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Bald man with glasses opening petty cash jar

Will cash disappear in the UK? 

That’s the question on every business owner’s mind. An increasing dependence on credit, debit cards and mobile payments in the UK means that the forward-thinking company is quickly catching up to our near cashless society. 

Having said that, there’s still a case for petty cash. 

As a separate designated area for small expenses, petty cash is used on the daily. Whether it’s the receptionist popping out for a book of stamps or you need to get a bunch of flowers for someone’s birthday. 

When an expense is small like those, it’s not worth going through the usual lengthy request and approval process that takes an average of nine days to reimburse an employee. 

It’s easy to see why many choose to dip their fingers into the petty cash box and keep things simple instead. 

What is petty cash?

Petty cash is a readily available sum of money that can be used to pay for nominal expenses, such as lunch or a new set of office pens. It’s a dedicated fund in the business used for day-to-day spending, so it doesn’t require a long process or procurement system.

Even though a petty cash system is (as the name suggests) cash-based, it still requires the full-blown accounting treatment. This means that petty cash undergoes reconciliation periods just like other expenses do.

Most businesses set their own maximum rate for expenses that can be paid with the petty cash fund, say £25. Because this maximum is so small, there are few other safety nets and controls in place when it comes to spending cash, putting it at risk for dodgy practices…

Why is a petty cash box important?

The major advantage to having a petty cash box is its convenience. A physical jar of cash always within reach makes paying for small, unplanned business purchases really easy. It’s even useful for those regular payments, like those office coffees to get you through the Wednesday afternoon slump. 

Plus, a petty cash box can help you work with vendors or other businesses that aren’t yet fully digital. When dealing with a cash-only business, and without a petty cash box, you’d have to send someone down to the nearest ATM each time.  

When and how to use petty cash 

Postage and packing supplies, birthday cards and cakes, taxi fares and parking meters. These are just a few examples of what can be found on the average petty cash expense list.

In a pinch, petty cash is sometimes used to provide change for customers when your tills are out. So it’s really not worth risking running out of petty cash.  

Most companies tackle the handling of petty cash with a petty cash log book of sorts. Maybe an Excel or paper spreadsheet. A notebook that people tend to doodle in. Essentially some place to record how much has been removed for purchases. Luckily, there are some software alternatives (we’ll get into that later). 

Receipts must also be submitted in order to provide proof of purchase. The same value of cash is then added back into the petty cash jar in order to effectively balance the books, or replace that which was taken.

But what should petty cash not be used for?

Operational costs like staff salaries, utilities and subscriptions should stick to the general expenses (trust us). Petty cash should be saved for small day-to-day costs only. 

How much petty cash should you carry?

The “right amount” for a petty cash tin will vary depending on the size of your business. A newly formed small business could get away with between £20-£50, while others hold up to £500. 

But as your business grows, your petty cash box will have to grow too in order to help your people keep on top of things. There’s no “one size fits all”. 

What to do when it comes to recording petty cash

With cash, it’s easy to feel like you say “abracadabra” and watch it simply disappear. Not to mention how almost impossible it is to then follow the trail. 

We’ve compiled a list of best practices for handling petty cash that you implement right away. Let’s dive in. 

Accounting for petty cash

One or two team members should be in charge of petty cash control. Any time a member of the team needs access, they should first be granted a petty cash voucher. This is an internal document that signifies the request and approval process for petty cash usage. It helps the accounting team to track where cash has been spent and who is responsible. 

Any time a member of your team takes some petty cash for a purchase, they should record it in the log book. Details like how much was taken and the purpose, for example. After the money is spent, a petty cash receipt should always be given to accounting in order to aid the petty cash reconciliation process

How to reconcile petty cash 

In theory, accounting for petty cash should be fairly simple, since it’s just about balancing the books. Similar to accounting and managing general business expenses

However, it’s when the actual figures and calculated figures don’t match that issues crop up and your team is left scrambling.

First things first, balance the books by counting how much money is left in your petty cash tin. Calculate the withdrawn amount by simply subtracting what’s left from the starting balance.

Determine the sum of all of the receipts from purchases made in the current accounting period. This should be the exact same figure as the withdrawn amount. If not, it looks like you might need to get the magnifying glass out and do some investigating. 

It’s easy to jump to conclusions, but a discrepancy might simply be down to human error (it happens!). Double-check the maths and the receipts before moving into more suspicious reasons for missing petty cash. 

How to record a cash purchase without a receipt

It’s best practice to always receive a receipt with your petty cash purchase. But it’s easy to forget, especially when you’re paying in cash. 

Depending on where your business is based, there are different rules. For example, in the US the IRS requires all purchases over $75 to come with a receipt to be accepted as a deductible expense.

In the UK, the HMRC often sets rates for things like meal and mileage expense claims, but they don’t specify a number. The guidance simply states that the amount your business can claim without receipts must be “reasonable” to a tax inspector. This also means that proper petty cash handling, even without receipts, is important for financial statements in case of an audit.  

This is pretty vague, so it’s best to just cover your back and get receipts for everything. In the case that someone forgets, remind them to fill out the petty cash log book and include the missing receipts in your reconciliation process to avoid spending hours sweating over the calculator screen. 

Petty cash best practices

Alongside always getting a receipt, there are several other petty cash guidelines to protect your business and its assets. 

The right amount of control to better pass audit checks

At any given time, the records should show all purchases that have already been made, how much cash has been taken and what the purchases were for. This includes filling out the petty cash vouchers properly. 

Making sure that your team frequently reconciles the petty cash is also important. Whether this is once per week or once per month will depend on the number of transactions made with petty cash. 

Decide who gets access to the petty cash jar 

In terms of where the petty cash is kept and how accessible it is, out of sight is usually best.  Ensure that the cash is locked away in a petty cash box that requires a key (or a petty cash jar or petty cash tin with lockable features). 

Only a couple of chosen individuals should be key holders to the petty cash, as noted in the petty cash policy that your company might put together. 

Now, this isn’t due to a lack of trust in the other team members. It’s because these chosen team members will be trained in filling out petty cash vouchers, asking for receipts and approving petty cash purchase decisions.  

Petty cash vs cash on hand: what’s the difference? 

There might be some confusion with regards to the term cash on hand in relation to petty cash. While mixing up these two happens, it can cause some pretty dire consequences for accounting, and would make an investor question their decisions meaning it’s important to know the difference between petty cash and cash on hand. 

Cash on hand (also known as cash in hand) is the total of the company’s highly liquid assets that are easily converted to cash. For example, money that has not yet been deposited into the bank or change in your tills. Cash on hand refers to any accessible funds within the business and has a completely different internal purpose compared to petty cash. 

Petty cash is only the physical coins and notes that you have put aside for small expenses. It’s kept differently from cash on hand, as is separated from the rest of the business operations. 

All petty cash is considered an asset and counts towards cash on hand, but not all cash on hand is petty.

Is it still worth carrying petty cash? 

There are pros and cons to just about everything, including petty cash. 

Advantages of petty cash

There’s a reason why petty cash has lasted as some other business expense concepts have adapted to the digital age. 

Its ease and convenience are the main reasons that businesses have continued to use a petty cash system – giving team members immediate access to resources as and when they’re needed. 

When filled out correctly, the records like petty cash vouchers make tracking where the money has gone simple enough. The system hasn’t really changed in decades because of this. 

Disadvantages of petty cash

There are also disadvantages when it comes to using petty cash. Since only small purchases are made, there tends to be  a huge lack of attention on it. This makes petty cash susceptible to errors and fraud that could be left undiscovered for months on end. 

Plus, the petty cash system usually relies on just one or two key holders. If they’re ill or off on the same day, the petty cash becomes inaccessible. 

And when the petty cash custodian (aka your finance team) changes hands, the record-keeping is also likely to change, making it harder for auditors to follow. Without proper accountancy training, key stakeholders are left to their own devices on how to run the petty cash.  

Tips for petty cash management 

Wondering how to manage petty cash in the most effective way? 

While most businesses usually have a strategy for managing general expenses, petty cash is often too small to be taken seriously. Follow these steps to get a grip on your petty cash management.

Have your petty cash box in a designated space 

A petty cash box is designed to hold all the notes and coins separately from the other cash you may have, which removes any confusion around spending. It also means that team members are aware they can’t take cash from elsewhere for small expenses. 

How to keep your petty cash book tidy

A petty cash book is the physical copy of your records. Petty cash vouchers, receipts and notes about purchases must all go into the book, which can sometimes lead to a mess of documents spilling out of the book. 

But this is supposed to help the key holders keep track of what is spent where, as well as how much petty cash is available. 

The solution? 

Make use of a filing system to organise all of the documents in your book in order to keep everything tidy. This way, when you need to double check a receipt or find a petty cash voucher from the past, it won’t take days and days. 

Consider petty cash software to streamline all expenses

Cash is becoming less and less relevant in today’s digital world. But that doesn’t mean petty cash is fully redundant. 

By combining your physical petty cash with software, you can form a hybrid between cash and the digital spending elements of your business. And it removes the outdated nature that petty cash is currently associated with. 

Recording and tracking your petty cash and credit card spending with the same software will mean that all expenses are in a centralised place. This makes it much easier for your finance department analysts to spot spending patterns and make a new (and improved) strategy. 

Software not only makes petty cash easier to track – it’s also more secure.

You can introduce automation into the expense request and approval system to crack down on personal purchases. Not to mention the fact that human error is out of the picture when it’s computers that are doing all the sums.

Take your petty cash digital

While cash isn’t likely to completely disappear from society, we can’t deny that going digital makes petty cash management a whole lot easier. Especially for managing remote team expenses, where employees still need access to petty cash but won’t necessarily have physical access.

For example, a petty cash card for businesses makes each transaction trackable, and holds employees accountable for the small expenses that they are incurring. It means that the petty cash custodians (remember that one?) no longer have to send a company-wide email wondering when that missing £2.63 was spent, what was purchased and who has the receipt. 

With Pleo, digital petty cash is made simple. Replace your physical petty cash with Pocket – our feature that allows transactions to be managed in real time, sends notifications for approval and alerts managers to send reimbursements automatically. 

We know that cash remains king for some companies around the country. But if it’s not working for your business, try our petty cash app instead.

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