receipts from the purchase made should either accompany the voucher - if the petty cash is a reimbursement - or be turned over to the custodian once the purchase has been made.

Keep in mind that the amount on the voucher must match the amount of cash that the fund custodian disburses to the employee. At all times, the balance in the account must equal the amount of cash on hand plus all the vouchers. So, if you have five vouchers of varying amounts, when you total them and add that to the amount of cash still available, it should all equal the original $300.

Finally, as the amount of cash on hand gets low, the custodian must submit the vouchers for reimbursement. Once the custodian receives reimbursement, the petty cash account should be back to its original $300 amount.

How to Monitor and Control the Petty Cash Account

One of the biggest issues with having a petty cash account is accountability. You must ensure that there are controls in place in order to prevent abuse of the system.

Therefore, companies typically will initiate a petty cash policy that not only describes the process and how it works, but outlines specific guidelines for having the fund.

Things to consider include:

• Who can authorize a petty cash payment (i.e. sign a voucher)

• When petty cash can and cannot be used (i.e. dollar amount limit, type of purchase allowed)

• How the account will be monitored (i.e. frequency of audits, minimum cash amount allowed before replenishing the account)

• What and when supporting documents are required (i.e. purchase receipts)

The purpose and benefit of having a petty cash fund is to allow flexibility for purchases that are of an immediate need and which would be hampered by having to go through the normal check request channels. However, it is vitally important to have the right checks and balances in place to ensure that employees do not use it to circumvent the normal accounting system.