What is petty cash? How does it affect my business?

Petty cash has long been a staple in business operations, providing employees with immediate funds for minor expenses. However, as businesses evolve, the traditional petty cash system reveals significant drawbacks that can hinder efficiency and financial integrity.

1. What is petty cash?
2. Who is affected by petty cash issues?
3. What are the risks associated with petty cash?
4. How can businesses address petty cash problems?
5. When should businesses transition from petty cash?

What is petty cash?

Petty cash is a pre-existing sum of money kept in the office that employees can use for their company expenditure. Like its name ‘petty’, this cash is meant to be used for small, daily office items. 

How companies manage their petty cash system varies in general. Some companies choose to allocate different amounts for different departments, while others prefer to have a lump-sum for all employees in the business. The goal is to allow employees easy access to cash.  

Who is affected by petty cash issues?

Businesses of all sizes that rely on petty cash for daily transactions are susceptible to its inherent challenges. Employees responsible for managing these funds often face difficulties in tracking and reconciling expenses, leading to potential discrepancies and financial mismanagement.

An over-reliance on petty cash can get quite chaotic, and it isn’t a good process in the long run. Let’s look at some of the reasons why.  

What are the risks associated with petty cash?

The primary concerns with petty cash include:

Risk of Fraud 

The ease of using petty cash is also its downfall. Because it’s a liquid asset, there is a lack of control over how the money is spent, as employees only need to fill up the petty cash book and produce a receipt as proof of transaction. This loophole in the system makes it easy for employees to misappropriate funds and spend them on personal reasons. There’s also a risk that receipts could go missing - either intentionally or on purpose.  

Companies can develop processes to ensure that these funds are appropriately managed, such as assigning the petty cash to a trusted employee, coming up with appropriate standard operating procedures (SOPs), and setting limits on petty cash. But that would contradict the purpose of having easy access to it. 

Potential Loss of Funds

Unfortunately, petty cash funds can often be mismanaged. Most of the time, petty cash is kept in unsafe places such as drawers and locked boxes, which is not secure enough in an office with many employees, contractors, and vendors coming in and out. 

Besides that, trusting employees with funds is also a sensitive matter, as there’s a risk of embezzlement. Although companies generally trust their employees, having too much money in an employee’s hands does have its risks. Even if the employee was trustworthy, it gives them an unnecessary burden with the company’s money because they’re held accountable for any loss. 

Tedious Manual Work

Managing petty cash may seem simple, but it can be a tedious process for companies who want to ensure that it’s well-spent. Employees would first have to request petty cash by filling out a form. They would then have to keep the cash separate from their own money when making the transaction, gather the receipts, and return it to the finance personnel. It’s certainly not as easy as a corporate credit card.

Manual work for the finance personnel is even worse. For a small amount of cash, the finance person would have to keep records of all transactions going in and out, compile all receipts, and ensure that the accounts tally. This does not include the time spent manually keying in the amount into the system and reconciling it with the bank. 

Risk of Overspending

Unfortunately, businesses cannot set expenditure limits on petty cash, which puts employees at risk of overspending. Without a set budget, employees can easily spend too much simply because they do not have a clear picture of how much they can spend, or what is left in their budget. 

Companies can set limits on petty cash, but this could result in insufficient funds. Furthermore, if the money is used up before it’s replenished by the end of the month, employees would have no choice but to use their own funds for company expenses.

How can businesses address petty cash problems?

To mitigate the drawbacks of petty cash, businesses can:

Implement digital expense management solutions:

Adopting platforms that offer real-time tracking, a built-in bill payment service, and automated reconciliation can streamline expense tracking processes and reduce manual errors. 

Utilise prepaid corporate cards:

These cards provide controlled access to funds, allowing businesses to set spending limits and monitor transactions - including those made with business fuel cards - thereby enhancing financial oversight. 

Enhance security measures:

Storing funds securely and establishing clear protocols for cash handling can minimise the risk of theft or loss.

When should businesses transition from petty cash?

The petty cash system unnecessarily holds too many people accountable for losses when they shouldn’t be. So what’s the best alternative? Company credit cards take time to apply for and process, and they are a hassle to be shared by all employees. Meanwhile, waiting for reimbursements can be a financial burden on employees. 

A growing trend among small businesses is using pre-loaded physical or virtual debit cards for their employees. Pre-loaded cards are a big part of finance automation, and it allows businesses to set budgets, track employee expenditure in real-time, and reconcile expenses automatically with the bank. Unlike corporate cards, it’s easy to procure, and it costs a lot less. 

For employees, using pre-loaded cards is simple, and it removes the need to store paper receipts, submit reimbursements, and tally petty cash balances. But, most importantly, it empowers the employee to manage their expenses in a trustworthy manner. 

To learn more about how your small business can manage expenses efficiently, download our eBook, The SMB Guide to Expense Management. Or, schedule a demo today to see how our Budget Management software helps businesses simplify and streamline their expense management process.