Why Do Businesses Use Petty Cash Funds? 7 Reasons You Should Know

A business can’t vouch and account for every small expense like a cup of coffee, taxi fare, smaller office supplies, etc. On the other hand, these expenses are unavoidable and must be carried out by the businesses. Therefore, a convenient, fair, and easily manageable method of vouching for small expenditures is necessary.

Many small businesses as well as large ones, use petty cash funds to manage their smaller expenditures. What is petty cash?

Why should businesses use this fund?

Why are businesses still using petty cash funds?

These are some commonly asked questions because the concept of petty cash funds sounds outdated. But it’s true that a large number of businesses still manage the petty cash funds, petty cash drawers, and sometimes petty cash registers.

In this article, we will talk about the reasons why businesses use petty cash funds and the certain limitations of using the method. So let’s get into it without a further ado.

What Is Petty Cash Fund?

As the name suggests, petty cash funds are cash funds maintained by businesses to cover small miscellaneous expenses. The petty cash fund is commonly used by businesses for certain expenses for which check transfer or electronic fund transfer doesn’t seem to be an optimal or feasible option.

Petty cash is often regarded as cash in hand, and the companies keep a specific amount of cash for meeting their incidental expenditures. The maintenance of petty cash accounts eliminates the need to make an account for each and every account. Whether small businesses or large corporations, petty cash funds are reconciled 

periodically for differences and transferred to financial statements.

Petty is derived from the term ‘petite,’ meaning small. The most common uses of petty cash are making change for customers, reimbursing cash to employees for expenses they have made for business, or funding other small purchases.

Requirements For Petty Cash

Although petty cash funds are maintained for funding the spontaneous and incidental expenses of the business, certain internal controls are required for proper regulation.

Custodians are responsible for maintaining and overseeing the petty cash funds. Certain internal control procedures are also put in place to ensure that petty cash fund abuse is not prevalent.

The common internal controls employed include:

  • Not every person has access to the petty cash fund.
  • There are certain expenses defined that can be funded by petty cash.
  • Only custodians or a few other authorized individuals are allowed to manage, disburse, and make expenses out of the petty cash account.
  • The incidental expenses are strictly related to the operations of the business.

Every business has varying cash management internal controls, but the main idea is the same in all cases.

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Accounting For Petty Cash Fund

7 Reasons Why Businesses Use Petty Cash Funds

Whether large corporations or small businesses, the use of petty cash funds brings great convenience to the smooth operations of the business. Here are the 7 reasons why businesses should use petty cash funds.

Employees Can Make Small Expenses Easily

In several instances, employees of the company might need to make expenses for business purposes. Despite making the expense out of the pocket and waiting for the reimbursement of the amount, a petty cash fund can be used in such instances.

For instance, an employee has to take a client for lunch or coffee. Having cash is indispensable for the employee, but the exact amount is also unknown. Most employees rely on petty cash in such instances than paying their own money and waiting for reimbursement.  

Funding For Small Expenditures In Office

Small office expenditures are also funded instantly by using the cash amount in the company’s petty cash fund. It’s a convenient way to fund the incidental expenses that must be funded at the moment. Pre-set SOPs and request the authorized individuals to pay cash for expenses; no other requisitions or approvals are required in petty cash funds.

The definition of small expenditures varies from business to business. The concept of materiality works here to define what small expenditures are.

The typical range of petty cash funds for small businesses is around $50 to $300. It can vary according to business size and type. The common small expenditures include office supplies, kitchen supplies, change for the clients, or other small purchases.

Overcoming Unwanted Financial Lags

When a company has already set rules and regulations regarding the flow of money, every transaction is regulated and monitored. The small expenses or emergency needs, as mentioned before, require quick action and decision-making.

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If a company does not maintain a petty cash fund, spontaneous decision-making at the departmental level or need-basis won’t be possible. Therefore, maintaining the fund is good for overcoming unwanted financial lags.

Here is an example of how a petty cash fund removes the financial lags. A yogurt company has run out of milk one evening. The next shipment of milk from the supplier is scheduled to come within the next 48 hours.

The company cannot continue operations without milk, and it’s necessary to restock the milk. Therefore, they must purchase at least 3 gallons of milk from the local grocery shop. This is an emergency expense that can’t wait for requisition and approval. Therefore, petty cash funds make the decision-making swift and easy.

A Good Alternative To Corporate Or Credit Cards

Credit cards or corporate cards are not always the best option for making payments on behalf of a business. A petty cash fund is a good alternative to corporate cards, and it’s also one benefit why businesses still stick to using petty cash funds.

Here is why.

It might not be practical to provide every employee with a corporate card. One reason is that an employee might have to incur a business expense exceeding the limit of the card. In other cases, the probability of money abuse and using the card for personal expenses still exist.

Therefore, when the company is using the petty cash fund, they don’t have to worry about the corporate card bills and keeping a check on the expenses of employees.

Easy Management and Planning

Although allocated in the company’s budget, the petty cash fund doesn’t require a lot of planning. The standards are set, and regulations are made in the financial system.

Generally, the imprest system is followed for managing petty cash funds. It implies that a certain amount is pre-funded to the custodian. When the petty cash fund falls below a certain limit, it’s refinanced and maintained at a specific amount.

Less Oversight Is Required

For sure, tracking and maintenance of petty cash are required like any other financial account. But the benefit of using the petty cash fund is that less oversight is required than other options like credit cards or corporate cards.

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The cash custodian is given the authority to maintain the funds and use them for expenses according to standard operating procedures and regulations.

On the employee side, any employee in need of cash for business expenses has to fill a voucher when the custodian issues the cash. After completing the transaction, a cash receipt is submitted by the employee.

As a result, the record is maintained continuously without any hassle and chances of theft.

Funding For Emergency Expenses

The inherent objective of a petty cash fund is to finance the emergencies or incidental expenses of a company or department. Therefore, it’s good for companies to create and maintain petty cash funds.

You can recall the example of the yogurt company that ran out of milk when the next shipment was not coming before 48 hours. Having enough amount in petty cash funds helped the employees make instant decisions and meet the business’s emergency needs.

Limitations Of Petty Cash Fund

A petty cash fund is very useful and beneficial for small businesses as well as large corporations. However, there are certain limitations of the petty cash fund. Let’s discuss them briefly.

Outdated Method

The petty cash fund method is often regarded as insufficient or outdated. Companies that have a lot of small expenses often consider it tedious and inefficient to fill out vouchers for making each and every transaction.

Not A Practical Approach For Large Expenses

We talked about the concept of materiality for defining small expenses or large expenses. Whether a company has a petty cash fund, the company must have separate standards and regulations for the larger expenses. In principle, a petty cash fund is not a practical approach for larger expenses, and credit cards/corporate cards are the only feasible option.

Conclusion

Nonetheless, the petty cash fund has some limitations, but the disadvantages of the method are not enough to undermine its usefulness of the method. The businesses are still using petty cash funds, and they will continue to use them to simplify small expenses and day-to-day operations.

We hope that these reasons would have helped you understand the importance of petty cash funds for any business.