Expense management

What is petty cash management?

Apr 05, 2024

Making business expenses is inevitable for any organization. It’s only a matter of how to manage these expenses accordingly. For smaller expenses, many businesses will opt to utilize petty cash for convenience and efficiency.

However, knowing how to manage petty cash effectively is necessary to make it work. Understanding what is petty cash management and why it is so important to businesses is key for any business, especially those with multiple office branches.

What is petty cash?

Put simply, petty cash means cash you keep on hand. This money is easily accessible by your employees and can be used for small purchases such as common office supplies.

Generally, you’ll only have a small amount kept on hand at any given time. When you run out of cash, you can top it up. Every top-up should be recorded accordingly.

Examples of petty cash

The definitive rules and parameters for how and where petty cash can be used will depend from business to business.

Here are some specific expenses where you may find using cash on hand to be useful.

Smaller office supplies like pens, papers, envelopes, and stamps are common expenses that you may use your petty cash for. While bigger batches of supplies will typically already be ordered from vendors, employees may need to quickly replenish stationery if they run out of something unexpectedly.

Petty cash management is also key for transport expenses. Employees at the office may have to travel or deliver goods at a moment’s notice. If it is urgent, they could use the cash on hand to make that expense and then note it down.

You might need to send cards or flowers to your customers, especially those who are considered VIPs. These can be arranged and paid for using the cash available at the office.

Why do businesses need petty cash?

Petty cash clearly has many uses for your business, with multiple situations such as urgent transport expenses, office supplies, and many more calling for it.

Here are some reasons why you always want to keep cash on hand and petty cash management is crucial for any business.

1. Convenience for small expenses

Generally, businesses will prefer to make vendor payments through bank transfers, especially when they have bulk orders.

However, some expenses, especially non-recurring and incidental ones, can be too small to bother with debiting your bank account.

In these cases, using cash on hand can be more convenient. If an employee needs to buy more envelopes or pens, for example, it’s much easier to just run to the store.

2. Expense control and tracking

An alternative to petty cash management can be reimbursement management, but that has its own set of problems.

Having cash on hand at the office can make it easier to track what expenses have been made.

Instead of going through reimbursement claims, you’ll have one list of expense records. Employees will also be limited to just the cash available, giving you more control. 

3. Operational efficiency

Waiting for a vendor to invoice you and setting up a bank transfer can take a bit of time, which is not ideal when you need a small purchase made immediately. This is especially true when you have branch offices that rely on the main office for expenses.

Instead of making every expense through the main office, smaller expenses are more efficient with petty cash management. 

4. Confidentiality and security

When you keep petty cash in the office, you’ll typically appoint a custodian who is in charge of ensuring that the cash is used appropriately.

Any time anyone wants to use the money, they’ll also have to report it to the custodian and make a record of the purchase. This ensures the money’s security and that it is used appropriately.

5. Reducing administrative costs

Cash is a relatively straightforward payment method. More often than not, there are no additional fees for cash payments. Keeping cash on hand bodes well when you’re trying to reduce administrative costs.

All you’ll need other than the cash is a way to record how it is used by your employees. No complicated delivery costs from the main office, either!

6. Emergency situations

Every once in a while you may come across situations that you haven’t planned for. In these emergencies, some small expenses could be necessary.

Having a small amount of cash in the office could make the difference between being able to quickly handle an emergency situation and nipping it in the bud or having to delay your response. 

7. Cultural or traditional practices

For many businesses, petty cash management has become the standard. Plenty of employees are used to having cash on hand and could feel inconvenienced when that is not readily available to them.

In areas where cash is still the primary payment method, petty cash would also be a preferred or even necessary practice to ensure business operations go smoothly.

8. Employee empowerment

While it may be tempting to entrust all expenses to senior management at the main office, easily accessible cash on hand empowers your employees. It shows that you trust employees to make expenses without upper management constantly hovering over them.

Allow your employees to spend on small expenses and make decisions on their own—aided by the petty cash policies.

What is petty cash management?

As the name suggests, petty cash management is a process or system you have in place in your organization that helps you track and manage the way your petty cash is used. This prevents any misuse and contributes to proper cost control of business expenses.

An effective petty cash management process will not only curb overspending but also help you avoid fraud attempts. 

Managing small amounts of cash may seem easy, but this could add up over time as you top up the cash you keep in the office.

To fully comprehend what petty cash management is and how to do it effectively, you also have to first understand what is meant by petty cash. 

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How to set up a petty cash management system

Having an established petty cash management system is straightforward, but there are key steps that you need to take to ensure that your system is efficient.

Start with establishing a policy and determining the fund amount before you begin monitoring cash usage on hand.

1. Determine the fund amount

How much cash you should have on hand depends on how big your business is. Consider the size of your business and what kinds of small expenses you may have to make.

That information will help you determine how much funds you should set aside. Keep in mind that you can always replenish the fund amount, so keep the limit at a reasonable level.

2. Designate a petty cash custodian

In short, a custodian is responsible for the petty cash you keep on hand. This includes not just the cash itself, but also the records and journal entries related to the cash and its expense usage.

Instead of having to chase down employees on clarity of cash usage, a custodian promotes accountability. Your custodian will know all the details about on-location petty cash management. 

3. Create a petty cash policy

Get everyone on the same page on how to manage petty cash. Having clear policies and established guidelines and workflows will give clarity to everyone involved, meaning that there are fewer chances of missed and unrecorded transactions.

It streamlines your petty cash management and helps you easily read expense logs when you have a standardized format that everyone is aware of. 

4. Choose a secure location

Having physical cash in the office may be risky, especially when it’s left unguarded. This is why it’s important that when you set up your petty cash management system, you pick a secure location to store your cash.

Typically, the cash should be kept in a separate room that is not easily accessible to everyone. You’ll also want a lockbox with a key that only authorized personnel can use. 

5. Establish a replenishment process

The replenishment process may look different from business to business. Find a process that works for your business and establish clear policies regarding it. This will provide employees with expectations of when petty cash will be replenished and who will authorize the process.

Employees should also be notified of how they can request replenishment and what they need to do once the cash on hand has been replenished. 

6. Create petty cash receipts

Make sure that every transaction made with cash on hand is documented accordingly, which should include the transaction receipts.

You may also want to create petty cash receipts, which the custodian can hand out to employees who request to take out a certain amount. This can then be matched up with the transaction receipts to ensure that the money is used accordingly. 

7. Set up accounting procedures

You don’t want end-of-month accounting to be stressful, which is why it’s necessary to set up the appropriate accounting procedures for your petty cash management.

Make sure that your employees know about what the bookkeeping process looks like and what must be done to keep accurate records and journal entries of cash usage.

Reconciling your accounts regularly is also vital.

Suggested read: Importance of bookkeeping for businesses

8. Train employees

While the petty cash management process may seem straightforward, employees still need to have proper training on how to use cash on hand and what is expected of them when they do.

If you establish limits on how big a transaction can be for petty cash usage, your employees will have to know this information. Conduct training sessions on how to record these transactions.


9. Regular auditing

It’s true that the cash you have on hand should not be large sums, but even smaller amounts add up over time as you replenish them. If discrepancies are overlooked, you could end up with a large amount unaccounted for.

To combat this, make sure that you have regular audit procedures in place. Both internal and external audits are beneficial. 

10. Review and adjust

Keep a close eye on your petty cash management even after you have a system set up and implemented. It’s a good idea to schedule reviews to see if the process is working the way you intended it to work. This helps you identify any inefficiencies in the process.

When you know what to look out for, you’ll be able to adjust accordingly. 

What is the importance of efficient petty cash management?

It’s great to have cash on hand at your office, but that cash is only as good as how you manage it. That’s why efficient petty cash management is crucial.

Here are some reasons why you want to stay on top of the petty cash management process at all times.

1. Expense control and tracking

The last thing you want is for your cash to go missing. This is why it’s incredibly important for businesses to have efficient petty cash management, as it helps them avoid unwanted situations like out-of-policy expenses or untracked money.

You’ll have a much easier time controlling and tracking your expenses when you know how to manage petty cash.

2. Operational fluidity

For many businesses, petty cash is essential to ensure that your business operations continue to run smoothly.

For restaurants or retail stores, for example, not having any cash on hand could mean not having any change for customer transactions. Efficient petty cash management is key to preventing these situations from cropping up. 

3. Financial accountability

While it’s unlikely you’ll deal with large amounts of cash on hand, proper petty cash management helps you ensure that every small amount is accounted for before it is replenished.

This promotes accountability amongst your employees and helps to remind them that petty cash should be used responsibly and smartly. 

4. Time and resource efficiency

Troubling the main office branch with small expenses is inefficient, especially when there are administrative and delivery costs that must be incurred.

Having an efficient petty cash management process allows you to trust smaller branch offices to make their own expenses appropriately and efficiently even without the main office getting involved. 

5. Risk mitigation and security

It’s no secret that keeping cash on hand at the office can be risky. This is why it’s important that you know how to manage petty cash, as it will reduce and mitigate the risks it comes with.

You also need to know how to store and handle the money securely. 

6. Business continuity

Your petty cash amounts may be small each time you replenish the funds, but they add up over time. If you don’t know how to manage petty cash and it is done poorly, you could lose a significant amount of money that will impact your business continuity.

Petty cash management helps you ensure you always have money in emergency situations.

7. Employee satisfaction

Just like any other business process, employees will be comforted and encouraged when petty cash management goes smoothly.

Ensuring that they can make expenses using cash on hand and entrusting them with the responsibility of it will boost employee morale and satisfaction. Keep in mind that you still want a degree of control, though!

8. Decision-making insights

Efficient petty cash management can help you achieve accurate tracking of how your cash on hand is used. This information, along with patterns identified along the way, will give you better insights into your business finances.

As a result, you will be more informed when making decisions regarding financial processes. 

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What are the main challenges with petty cash management?

1. Accountability and oversight

Put simply, a lack of attention could end with unrecorded transactions or amounts of cash missing right under your nose.

The last thing you want is an oversight when handling petty cash, as this could add up to large sums over time.

It can also be difficult to hold all employees accountable, especially when you don’t have guidelines regarding expense logs and records.  

2. Manual recording and documentation

A paper-based approach to your petty cash management could be the wrong move, as it is time-consuming and can get complicated really quickly.

When you record and document your petty cash management manually, you risk not only wasting your time but also your overall accuracy.

Between the errors that you’ll have to deal with and the amount of storage space you need, manual documentation is incredibly tedious.

3. Cash shortages and replenishment issues

The cash on hand in your office could run out before it’s the replenishment date, especially if there are emergency expenses that need to be made.

Employees may also need to make an expense and realize they don’t have enough cash to do it. These cash shortages could lead to problems if not rectified immediately.

Make sure that you have policies for situations like these.

4. Security concerns

Even with a secure place to store your cash, having petty cash at the office is not without security risks. For one, you are almost entirely reliant on your custodian when it comes to cash security.

This is why it’s extremely important to ensure that the custodian you assign to help with your petty cash management is a reliable and trustworthy employee in your organization. 

5. Lack of policies and procedures

The reason why you want to establish clear and detailed policies regarding petty cash before you allow employees to start using the money is to avoid confusion.

A lack of clear policies or standardized procedures will inevitably lead to misunderstandings and cause disarray within your business.

Every aspect of the petty cash management process should be covered in sufficient detail in your policies.

6. Compliance and audit trails

It’s true that using petty cash makes small expenses convenient, but given the purchase size and the casual nature of cash on hand, you could have trouble enforcing policy compliance.

You could also run into problems where you don’t have a clear record of the way the money is being used.

As a result, you’ll have to spend more time building audit trails.

Petty cash management: Best practices

Petty cash management may seem like a fairly straightforward process, but given the challenges you may face, you want to always employ the best practices for your business.

Some ways to streamline your petty cash management include:

1. Establish clear policies

Regardless of what your petty cash management process looks like, one crucial step that you don’t want to miss is establishing clear policies surrounding it.

Make sure everyone is on the same page about what the money should be used for. You also want to explain how expense logs should be made when using the money.

2. Designate a custodian

By having a designated custodian, petty cash management will be undoubtedly more streamlined. It signals to your employees that to use the money available, they’ll have to notify the custodian and ensure that the expense is logged.

Upper management will also have an easier time tracking the money when someone is responsible for it.

3. Set a fixed amount

Put a cap on how much petty cash you want to have on hand at a time. This not only makes it more manageable and curbs overspending but also reduces your security risks.

Only small purchases may be made through the money. If the amount rubs out, you can always top it up. 

4. Secure storage

It’s crucial that your cash is stored in a safe place, such as a lockbox with a key that only the custodian can access. It’s also recommended that your petty cash is stored in a separate room that isn’t accessible to unauthorized personnel.

Alternatively, you can use a petty cash bank account. 

5. Receipts and documentation

When a purchase is made using cash on hand, employees should be able to provide proof of the transaction. This is why having clear policies on receipts and any other documentation is key to smooth petty cash management.

Using a receipt scanning app may help you document transactions and keep track of them better.

6. Regular reconciliation

You want to promote regular reconciliation of your petty cash accounts. The custodian or a member of your finance team should regularly check the corresponding journal entries and compare them with your existing cash balance on hand.

If there are discrepancies, these need to be addressed and rectified immediately. 

7. Controlled access

Regardless of where you store your cash, the last thing you want is to give access to unauthorized personnel. Ensure that you can manage and control access to the cash on hand.

For safety reasons and streamlined petty cash management, the custodian should be the one controlling its access. 

8. Training and awareness

Getting everyone on the same page makes managing cash on hand easier.

Hosting training sessions will allow you to communicate your expectations from employees and clear up any misunderstandings regarding how petty cash should be used.

Allow your employees to ask for clarity. Awareness also promotes accountability regarding cash usage. 

9. Use petty cash for small expenses

The whole purpose of having petty cash is to make small expenses more convenient. If you already have cash on hand, make sure your employees know that it is meant to be used—responsibly.

Decide on a limit of how much an expense could be and allow employees to use the money to make expenses under that limit.

10. Replenishment process

Establish a standardized replenishment process. This clears up any confusion and makes the entire process easier for everyone.

For example, your custodian will have to know who they should report to when the cash on hand needs to be replenished. Designate who will approve and authorize the replenishment as well. 

11. Audit regularly

Considering that a lot of your petty cash management hinges on your custodian, it’s important to audit the usage regularly to hold the custodian and other employees accountable.

Regular audits also can help you identify different patterns in your expenses, including where you may be overspending and what can be done to stop it.

12. Adapt and improve

Petty cash management is not a static process. You want to make sure that you’re constantly reviewing petty cash usage and its relation to your business needs. If there are any ineffective points in your petty cash management, address those as well.

Adapt accordingly and ensure that you are making continuous improvements. 

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Tools and software for petty cash management

1. Excel or Google Sheets

One way to keep records of your petty cash usage is by making logs on Excel or Google Sheets.

While digital, however, Excel and Google Sheets still require manual work to keep them up to date, which could be a hassle.

2. Accounting software

Petty cash management involves making journal entries of expenses made with your petty cash, which is why having accounting software will be handy for your business.

It streamlines your accounting processes and ensures that your entries are all accurate and updated. 

3. Expense management apps

There are plenty of expense management software available, with features like budgeting and expense tracking.

Using one for your business will provide you with a centralized location where employees can log their expenses while you can track them through just one platform.

4. Petty cash management software

While expense management apps provide a wider scope, petty cash management software is designed specifically for that exact process.

Many providers will also offer an alternative to cash in the form of prepaid cards that you can top up with your petty cash amount. 

5. Mobile banking apps

Instead of a physical cash box, a bank account for cash on hand may be preferable. In that case, you’ll want to have a mobile banking app to help you easily access the money.

The custodian will typically be in charge of this tool.

6. Customized tools

It’s possible that your business has specific needs or wants an integrated tool that encompasses multiple things.

Some software providers offer customizable tools with multi-function features. This is especially useful for bigger businesses with more complex processes. 

7. Receipt scanning apps

You’ll want to keep track of the transaction proofs when employees use cash on hand. For most transactions, this proof will come in the form of a receipt.

A receipt scanning app helps you extract information and store your receipts digitally.

8. Point of Sale (POS) systems

For businesses that see customers daily in their physical location, —such as restaurants or retail shops—a point of sale (POS) system is a good tool to track loose change.

Employees will log all transactions in the system as they happen.

9. Cloud-based storage

In the modern day, most of your petty cash management will likely be done digitally. This saves you physical space and papers.

To do that effectively, however, you’ll want cloud-based storage. It’s also safer than relying on external hard drives that could get damaged. 

10. Inventory management software

In some cases, petty cash can be used to stock up on emergency inventory that you’re running out of. When you use inventory management software, you’ll not only stay on top of your inventory, but you’ll also be able to log any purchases made for it. 

How can we help — Volopay!

Given the nature of petty cash, it’s almost always preferable that you have easily accessible funds on hand for employees to make small purchases. However, petty cash management is not without its challenges. 

This is where Volopay comes in. 

No more relying on physical cash in lockboxes and worrying about its security.

Instead, you can equip your employees with prepaid cards to make petty cash expenses. Each card can be loaded and topped up accordingly—similar to the way you would replenish cash on hand. The difference is that your employees won’t have to carry cash and every time they make a transaction, it will be automatically recorded on your Volopay platform.

On top of prepaid cards, Volopay also provides you with the ability to easily log your transactions and keep track of them on a single platform.

Create departmental or project budgets for different business locations and use them accordingly. Each transaction can be easily assigned a budget and recorded in just a few clicks.

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FAQs on petty cash management

1. How do you manage petty cash funds?

When looking at how to manage petty cash effectively, some key steps include employing a custodian, keeping organized records, and ensuring that you have a clear policy on how the cash should be used. Staying on top of your usage is crucial.

What is an example of petty cash?

Expenses you can make using petty cash will vary, though some include office supplies like pens and stamps, client lunches, delivery fees, and more. 

What is the best way to manage petty cash?

Make sure you have a petty cash management system that everyone understands. Alternatively, you can also replace petty cash in its physical form with prepaid business cards for small employee expenses.

All transactions will be automatically recorded for easy tracking and management. 

How does Volopay help in petty cash management?

Petty cash management is easier when you don’t have loose change everywhere. Volopay offers prepaid cards that you can assign to your employees and set customizable limits for them.

Using these to make employee expenses reduces the need for cash on hand while fulfilling the same role.

Why do businesses choose Volopay for petty cash management?

You won’t need to worry about a lack of transparency or visibility with Volopay. Businesses can replace the physical cash they have on hand with prepaid cards that can be loaded and topped up easily.

Volopay’s built-in spend control features make petty cash management hassle-free.