The Importance of Petty Cash Management for Startups

Startups often have a number of small, sudden, or unexpected expenses. Maybe you ran out of coffee, or you want to pick up dinner for your team while they’re working late. In such situations, having petty cash on hand is useful.

What is petty cash?

Petty cash is a small amount of money that your business keeps on hand for paying small expenses. These expenses are usually so small that going through the regular approval and disbursement process would be unnecessarily time-consuming.

Most startups use petty cash for things like office supplies, snacks and meals, or reimbursing employees for out-of-pocket expenses. The company keeps a set amount on hand and replenishes it regularly.

Why is petty cash management important?

While petty cash may be a small amount of money compared to your startup’s overall budget, it can easily be abused or stolen if you don’t manage it right. After all, the amount of petty cash available at any one moment might be small, but the cumulative amount that goes into petty cash over a month, quarter or year can be significant.

The Institute of Internal Auditors identifies three risks associated with petty cash, including:

• Waste. Failing to control and account for petty cash funds appropriately leads to wasting money on things that don’t align with your startup’s goals.
• Misappropriation of funds. Employees may be tempted to use funds for personal expenses or “borrow” funds, thinking it will go unnoticed.
• Human error. Most startups only reconcile petty cash at the end of the month or when replenishing funds. Anytime there is a lag between disbursement and reconciliation, there’s a risk that human errors won’t be discovered.

Petty cash management best practices

Petty cash is a convenient way for employees to cover small costs but giving people easy access to cash – even in small amounts – comes with some risk. Fortunately, by following a few best practices, you can protect your startup and your employees.

Step 1: Determine a reasonable dollar amount

Think about how much your starting petty cash balance should be. You want an amount that’s small enough that employees aren’t tempted to steal it but large enough that you don’t need to replenish it too often. Larger startups might consider setting up a petty cash management fund for each department, whereas smaller startups might have a single petty cash fund for the entire company. The Association of Certified Fraud Examiners recommends maintaining a petty cash fund at about 2.5 times the amount of monthly expenditures made with the fund.

Step 2: Decide how to secure petty cash

You may want to keep your petty cash fund in a lockbox, a locked drawer, a cabinet, or a small safe. Cash is a highly liquid asset, meaning it’s easy to steal, so never leave petty cash out in the open, where visitors, customers or other employees may access it.

Decide on a petty cash custodian to be responsible for distributing money and tracking expenses. This may be an office manager or financial controller, as long as they are trustworthy and up to the task of controlling access and determining whether an expense is appropriate.

Step 3: Establish authorized uses

Create a policy that explains how petty cash can and can’t be spent. For example, you may specify that employees can use petty cash for purchases of $100 or less and only for legitimate business expenses but not for cash advances or paying wages. Put your policy in writing and ensure everyone with access to petty cash understands the rules.

Step 4: Track withdrawals and deposits

Petty cash may not be used for major cash outlays, but it’s still important to account for how you spend the money. Failing to do so encourages theft or misappropriation.

Many startups track uses of petty cash with a simple logbook or spreadsheet. Each entry in the petty cash record should include the date, amount, purpose, beginning and ending fund balance, and who incurred the expense. Microsoft Office has a petty cash log template that can be a good starting point. It’s also important to save receipts for petty cash expenditures.

Step 5: Evaluate petty cash spending

Regularly look over your petty cash spending log to see where the money is going and ensure there aren’t any odd transactions or missing funds. Suppose you regularly need to tap petty cash to cover office supplies. In that case, you may want to ask the purchasing department to update your master order list or restock your supplies more often since ordering in bulk is typically more cost-effective than one-off purchases.

Managing your startup’s petty cash is important, but it doesn’t have to be complicated. Follow the best practices above to secure and track petty cash and avoid problems down the road. If you find your team turning to petty cash often, you might consider opening a business credit card specifically for these types of expenses.