How to keep track of petty cash with the imprest system
Many of us think there's no point dealing in wads of notes or the jingling coins in your pocket because vendors simply won't accept cash. But even during 2020 (the year that cash was supposedly wiped out for good), 1 in 6 purchases was still paid for in cash. For a so-called cashless society, that's a heck of a lot.
If your business still deals in cash, it’s important to manage it correctly. As well as general income and expenses, this includes your petty cash system. Because without proper management, petty cash can leak funds from quarter to quarter.
Luckily, there’s the imprest system.
A lean and efficient way to manage your small expenses, this system can transform your cash budgeting from static to dynamic.
What’s the imprest system of petty cash?
There are several different ways to manage a petty cash fund, but the imprest system is generally regarded as the most efficient accounting method. It refers to when you top up the pot back to a predetermined amount.
Let’s imagine there’s £100 in the fund at the beginning of the month. If £75 is spent during the next thirty days, the receipts must equal £75 and this amount will be returned from the general accounts to the petty cash account at the start of the following month.
How does an imprest account work?
An imprest system has two main parts:
- Employees are credited with the amount they spent on petty cash expenses after providing a receipt
- The entire fund is topped up to its original amount at the end of a given period
Here’s a breakdown of how an imprest account could work:
- The petty cash box is filled up with a specific amount, let’s say: £100
- Each time someone in the business incurs a petty cash expense, they bring the receipt or invoice to the petty cashier
- Once approved, expenses are debited from the petty cash jar and credited to the employee who incurred the expense of £10 (following along so far?)
- The receipt for the original purchase, alongside other documentation, forms a petty cash voucher and is then recorded in the imprest petty cash book
- At the end of the accounting period (usually once per month), the petty cash fund gets that £10 back, so its at the starting amount again, from the general company expenses pot. The amount given to the imprest petty cash fund should equal the amount spent during the month, and match the total value of the receipts
- The amount used to top-up the petty cash jar back to its original amount (in this example £10) is recorded in the general ledger as petty cash expenses
Types of imprest accounts
Before we dive into the features of an imprest system, you should know that there are two different types of imprest accounts – standing imprest and special advance.
With standing imprest accounts, an employee makes a purchase with their own money and then asks for reimbursement from the petty cash fund when they present a receipt.
Alternatively, a special advance account allows an employee to get the petty cash before the purchase, so they don’t have to dip into their own pockets.
Features of the imprest system
Two key features of an imprest account separates it from the standard open or fixed petty cash systems:
- Limited total allocation
- Working retrospectively OR proactively
Limited total allocation
The main feature of an imprest system is that it always has a maximum amount that you can never go over, which means it can’t accumulate money.
In open and fixed petty cash systems, there’s the risk of running out of cash or allocating too many resources to the petty cash fund.
But with evidence-based replenishment (as documented by the receipts in an imprest system), these issues are not present. Phew!
What’s more, expenses are periodically recognised when the petty cash custodian (aka the person put in charge of the petty cash jar) documents everything, making it relatively easy to spot and investigate any discrepancies.
Retrospective vs prospective nature
A standing imprest system that works retrospectively, in that your employee has already made the purchase by the time they come to your petty cash custodian to request reimbursement.
But working prospectively, a special advance requires your people to request the petty cash funds before they have paid out for an expense. Essentially skipping the middle-man and simply using the company funds to pay for small expenses.
This feature is useful as you can decide what method of working is the best for your situation. Plus, there are automated expense systems available for other types of spending, but despite this, cash is usually kept manual with a petty cash log book.
What are the benefits of using the imprest system?
The imprest management is widely regarded as the best form of petty cash system.
No unauthorised purchases
When compared to an open system, the petty cash custodian is granted an amount with no spending period. Once this is spent (no matter how quickly), the petty cash custodian will request more from the general expenses account. This is considered a poor way to work compared to an imprest system since it doesn't encourage the conservation of spending.
Without guidelines, people are likelier to spend on unnecessary and unauthorised purchases. But the documentation that comes with an imprest system works to prevent this.
Leaner cash management
And when compared to a fixed system of petty cash can lead to extra money being allocated to the petty cash fund that simply never gets spent. And guess what? You don’t get that problem with imprest management.
The fixed petty cash system means there’s a fixed period to spend the money over, and then the fund is always given the same amount, even if the full amount wasn’t spent. It’s tricky, because it means the petty cash fund can accumulate.
And this can skew budgetting and affect working cash flow, where an imprest system is the more lean way to work (while still being efficient) as it gives only what you need and nothing more.
More dynamic budgeting
Another reason that the imprest system in accounting is generally preferred is that it works with double documentation. Meaning the total amount can be changed based on historical spending patterns, and more or less can be allocated to the petty cash fund based on spending each month – making bookkeeping easier.
What to watch out for with the imprest system
The major concern for any petty cash system is leakage; the small, controllable losses of money. No matter whether your company uses an imprest account entry, open or fixed, a poorly trained petty cash custodian is likely to make mistakes. And if the system isn’t well-oiled, then there’s a chance that some people could take advantage with unapproved spending.
The other key concern when using a standard imprest system is that the only way to control spending is after that money is already gone. This may leave businesses in a sticky situation, either reimbursing staff for unauthorised purchases or turning requests away. Many instances of the latter may lead to lower workplace satisfaction, decreased productivity and contribute to a higher employee turnover rate.
What does the future of the imprest system hold?
These days, petty cash systems are becoming less and less common as people make way for credit cards and digital payment systems. For some companies, it’s a no-brainer when there’s no paperwork required, less time spent in accounting and no account replenishment.
Smart company cards make spending easier to control, especially when spending limits can be set and adjusted accordingly.
Maybe you’re ready for a change?
Plus, admins get access to a dashboard where they see what’s owed to who, along with all the other business spending too, like mileage reimbursement.
So, the next time you need to log a fancy £9.99 supermarket trifle for the next office birthday, digital petty cash management will turn that trifle into a piece of cake.
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