Accounting for Small Purchases: Why and How to Use Petty Cash

Ask around to any business experts on what kind of perks they offer their customers and the number one item is always coffee. However, if you’re running on razor thin margins, you might want to ensure that this money is accounted for properly. The best way to do this is by managing your small business petty cash.

If you’re new to using petty cash or not sure how it could benefit your business, here is what you need to know so you can give employees what they need.

What Petty Cash Means

When you’re running a business, not everything you need is going to be able to be bought and paid for through standard invoicing. Some businesses need to make small purchases here and there throughout the day without worrying about accounting issues.

If you run a cafe, you might need to pay for milk when you run out for a day. Your office might need to get some staples and pens if you suddenly run out and haven’t ordered more yet. You might even just need to buy snacks for an employee birthday party, which doesn’t fall under the umbrella of what your business needs to actually run.

These items can be taken out of petty cash without committing the time and paperwork required to manage similar transactions. At times, you need the items more urgently than it would take for paperwork to go through. You can handle the red tape later and spend $20 now to be accounted for at another date.

Using petty cash gives you the opportunity to run to the store and get what you need now. Have someone bring what you need on their way into the office and give them cash in exchange for the receipt. Whatever your setup is, you can get what you need quickly and easily without hassle.

What To Use It For (and What Not To)

When you have petty cash set aside, it allows your business to run more efficiently. Rather than having to wait to mail something out because you don’t have stamps, go buy the stamps now with your petty cash. If you need to buy lunch for a meeting that goes over, then that’s a great time to use petty cash.

The basic rule is that things should be small, consumable, and of a low dollar amount. when you’re using petty cash to buy something that’s permanent or isn’t set to run out for a while, that means you could plan for the purchase.

While you might need to buy a new laptop charger right now, it shouldn’t always come out of petty cash, since you could order that from a supplier and save. Items that you’ll be using for work for a while to come aren’t good candidates for petty cash.

Some items start out coming out of petty cash and end up becoming an invoice item. If you start subsidizing lunches at a nearby restaurant out of petty cash once a week, you might want to open up a tab with them and pay it monthly.

How To Use It

The most important rule to remember when it comes to petty cash is to always document everything. When you spend any of it, you should always have a receipt to match. Whatever amount is in the locked box should always add up, between invoices, receipts, and cash, to the amount that you’ve set aside for petty cash.

In most businesses, the petty cash is in a locked box that’s kept at the front of a business. This money is used to help start up new ideas or keep track of small buys. If someone thinks you should start adding candy and magazines to your waiting room, it’s going to start coming out of your petty cash first.

When money is taken out, fill out a form to show who has taken money out and how much. You should always have a second person sign off on things as an act of accountability.

After a purchase is completed, the change and the receipt go into the box, which should all add up to the same amount as was in the box before. Attach the receipt to the original petty cash document and make a note if change was returned.

Bookkeepers should add things up periodically to ensure that the amount intended to be in your box is always in there.

Deciding How Much

Every business is going to have to decide how much money that want to keep in their petty cash fund based on their needs. The number varies from business to business as each company is going to have different things that they’ll need to spend it on regularly. As a business grows, their petty cash fund might as well.

Running a small retail store or a company with just a few employees might not require you to keep much on hand. You might need to spend it on postage and shipping, for coffee or other office supplies, and on refilling your company car. Otherwise, you won’t need much more than $100.

If you’re running a large enterprise, you might need more like $500 to keep things going. You might have frequent small purchases or larger purchases that happen from time to time. Evaluate how much petty cash you need based on your bookkeeper and how they see the petty cash being managed.

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Small Business Petty Cash is Essential

Rather than having to constantly manage every penny, every invoice, and each thing your business needs, small business petty cash gives you an out. You can ensure that you always have what you need on hand to thrive without having to constantly bother your bookkeeper.

If your use of petty cash is to make employees happy, check out our guide for activities to bring them closer together.

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