Petty cash lets businesses pay for small everyday expenses—like office supplies, parking, or client refreshments—quickly, without waiting for formal approvals. This guide explains what petty cash is, why it’s important, and how it helps operations run smoothly. You will learn how petty cash is set up, managed, refilled, and audited, with examples of what expenses are allowed and what are not. It also explains the difference between petty cash and cash on hand to improve financial understanding.
What is petty cash?
Petty cash is a small amount of cash kept by a business to pay for minor everyday expenses, such as office supplies, postage, or client refreshments. It is managed by a designated person, allowing quick payments without using checks or electronic transfers. Careful record-keeping and regular checks are important to prevent misuse.
Importance of Petty Cash Fund for Business
A petty cash fund offers several operational advantages:
- Immediate Access: Petty cash lets businesses quickly pay for small, urgent expenses like parking fees or emergency supplies, especially when cards aren’t accepted or waiting for checks would cause delays.
- Less Paperwork: Small expenses don’t need to go through the central office, saving time on lengthy expense reports for both employees and managers.
- Better Efficiency and Employee Satisfaction: Employees don’t have to use their own money and wait for reimbursement, which speeds up work and boosts morale.
- Quick Customer Hospitality: Petty cash can be used immediately for small gestures, like refreshments or gifts for clients, without needing formal approval.
How petty cash works?
Petty cash follows a simple, structured process:
- Setting the fund amount: A fixed amount is allocated based on expected small expenses.
- Assigning a custodian: A responsible person manages the fund and maintains records.
- Using cash for small expenses: Cash is spent on approved items such as office supplies or refreshments.
- Collecting receipts: Every expense must have a supporting bill or note.
- Replenishing the fund: When the cash runs low, the business restores it to the original amount by accounting for all recorded expenses.
Businesses evaluating additional funding for operational needs can also check your pre-approved business loan offer for quicker access to capital.
Step-by-step guide to managing a petty cash fund
Here’s how businesses can maintain a well-organised petty cash system:
- Determine the fund size based on frequency and type of small purchases.
- Assign a custodian responsible for safekeeping and tracking transactions.
- Set clear policies outlining what petty cash can and cannot be used for.
- Record every transaction with receipts and a short description.
- Review expenses periodically to ensure proper usage.
- Replenish the fund once it reaches a minimum threshold.
- Conduct regular audits to maintain transparency and accuracy.
What can and can't you use petty cash for?
| Category | Allowed Uses | Not Allowed Uses |
|---|---|---|
| Office & Admin | Small stationery items (pens, paper, tape), postage stamps, urgent courier charges | Large equipment, expensive inventory, or office furniture |
| Travel & Transit | Local taxi fares, parking, road tolls, emergency fuel for company vehicles | Major travel costs like airfare, hotel stays, or long-distance mileage |
| Hospitality | Refreshments for meetings (coffee, snacks), client lunches, cards or flowers for special occasions | Personal meals not linked to business meetings or events |
| Maintenance | Minor emergency repairs (lightbulbs, broken locks, small plumbing fixes) | Regular bills (electricity, internet, rent) or major building repairs |
| Finance & HR | Small employee reimbursements (within limits), giving change to customers | Personal loans, salaries, wages, or cashing personal cheques |
| Compliance | Legal or business-related incidental costs with a valid receipt | Personal expenses, health insurance, or political donations |
How to manage a petty cash book?
Managing a petty cash book ensures accurate tracking and avoids misuse. Key steps include:
- Record all transactions immediately to prevent errors or missing entries.
- Use simple columns such as date, description, amount spent, and balance.
- Attach receipts for every transaction to maintain clarity.
- Update the balance daily to keep records current.
- Reconcile regularly by comparing physical cash with recorded amounts.
- Store the book securely along with the cash to avoid discrepancies.
Difference between Petty Cash and Cash on Hand
| Feature | Petty Cash | Cash on Hand |
|---|---|---|
| Definition | A small, fixed amount of cash kept on-site for minor expenses | The total funds a business can access immediately, including both cash and digital money |
| Form | Always physical (notes and coins) | Can be physical (cash) or digital (bank accounts, cash equivalents) |
| Purpose | To pay for small everyday costs like office supplies, postage, or snacks | To cover all short-term financial needs, including payroll, rent, or planned investments |
| Management | Usually handled by a designated custodian using an imprest system | Managed by the finance team or business owner across multiple accounts |
| Location | Stored securely on the premises in a lockbox or drawer | Spread across safes, registers, and bank accounts |
Conclusion
A petty cash fund is a valuable tool for managing everyday business expenses efficiently. With proper tracking, clear policies, and regular audits, it ensures smooth operations and financial transparency. For larger funding needs beyond small expenses, businesses can consider applying for a business loan. Before applying, it’s important to assess business loan eligibility based on the lender’s criteria and financial profile. Using a business loan EMI calculator can also help estimate repayments in advance. Understanding the applicable business loan interest rate also helps businesses plan finances responsibly and maintain steady growth.
