Question: How Do I Set Up and Manage a Petty Cash System?

Answer:

What is Petty Cash?
Petty cash, so-named because it is small (petite) amounts of cash available to a business for making change and for small purchases, needs to be managed in the same way as other assets of your business. Answer these questions to get your business set up for petty cash management.

Setting up and keeping track of petty cash should be part of the overall record keeping system for your company.

How much money is needed for a petty cash fund?
You want a balance between too little (in which case you must replenish it often) and too much (in which case you have the problem of the money disappearing). The amount depends on (a) the number of customers who pay you in cash and (b) the volume of transactions in which you use petty cash. A good rule-of-thumb might be that you don't want to replenish any more than twice a month. Trial and error will give you a good idea of how much needs to be in the fund.

Who has access and responsibility for petty cash?
The fewer employees who have access the better, but you should have at least two people. The person who replenishes petty cash should not be the person who inputs the transactions into your bookkeeping program. Monitoring petty cash is one important way to detect and prevent employee theft and embezzlement.

How should petty cash transactions be recorded?
You can record on slips or a listing, whichever is easier. The important thing to remember is that EVERY transaction must be recorded and must include:

• Date of the transaction
• Amount of the transaction
• General description of the transaction ("donuts for office meeting," for example)

You don't have to record the account number at the time of the transaction.
When you replenish petty cash, group transactions by account number and enter them in your bookkeeping program.

When should the petty cash fund be replenished?
The timing differs, but you should replace petty cash (up to the designated amount) when you think you won't be able to go through a day without a problem.

What can the petty cash fund be used for?
That is up to you as the business owner. Typically, petty cash funds are used for (a) making change, and (b) paying for small transactions. You can set a dollar limit on transactions to make it easy for employees to remember. For example, any transaction over $25 needs to be in the form of a check or must have a purchase order or requisition, and should not be taken from petty cash.

How do I deal with theft or suspected theft from the petty cash fund?
It is often difficult to prove theft, so tread carefully here. If you suspect an employee from stealing from petty cash, restrict access to the fund and see what happens. If you have proof of theft from petty cash, contact your attorney before you make any accusations or call the police.

It is your responsibility as a business owner to set up policies for use of petty cash, to monitor petty cash transactions, and to make sure that employees are using petty cash responsibly.