How to Manage Petty Cash as a Small Business in Canada

Petty cash funds are common in business. As the name suggests, petty cash is for expenses that are small, incidental, and infrequent. Having a petty cash fund provides a quick and convenient way for business owners to reimburse themselves and employees for business costs they paid for with their own money, thus avoiding the tedious task of writing cheques from their bank accounts for small expenses. Here’s what you need to know about managing your petty cash fund.

What is petty cash intended for?

Business owners often need their employees to pick up supplies, or lunches, for the office. Employees can either be given cash for these expenses in advance from the petty cash fund or, more commonly, they can be reimbursed after having made the purchase by presenting a receipt.

If an employee is not comfortable using their own money for these small business expenses, a business owner can simply give them cash from the petty cash fund in advance of making a purchase on the business owner’s behalf. 

How do you use petty cash in your business?

Starting a petty cash fund and using it in a business is fairly straightforward. This article will walk you through easy steps and considerations to both start and manage a petty cash fund. 

How much is needed?

When a business owner is looking to first set up a petty cash fund, they need to think about the small expenses they would likely use it for. Petty cash is commonly used for office supplies, lunches with clients, Christmas cash for employees, postage, small games for a planning retreat, etc.

Having a general idea of what expenses could be paid for with petty cash will give the business owner insight into how much cash they need to keep in the fund. Between $100 and $500 should be enough petty cash for most small businesses that want a convenient way to cover small infrequent expenses.

What expenses are appropriate?

The business owner needs to make it clear what the fund can be used for and what it cannot be used for. The petty cash fund’s allowable expenses will generally fall within existing general budget expense areas such as client relations, office engagement, retreat planning, office supplies, etc.

This will not only help ensure that the cash is being used appropriately, but will also make it easier for your accountant to reconcile the petty cash fund and put the expenses in the correct expense buckets. 

Who will manage the petty cash?

One person needs to manage the disbursement of petty cash fund. More than one person taking from the fund can make managing it difficult and could open the door to theft. An administrator who may also have other responsibilities, such as managing the front desk and answering the phone, is often an appropriate person to manage the petty cash fund.

While only one person is managing the petty cash disbursements, another employee, such as a bookkeeper, should use the record of petty cash disbursements to reconcile the balance, record expenses, and replenish the petty cash fund. 

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Where should you keep the petty cash fund?

A business owner needs to balance the convenience of location and security of the funds when determining where to keep the fund. Keeping it in a small lock box in a locked desk drawer will help keep it safe. 

The tracking log

A petty cash fund tracking log can be purchased from a local stationary store, or a petty cash log template can be easily downloaded. Key information every tracking log should have for each transaction includes the date, description, amount deposited or withdrawn, expense account charged, who received or deposited the cash, and the person who managed the transaction. The person who manages the petty cash should be the one to record these details in the tracking log.

Reconciliation

The timing of the petty cash fund reconciliation will depend on how frequently the business uses it. However, to ensure proper management and use of the fund, it is important to reconcile at least once per month, regardless of how frequently it is used. 

Reconciliation should be conducted by someone other than the person managing the petty cash fund. This person is often the accountant or bookkeeper of the business. If the petty cash fund tracking log has been filed correctly, reconciliation is an easy task.

Simply take the balance at the beginning of the period, add all cash inflows and subtract all cash outflows, and you should be able to calculate the amount of cash remaining. If there is a discrepancy, the person reconciling the fund will need to work with the person managing it to determine the cause. Discrepancies are most commonly due to missed transactions in the petty cash log.

How much should be in the fund?

Business owners should periodically revisit whether the amount kept in the petty cash fund is enough, or if it needs to be increased or decreased. Once the petty cash fund has been reconciled, funds can be added or subtracted to increase or decrease the balance to an amount the business owner deems appropriate.

Summary

Keeping a petty cash fund provides a convenient and efficient way to cover incidental expenses. However, given the ubiquitous use of credit cards, fewer businesses are using petty cash for such expenses. Many businesses today have company credit cards for expenses traditionally covered by a petty cash fund.

Each credit card transaction is automatically tracked by the credit card company, which makes statements available to be viewed online at any time. Moreover, cloud-based bookkeeping services can automatically classify and provide journal entries from electronic credit card statements.