How to Set Up and Manage a Petty Cash Fund for Your Business
For many businesses, particularly small and medium-sized enterprises (SMEs), a petty cash fund is an essential tool for managing small, immediate expenses. It provides a convenient way to pay for items without resorting to cheques, credit cards, or reimbursement processes for minor costs. This guide will walk you through the process of setting up and managing a petty cash fund for your Australian business, ensuring it's both efficient and accountable.
1. Determining the Appropriate Fund Size
The first step is to determine the appropriate size of your petty cash fund. This will depend on the nature and frequency of small expenses your business incurs. Setting the fund too small will lead to frequent replenishments, while setting it too large increases the risk of theft or misuse.
Assessing Typical Expenses
Start by analysing your business's typical small expenses over a period of time, such as a month or quarter. Consider the following:
Types of expenses: What kinds of items are typically purchased with cash (e.g., office supplies, postage, parking, small repairs)?
Frequency of expenses: How often are these small purchases made?
Average amount per expense: What is the typical dollar value of each purchase?
For example, if your office typically spends $50 per week on stationery, $20 per week on postage, and $30 per week on parking, your weekly petty cash needs would be around $100. A reasonable fund size might then be $400 to cover a month's worth of expenses.
Considering Business Size and Activity
Larger businesses with more employees or higher transaction volumes will generally require a larger petty cash fund than smaller businesses. Similarly, businesses with frequent small expenses will need a larger fund than those with infrequent ones.
Setting a Reasonable Limit
Based on your assessment, set a reasonable limit for the petty cash fund. It's better to start with a conservative amount and increase it later if needed. A common starting point for small businesses is between $200 and $500. Review this amount periodically (e.g., quarterly or annually) to ensure it still meets your business needs.
2. Establishing Clear Rules and Procedures
Once you've determined the fund size, it's crucial to establish clear rules and procedures for its use. This will help prevent misuse, ensure accountability, and maintain accurate records.
Permitted and Prohibited Expenses
Clearly define what types of expenses can be paid for from the petty cash fund and what types are prohibited. Permitted expenses might include:
Office supplies (pens, paper, staplers)
Postage
Parking fees
Small repairs (e.g., replacing a light bulb)
Coffee, tea, and milk for the office
Prohibited expenses might include:
Personal expenses
Large purchases that should be made with a purchase order
Loans to employees
Cash advances
Alcohol
Spending Limits
Set a maximum spending limit for individual transactions. For example, you might limit petty cash purchases to $50 or $100 per transaction. This helps prevent employees from using the fund for larger, unauthorised purchases.
Requesting and Approving Funds
Establish a clear process for requesting and approving funds. This might involve a simple form that employees fill out, stating the purpose of the expense and the amount needed. The form should be approved by a designated supervisor or manager before the funds are disbursed. Learn more about Expense and how we can help you streamline your expense management processes.
Replenishing the Fund
Define the process for replenishing the petty cash fund. This typically involves submitting receipts for all expenses paid from the fund, along with a reconciliation statement showing the beginning balance, expenses, and remaining balance. The fund should be replenished when it reaches a predetermined level (e.g., 25% of the original amount) or at regular intervals (e.g., monthly).
3. Designating a Responsible Custodian
The success of a petty cash fund depends on having a responsible and trustworthy custodian. This person is responsible for managing the fund, disbursing cash, collecting receipts, and replenishing the fund.
Key Responsibilities of the Custodian
The custodian's responsibilities should include:
Safeguarding the petty cash fund (e.g., keeping it in a locked box or drawer).
Disbursing cash only for authorised expenses.
Obtaining receipts for all expenses.
Maintaining accurate records of all transactions.
Replenishing the fund when necessary.
Reconciling the fund regularly.
Choosing the Right Person
When choosing a custodian, look for someone who is organised, detail-oriented, and trustworthy. They should also have a good understanding of the business's policies and procedures. Common choices for custodian include office managers, administrative assistants, or accounting clerks. It's important to provide the custodian with adequate training and support to ensure they can effectively manage the fund. You might also want to consider our services for managing petty cash and other business expenses.
Separation of Duties
Ideally, the custodian should not be the same person who approves petty cash requests or reconciles the bank statements. This helps maintain a separation of duties and reduces the risk of fraud or errors.
4. Maintaining Accurate Records and Receipts
Accurate record-keeping is essential for maintaining control over the petty cash fund. This involves keeping a detailed log of all transactions and collecting receipts for all expenses.
Petty Cash Log
Maintain a petty cash log to record all transactions. The log should include the following information:
Date of the transaction
Description of the expense
Amount of the expense
Name of the person who received the cash
Receipt number (if applicable)
Running balance of the fund
The log can be kept in a spreadsheet or a dedicated accounting software programme. Ensure the custodian updates the log promptly after each transaction.
Receipt Management
Require employees to submit receipts for all petty cash expenses. The receipts should be original and legible. The custodian should review the receipts to ensure they are valid and match the descriptions in the petty cash log. Attach the receipts to the corresponding entries in the log or store them in a separate file. If a receipt is lost, require the employee to provide a written explanation and obtain a duplicate receipt if possible. If you have frequently asked questions about receipt management, consult with your accountant or bookkeeper.
Reconciliation Statement
When replenishing the fund, prepare a reconciliation statement. This statement should show the beginning balance of the fund, the total amount of expenses paid, and the remaining balance. The remaining balance should match the amount of cash on hand. Any discrepancies should be investigated and resolved before the fund is replenished.
5. Regularly Auditing the Petty Cash Fund
To ensure the integrity of the petty cash fund, it's important to conduct regular audits. This involves verifying the accuracy of the records, checking the validity of the receipts, and confirming that the cash on hand matches the balance in the petty cash log.
Frequency of Audits
Audits should be conducted at least quarterly, or more frequently if there are concerns about the fund's management. Surprise audits can also be effective in deterring fraud or misuse.
Audit Procedures
During an audit, the auditor should:
Count the cash on hand.
Compare the cash on hand to the balance in the petty cash log.
Review the receipts to ensure they are valid and match the descriptions in the log.
Verify that all expenses are authorised and comply with the business's policies.
Investigate any discrepancies or irregularities.
Addressing Discrepancies
If any discrepancies are found during the audit, they should be investigated promptly. This might involve interviewing the custodian, reviewing the transaction records, and contacting vendors to verify receipts. If fraud or misuse is suspected, the business should take appropriate disciplinary action. By following these steps, you can establish and manage a petty cash fund that is both efficient and accountable, helping your business run smoothly and avoid unnecessary financial risks.