Understanding Petty Cash Management

When it comes to your business, every dirham, whether earned or lost, matters, and that's where petty cash accounting comes into the picture.

According to a study by Argos Retail Group, businesses lose around 8.78 billion AED annually due to petty cash-related errors and fraud. 

Therefore, automating petty cash or issuing corporate cards to staff for small purchases is essential, as it enhances accountability, efficiency, control, and transparency. Employees can track expenses in real-time without going through time-consuming reimbursement processes, reducing the risk of errors, misuse, or petty cash fraud.

Today in this blog, we’ll map out details, including petty cash, why businesses should care about it, how you can set up and manage petty cash, the best petty cash policies and practices, and the challenges you face in petty cash management.

Understanding Petty Cash Management

Petty cash management refers to handling small amounts of cash businesses use for minor expenses, such as office supplies, travel reimbursements, or other incidental costs. Besides managing petty cash, it's essential to understand what it is, how it's used for small business expenses, how it is used to handle minor costs, and how it is recorded in financial statements. (Simplified phrasing for better readability.

What is Petty Cash Management?

A petty cash fund is a small stash of company cash that businesses keep on hand—often in a secure drawer—to cover minor expenses. These could include expenses like office supplies or reimbursing employees for small purchases. This system offers a convenient way to manage these minor expenses, relieving you of extensive paperwork. Companies regularly check and reconcile petty cash funds to ensure consistency, recording all transactions in their financial statements.

Petty Cash Accounting in Organisations

Petty cash accounting is a system that businesses use to manage small, everyday expenses without the need for extensive and hectic paperwork. Imagine the office boy needs to buy supplies for the office, arrange lunch for a meeting, or cover any other minor repairs. They can use petty cash instead of going through a lengthy approval process or waiting for reimbursement.

How Does It Function?

Petty cash is a small amount of cash that organisations keep on hand to cover these minor expenses. Here's how it usually works: First, a designated amount is set aside to cover small routine expenses. Cash is then allocated or dispensed to employees as needed, often in exchange for receipts. All transactions are carefully recorded in a petty cash log, ensuring accurate tracking of where funds are spent. 

Finally, when the cash fund runs low, it is replenished by reconciling receipts and restoring the original balance. This transparent system ensures that small business expenses are managed efficiently and that you can have full confidence in the process.

Position in Financial Statements

Petty cash is listed as a current asset in financial statements because it is liquid cash that can quickly cover expenses. You'll find petty cash listed under current assets in your balance sheet, indicating its vital role in the company's financial health or stability.

One key benefit of petty cash accounting is its ability to reduce paperwork. Streamlining operations and handling numerous small transactions reduces the administrative burden. This is particularly evident when compared to corporate cards and petty cash accounting software, highlighting the system's efficiency and practicality in daily business operations.

Importance of Petty Cash System

In an organisation's financial management, a petty cash system plays a vital role in the following:

• Simplifying your minor expenses.
• Provides cash on hand for urgent expenses.
• Allows your employees to meet their immediate needs without using their funds.

Besides these benefits, the petty cash system also helps your business achieve the following financial goals:

1. Accurate Record-Keeping

• Ensures accurate recording of transactions.
• Prioritises recording to achieve financial accuracy.
• Reduces risk of discrepancies and helps track expenses on balance sheets.

2. Efficiency, Integrity, and Speed

• An effective petty cash system boosts operational efficiency.
• Aid in maintaining financial integrity.
• Enables fast transactions for immediate expenses.

3. Transparency and Accountability

• Improves transparency in financial operations.
• Promotes accountability and trust within the organisation.
• Reduces potential financial loopholes.

However, options such as Alaan’s prepaid corporate cards offer the benefits of petty cash without the associated risks. In recent times, many businesses have adopted this solution and moved away from using petty cash entirely.

Read More: Why are UAE businesses moving away from manual petty cash management?

Setting Up a Petty Cash Fund

Setting up a petty cash fund in your organisation can be complex, as it’s usually challenging to manage. However, building up such a small cash fund requires careful consideration of a few key factors to ensure it operates smoothly. 

Here is a simple breakdown of the petty cash system into four main sections: 

1. Appointment of Petty Cash Custodian

The first step is to decide on a petty cash custodian. This factor, or precisely, the individual, is responsible for managing the petty cash fund, encompassing maintenance of records, allocation of cash, and restoration of the fund when required. It's important to appoint someone who's trustworthy and organised, as they will supervise each and every transaction related to petty cash​.

2. Determine the Appropriate Fund Amount

The next step in setting up a petty cash fund is determining the appropriate amount. Usually, petty cash funds range between AED 183.63 and AED 1101.75, depending on the size of your organisation and its expenditure requirements. This amount should cover small expenses but still be easy to manage. It's important to check it regularly to ensure it fits your organisation's needs without straining the budget.

3. Secure Funds

Once the cash flows into the petty cash fund, you will likely wish to secure it in a drawer, safe, locked box, or file cabinet. Alaan's designated individuals and custodians, such as the CFO, may hold the key. This helps you ensure accountability and offers you protection against theft or fraud.

Read More: How to pick the right accounting software as a CFO

4. Establishing Policies & Procedures

Finally, initiating policies and procedures is pivotal for effectively managing the petty cash fund. These guidelines highlight how and when you can access cash, the different types of expenses that fall under these policies and procedures, and the process of recording transactions. Detailed and transparent policies can help you prevent misuse and ensure that all expenditures are accountable​ and documented.

In a nutshell, Alaan corporate cards will help you with petty cash management.

Managing Petty Cash

Effective management of petty cash plays an indispensable role in maintaining budgetary control over minor operational expenses. Here, you can have a quick look at the key factors involved in managing petty cash:

1. Keeping an Eye on Routine Minor Business Operational Expenses

Did you know businesses lose their revenue when they're unable to manage their expenses correctly? Thus, tracking your minor operational expenses becomes a must-do process.

When your business analyses its expenses daily, it helps you monitor how your petty cash is utilised. When you keep attention-to-detail records of each transaction, your business can audit its spending patterns, which, in turn, assists you in making well-informed financial decisions for your business, considering its futuristic approach.

According to Harvard Business Review, companies tracking petty cash expenses can save up to 30% in operating expenses by eliminating unnecessary spending​.

2. Imprest System’s Prominent Role

The imprest system helps you control petty cash by keeping a fixed amount. When you spend money, it's replenished to the original amount. This method removes the complexities of tracking expenses and ensures that funds are available without interruption for urgent needs.

3. Petty Cash Voucher Approval & Preparation

Companies implementing stringent voucher systems experience a 50% reduction in errors related to petty cash transactions. Also, when you accomplish proper documentation, it helps manage petty cash. 

A voucher outlines the expense details, including the amount, date, purpose, and supporting receipts accompanying each transaction. In addition, petty cash voucher approval and preparation ensure accountability and transparency, as vouchers need approval from designated personnel before cash is distributed.

4. Frequent Cash and Receipts Reconciliation

Regularly reconciling petty cash is essential for preventing fraud and maintaining accuracy within your organisation's expense system. 

Your business can identify discrepancies by comparing cash with recorded transactions and receipts. Also, conducting these reconciliations for at least a month helps your business ensure that the petty cash fund is correctly managed and will prevent you from incurring financial losses. Companies that fail to conduct regular reconciliations may encounter issues related to cash mismanagement.

Do you still need to work on managing your minor expenses? Let Alaan help you manage your petty cash!

Petty Cash Accounting

Managing petty cash might sound like a breeze, but it plays a major role in handling small, day-to-day expenses. 

Here's an easy-to-follow guide to managing petty cash in your accounting system. It covers the setup process, replenishing the fund, and tracking expenses.

Petty cash accounting includes the following parameters:

1. Setting Up Petty Cash

The first step is creating the petty cash fund. For this, you'll make an initial journal entry by increasing the petty cash account and decreasing the cash account. This sets aside a certain amount of cash that one can use for smaller expenses such as refreshments or office supplies.

2. Recording Petty Cash Expenses

As small expenses come up, accurately tracking them becomes crucial. When you spend money, you must increase the appropriate expense accounts (Travel Expenses or Office Supplies) and decrease the petty cash account. This records how you use the petty cash and which expenses it covers.

3. Replenishing the Petty Cash Fund

Once the petty cash runs low, it's time to replenish it. For this, summarise all receipts and expenses that have been recorded. After this, you'll create a journal entry to increase the relevant expense accounts (reflecting the costs incurred) and decrease the cash account (reflecting the amount withdrawn). Doing this can restore the petty cash fund to its original amount while keeping a detailed record of its spending.

Petty Cash Policies and Best Practices

Managing petty cash requires clear policies and good practices to ensure everything runs without any hassles.

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Let's compile the key elements that benefit accuracy in handling petty cash and maintaining control, including:

1. Establishing Strict Internal Policies and Controls

Implement clear rules for handling petty cash to avoid any misuse of internal policies. Guidelines should include the purpose of using petty cash, including small purchases or office supplies. They should also specify the maximum amount of money kept in the fund and set up a spending limit.

2. Role of the Petty Cash Custodian

Assigning a responsible person, named petty cash custodian, is paramount. This person keeps receipts, looks after petty cash, authorises transactions, and ensures the fund is used appropriately. The custodian is also responsible for maintaining a clear record of all petty cash transactions, which can be helpful.

3. Maintaining and Recording Receipts

When you use petty cash, the receipt should be collected and recorded. These receipts are proof of the transaction and help track the money flow. The custodian should organise these receipts and ensure they are correctly filed for auditing or future reference.

4. Regular Monitoring and Reconciliation 

Regular checks are essential to ensure the accuracy of petty cash balances. The custodian should reconcile the petty cash account by simply comparing the cash on hand with the recorded receipts. This process helps identify any discrepancies early on, ensuring everything is accounted for.

Next, we'll examine the complexities of your business in petty cash accounting!

Challenges in Petty Cash Management

Managing petty cash might seem like a simple process. However, a few challenges interfere with your business's financial accuracy and security. 

Talking about the previous experience of one of our customers, such as CarSwitch, the company almost found it impossible to procure hundreds of cards for their staff. Their finance team found it difficult to manage these expenses with petty cash and a cumbersome reimbursement process that ultimately hampered their team’s productivity.

Now, let's take a closer look at the key factors of a few challenges that several companies face, just like Carwitch:

1. Mismanagement

Handling petty cash across different levels often leads to inconsistent policies, making it harder to track expenses. Dispersed management increases the risk of errors, fraud, and inefficiencies.

Addressing the challenges mentioned above can enhance your business's petty cash accounting, ensuring better control over small expenses while maintaining financial transparency within your system.

2. Theft and Misuse Risk

Petty cash is often considered unsecured, making it more vulnerable to employee theft or personal misuse. Thus, without strict supervision, tracking small transactions can be tricky and lead to unauthorised use.

3. Problems in Managing Your Receipts

Employees may forget or lose receipts, making it challenging to reconcile petty cash expenses accurately. This results in gaps in financial records and creates audit challenges.

4. Approval Related Workflow Complications

When unclear approvals for petty cash from higher authorities exist, it can lead to delays or unauthorised spending. In all, inconsistent approvals can increase the risk of misuse and hinder financial control.

5. Handling Foreign Currency

Taking care of petty cash accounting is important when making international transactions with foreign currencies. However, managing petty cash in foreign currencies is complex, with potential currency-related discrepancies and fluctuating exchange rates that require your diligent attention.

6. Slow Replenishment Time

Fast and timely replenishment of the petty cash fund is essential to prevent operational disruptions and manage consistency in your financial records.

7.  Lack of Transparency

Generating accurate and transparent reports for petty cash transactions invites challenges, especially when you talk about manual accounting systems.

Wrapping up on these challenges, CarSwitch was searching for an online platform to manage its routine and operations-related expenses, and that’s how it became known to Alaan.

💡Alaan was their one-stop solution, and according to them-

Switching to Alaan saved CarSwitch about one week of work every quarter for our finance team, not to mention better visibility and control over business spending!

The company found it easier to automate its expense management with the help of the Alaan app. The app also made it simpler for team members to submit, verify, approve, and track expenses. Also, their managers could now easily access and review expense reports anytime, anywhere.

Today, the teams at CarSwitch use Alaan corporate cards for software, marketing, and field expenses, making it a significant part of their internal financial processes.

Are you one of those dealing with the same issues? Book a demo with Alaan today to eliminate all such hassles in one go!

Manage Your Petty Cash Accounting Today with Alaan!

Handling petty cash can be challenging, from vulnerability to theft to dealing with lost receipts and approval delays, ensuring the best policies and practices, and managing petty cash accounting. Therefore, businesses need apparent supervision, time-saving processes, and proper tracking mechanisms to manage these hassles seamlessly.

Alaan Intelligence offers you advanced technological tools that streamline petty cash accounting and allow your organisation to automate the management of daily minor operational expenses. Also, by using Alaan corporate cards, businesses can do effective petty cash management, which allows them to focus on more strategic and high-priority tasks that drive business growth. If you want to improve your petty cash management, we’re here to do the heavy lifting for you.

Ready to simplify your petty cash accounting? Schedule a demo today to transform your business spending!