In accounting terms, petty cash is defined as a small amount of cash that a business sets aside for making small, day-to-day expenditures. Say you operate a cozy assisted living facility, petty cash might be used for purchasing small medical supplies, or refreshments for residents.

The nature of petty cash – informal handling, smaller transaction values – makes it easier to mismanage than other forms of financial transactions or accounts, and in the end, there are many examples of businesses that lose a significant amount of money as a result.

Here are 3 ways your small business can avoid the pitfalls of mismanaging petty cash.

Communicate a Petty Cash Policy

One of the first things you want to do is have a clear policy in place that everyone is aware of.

A petty cash policy is a set of guidelines and rules that dictate the proper use of petty cash in your small business. This way, employees know for sure to only use petty cash for legitimate business expenses.

Here are some key things that generally should be included in your policy:

• Define which types of expenses can be paid from petty cash. For example, it could cover small office supplies and minor repairs, or only employee reimbursements for small purchases
• Specify who is responsible for approving petty cash transactions. Typically, this would be the custodian or a designated manager
• Detail how and when the petty cash fund should be replenished. For example, it could be triggered by reaching a certain threshold or on a monthly basis

Maintain a Petty Cash Log

Meticulous record-keeping prevents a lot of business problems, including cash mismanagement.

A petty cash log is a record-keeping tool that helps you track every transaction involving your petty cash fund.

Here are some tips on how to maintain one effectively:

• Use a physical logbook or an electronic spreadsheet to create a detailed record of each transaction. Include columns for date, purpose, recipient, amount, and supporting documentation (receipts)
• Insist that transactions are entered as soon as possible by the custodian
• Keep a running total of funds left at any given time

Audit the Petty Cash

Auditing is employed in almost every institution because it works. It’s a crucial step in managing money and it needs to be a part of your process if you want to be certain that your petty cash fund is being used appropriately.

Here are some tips on a proper petty cash audit:

• Perform surprise audits at irregular intervals to catch any unauthorized or improper use of petty cash
• During audits, compare entries in the log with the actual cash to make sure that the total amount matches the recorded balance
• Examine receipts or invoices for legitimacy, as forgery of financial documents is quite common

Implementing a clear petty cash policy, maintaining a detailed petty cash log, and conducting regular audits is a good place to start if you’re looking to keep a handle on your business’s finances.