Petty Cash Policy and Procedures: Guidelines and Regulations

Petty cash is a small amount of money kept by companies in cash form to use for frequent, but small, business expenses. 

Although it’s an easy way to ensure employees don’t have to pay out of their own pocket, they are often not recorded because they are minor transactions. Also, it’s difficult to track them sometimes because they won’t have receipts. 

It’s important to have a clear petty cash policy and procedure in place to ensure there’s no room for misuse. 

In this article, we’ll take a closer look at the importance of petty cash policies and procedures, explore best practices, and learn more about the best petty cash management solutions.

Read More: What is Petty Cash Management: A Process Set Up Guide

What is a petty cash policy?

A petty cash policy is a set of guidelines and procedures that enforce controls on petty cash use and management.

It is generally used to restock or purchase office supplies, postage, and minor repairs. A custodian is responsible for it and ensures that it is appropriately spent and the transactions are documented properly.

What is the objective of petty cash policy?

The main objective of a petty cash policy is to ensure that petty cash funds are readily available to the companies.  It takes care of the following functions-

1. Petty cash disbursements

A petty cash policy has to clearly state the method of petty cash disbursements. It should name the custodian of the petty cash fund and the procedure required to procure petty cash for spending. 

2. Documentation

The petty cash policy also needs to have the methods for properly recording the disbursement and use of petty cash. 

3. Reporting

Petty cash policy states the procedures that need to be followed to efficiently report all the petty cash use throughout the year at the time of expense reconciliation.

4. Prevention of theft and misuse

Petty cash policy details the framework required to ensure the prevention of theft and petty cash fund misuse. It may also detail the corrective measures that need to taken for the defaulters. 

Importance of petty cash policy

Petty cash policy ensures that all petty cash-related functions are properly executed, documented, and reported. The policy can help businesses in a number of ways. 

Firstly, a petty cash policy ensures that a company saves money. By preventing theft and misuse of funds, a petty cash policy helps a company save the funds that would otherwise be vanquied. 

A petty cash policy also estabishes a clear reporting strategy. This means that petty cash expenses are properly accounted for and considered during a company’s financial decision-making. In turn, this ensures that the financial decisions are more informed and lead to more cost-efficient practices. 

Lastly, a petty cash policy helps increase disbursement efficiency and accelerates overall petty cash spending. This is because the petty cash policy efficiently eliminates all confusion regarding the disbursement process. 

Benefits of a petty cash policy

Petty cash policies offer many advantages. It streamlines the disbursement process and develops a mechanism for tracking it. 

Here are the benefits of a petty cash policy:

• Cash management: Petty cash policies help manage cash flow more effectively by allowing you to control and monitor the use of small amounts of cash for daily expenses.
• Reduced risks: With clear guidelines and procedures, petty cash policies help reduce the risk of fraud and misuse of funds.
• Increased accountability: Since petty cash policies require detailed records of all transactions and receipts, it boosts accountability and transparency.
• Improved accuracy: The policies help ensure that all the expenses get documented and accounted for. This improves the financial report accuracy and helps with better decision-making.
• Saves you time: Petty cash policies reduce the need for employees to request small and frequent reimbursements by letting them access the cash they need quickly and easily. 

Quick Read: Cash Management System – Types, How It Works and Best Practices

What is a petty cash procedure?

Petty cash procedures are a set of rules and guidelines to manage the petty cash fund.

Here are some steps included in a petty cash procedure: 

1. Filling out a request form

The petty cash custodian (the person managing the fund) lists the amount of cash on hand, vouchers, and any overages. Petty cash vouchers are receipts that show the amount, date, and purpose of each expenditure. The accounting staff reviews the form, approves it, and sends it to the accounts payable team.

2. Obtain the petty cash

The staff creates a check to the cashier with the amount required to fund the petty cash. This person deposits the check and converts the funds to cash. The accounts payable staff forwards the reconciliation form to an accountant.

3. Add the cash to the fund

Next, the cashier gives the money to the custodian, who adds it to the fund. If there is a petty cash book (a record of all transactions), the custodian enters the amount received and updates the running balance. 

4. Record vouchers in the general ledger

An accountant records the voucher amounts in the general ledger as expenses and files them. 

Here are some of the steps involved in handling petty cash the traditional way: 

1. Monitor disbursement requests

Only the requests for minor business expenses that fall within the guidelines get approved. 

2. Unlock petty cash

Apart from disbursal, the fund should be locked in a safe, a filing cabinet, or a cash box when not in use. 

3. Complete the voucher

The person being reimbursed fills out a voucher. If there is a receipt or purchase order, it is attached along with it. The employee also signs the voucher to signify proof of payment. 

4. Disburse cash

The custodian cross-verifies the cash disbursed with the recipient. 

This is where Happay’s petty cash module comes in. 

Happay is an end-to-end expense management solution that offers a centralized petty cash management tool. It allows you to disburse cash from a central seat to multiple branches directly to the petty cash cards.

What happens if you don’t have a petty cash policy?

Many things can go wrong if you don’t have a solid petty cash policy in place, ranging from misuse of funds to plain overspending. 

Here are some examples of what happens if you don’t have a petty cash policy:

• Misuse, theft, or fraud: Without clear rules and controls over petty cash, some employees may be tempted to take advantage of the fund for personal or inappropriate purposes. This results in losses for the company and legal consequences for the offenders.
• Overspending or wastage: Without limits on the amount, frequency, and purpose of petty cash expenditures, some employees may use the fund for unnecessary or excessive purchases. This reduces the efficiency and profitability of the company and creates cash flow problems.
• Mistakes or discrepancies: Without proper documentation and reconciliation of petty cash transactions, some errors or inconsistencies may occur in the records. This can make it difficult to track and audit the fund and may lead to tax or compliance issues.

Future Read: 6 Best Cash Flow Management Software

How to write a petty cash policy?

Petty cash policy and procedures example

Petty cash policy best practices

Petty cash policies help ensure your funds aren’t misused and ensure increased employee accountability. 

Here are some best practices for petty cash management:

• Clear and concise guidelines: Ensure your policy outlines the purpose of the petty cash fund, the staff members responsible, how expenses need to be recorded, and the approval process.
• Set spending limits: Make it clear how much every employee can spend from the fund and what they can use it for. 
• Receipts: Ensure you make cash receipts or other supporting documentation mandatory. 
• Limit access: Limit access to the petty cash fund to specific designees (a petty cash fund custodian, for example) and ensure that it is stored in a secure location. 
• Internal audits: Conduct regular audits of the fund to ensure that expenses are accounted for, and the total money matches the recorded expenses.
• Record expenses: Make sure your employees record the petty cash transactions in the system to prevent backlogs and make it mandatory to provide accurate documentation with details such as date of purchase, account number, and more. 

Challenges with petty cash management

Petty cash management practices and policies require careful attention to detail and controls.

Here are a few challenges associated with it: 

• Handling the money: Petty cash, as the name suggests, is often in cash form. The challenge here is ensuring it doesn’t get lost or stolen. You need to also ensure proper security measures are in place.
• Documentation: You must document the expenses and ensure they comply with accounting standards. To do this, you need to ensure that it is used within allowable limits and that the total amounts are maintained in receipts and reports. 
• Resolution: You need to ensure that the amount of the fund accounts for shortages regularly. The amount of cash on hand needs to match total expenses. This process can be time-consuming and requires a high degree of accuracy.
• Fraud prevention: Petty cash is vulnerable to fraud. People could put it to personal use. Petty cash expenditures should have controls to prevent fraud. 
• No visibility: It can be difficult to track petty cash accounts and expenditures since there are many small transactions. This can make it challenging to identify the use of petty cash, trends, identifying cost savings opportunities, and spot areas to improve.

Many of these challenges can be solved with petty cash management software. Continue reading to learn more about the best solutions in 2023.

Quick Read: Capital Expenditure (CapEX): Meaning, Types, Examples & Importance

About petty cash management software

Petty cash management software helps you manage petty cash funds efficiently. 

It lets you track expenses, record transactions, and reconcile easily. It automates the entire process, making it easier to manage expenses and maintain accurate records.

With the solution, you can create a virtual fund and record all transactions digitally. It lets you categorize expenses, attach receipts, and generate reports to track expenses and identify cost-saving areas.

You need to look for these key features when choosing a petty cash management solution: 

• Expense tracking
• Receipt management
• Approval workflow
• Reporting and analytics
• Integration with accounting systems
• Customization options
• User-friendly interface

5 Best petty cash management software in 2023

1. Happay

Most companies don’t manage petty cash properly. 

There are two reasons for this:

• No solid processes
• No control measures

Enter Happay.

Happay’s Petty Cash Solution is a prepaid card tied to the expense management system.

You get complete control over your funds, disbursals, reconciliations, and compliance with the solution.

Here’s what you get with Happay: 

• Complete control over petty cash: Easily transfer money to employee’s cards, set spending limits and restrictions, and revoke access to cards whenever there are non-compliance or dispute issues. 
• Avoid cash leakage: Happay’s corporate cards help you enforce authorized spending. 
• Ensure expense filing accuracy: Let employees easily upload multiple invoices with the smart OCR feature, wherever they are, with complete accuracy. Never delay expense filing again.
• No more manual reconciliations: With Happay, violation checks happen automatically, so there’s no need for manual cross-verification.
• Integration with all your tools: Happay integrates with a wide range of accounting and ERP tools to help you save time on repetitive tasks. 

Happay’s Petty Cash Management Software helps your process become 100% paperless and cashless. 

Quick Read: 10 Best Expense Management Software and Tools

2. Spendesk

Spendesk is a solution that helps businesses track and control small expenses with smart debit cards and spend management software. It automates the petty cash log, monitors business expenses in real time, syncs spending with the accounting system, and sets clear petty cash policies. It also reduces manual entry, avoids errors, and helps companies save time and money.

Read More: What Is Spend Management: The Comprehensive Guide

3. Pleo

Pleo offers a petty cash management solution with its app and card. With their solution, you can log purchases, send cash reimbursements from anywhere, and simplify petty cash reconciliation, since all cash expenses get recorded in real-time. 

4. Expenzing

Expenzing Petty Cash Management Software helps manage, disburse, spend, and account for petty cash in your organization. It lets you record cash expenses on the spot, monitor imprest cash in real-time, set spending limits for each branch, optimize cash refills, and audit branch expenses. It also integrates with your ERP system.

Future Read: Best Expenzing Alternatives, Competitors, Reviews & Pricing

5. Webexpenses

Webexpenses petty cash management software is part of Webexpenses’ expense management solution, which includes invoice processing, payments, and expense auditing. It lets companies dedicate individual users to lockboxes, upload and attach receipts, get real-time reporting, pre-approve purchases, track spending, and integrate with existing ERP systems.

Conclusion

A well-designed petty cash policy and procedure help companies streamline their minor expenses and prevent financial mismanagement. With clear guidelines, they can minimize fraud and risks, increase accountability, and ensure all transactions get accurately captured. 

Petty cash is anything but insignificant. However, it does have a positive impact on financial health. It’s important to implement a robust system to address all aspects of petty cash, from initial requests to final reconciliation. 

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