Managing Petty Cash in Business: Pros and Cons

Definition of Petty Cash :

Petty cash is a small amount of cash that is set aside for making small payments and reimbursing minor expenses in a business. Petty cash is typically used for small purchases such as office supplies, postage, and other expenses that are too small to be paid by check or credit card. The petty cash fund is usually maintained by a designated employee who is responsible for disbursing funds and keeping accurate records of all transactions. Petty cash is an important tool for managing small expenses efficiently and effectively, while reducing the need for time-consuming and costly payment processes. If you’re feeling overwhelmed with financial (Also see Financial Reporting Standards 18) tasks, accounting firm in Johor Bahru can help lighten the load

Setting up a petty cash system involves creating a process for handling small cash transactions and ensuring that there are controls in place to prevent misuse or errors. Here are some steps to consider when setting up a petty cash system:

1. Determine the appropriate amount of petty cash: Consider the volume of small transactions and estimate how much cash will be needed to cover them. This amount should be sufficient to cover minor expenses but not so much that it becomes a security risk.
2. Assign a custodian: Choose a trustworthy employee to be responsible for managing the petty cash fund. This person should keep the cash secure and be accountable for all transactions.
3. Establish a petty cash account: Open a separate account (Also see Outsourcing – Getting Accounting Services?) for petty cash transactions. This account should be separate from the main cash account to ensure that petty cash transactions do not get mixed up with other cash transactions.
4. Create a petty cash log: Record all petty cash transactions in a logbook or register. Each transaction should include the date, the amount, the purpose of the transaction, and the name of the person who received the cash.
5. Establish petty cash policies and procedures: Develop written policies and procedures for petty cash transactions. These policies should outline who is authorized to use the petty cash, what types of expenses can be paid with petty cash, and how often the petty cash should be reconciled.
6. Reconcile the petty cash account: Regularly compare the amount of cash in the petty cash fund to the transactions recorded in the petty cash log. This will help identify any discrepancies and ensure that the fund is properly managed.
7. Train employees: Train employees on the proper use of petty cash and the policies and procedures for managing the petty cash fund.

By following these steps, businesses (Also see Essential Lessons That You Might Not Have Learnt from Business Schools) can establish a proper petty cash system that is secure, efficient, and effective.

Advantages :

• Convenience: Petty cash is a convenient way to make small purchases that cannot be easily paid for by check or credit card.
• Time-saving: Petty cash allows for quick payments without having to go through the process of creating a purchase order or obtaining approval.
• Cost-effective: Petty cash reduces the need for writing and processing small checks, which can be costly and time-consuming.
• Control: Petty cash can be closely monitored to ensure that funds are used only for their intended purpose.

Disadvantages :

• Risk of Misuse: Petty cash is vulnerable to theft and misuse, as it is often unsecured and unmonitored.
• Lack of Accountability: Petty cash transactions may not be properly documented, which can lead to errors or fraud.
• Inefficiency: Petty cash can be inefficient if there are frequent small purchases, as it requires regular maintenance and accounting (Also see Management Accounting – Budgeting and Forecasting Techniques).
• Time-consuming: Petty cash requires regular monitoring and documentation, which can be time-consuming and take away from other important tasks.
• Overall, petty cash can be a useful tool for managing small expenses in a business, but it should be used with caution and careful monitoring to ensure that it is not misused or abused.