Petty Cash: The Risks and how to Erase Them

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What is petty cash?

Petty cash is a pot of funds used in many offices for small business expenses, such as ad hoc office supplies, staff refreshments or postage.

These transactions are typically unplanned, urgent and low in value. So, channeling them through central purchasing could halt progress whilst incurring onerous due diligence – often disproportionate to the value of the transactions themselves.

As a result, petty cash transactions are usually handled within a team or department, rather than centrally. A nominated cashier typically processes them manually using a system of request forms, receipts and cheques.

The risks of petty cash

As their namesake implies, petty cash purchases are often dismissed as trivial. For small business, these transactions may be of little concern. Yet, for bigger businesses, the stakes are higher. Though these transactions may be small in themselves, as the number of purchases increases so does their significance for the company’s cost base.

Here are four key challenges businesses face when using petty cash:

  1. Susceptible to error – The highly manual process can lead to mistakes, logging errors and even false claims. In particular, receipts may be lost, descriptions unclear or matters confused when personal items are purchased in the same transaction as business goods.
  2. Poor visibility – The low value of purchases can lead to complacency around record-keeping, including missing receipts or incomplete details. As a result, tracking spend can be difficult. Meanwhile, decentralised records make it hard for central finance to review buying activity.
  3. Questionable value – Handing cash over to staff gives them control over the price paid. So you cannot be sure best value is achieved. Some expenses may not be cost-effective, especially if purchased last-minute (e.g. transport), so you could be paying over-the-odds.
  4. Soft costs – Staff often leave the workplace to make petty cash purchases in person. Staff stepping away to run errands of this kind reduces productivity whilst wasting paid time. Highly-manual petty cash processes also require a nominated cashier. The paid hours spent processing these transactions may be disproportionate to the value of the purchases themselves.

Other options

Companies seeking to streamline costs may be able to yield savings by reviewing how petty cash is handled within their business. A variety of tools are available to help control, streamline or entirely automate these transactions. Four alternatives include:

  1. eProcurement – Procurement systems are purpose-built to manage business transactions. Plus, many suppliers offer online ordering systems as a free, value-added service to help you transact with them. The best of these include features to help control your spend, such as agreed prices, product restrictions and budget limits. So, your staff are free to order essential supplies within centrally-controlled parameters.
  2. Prepaid Business Credit Cards – A pre-paid card allows costs to be capped, avoiding unexpected expenses. Meanwhile, transactions can be viewed online in real-time, giving you complete visibility. Furthermore, many providers allow transactions to be restricted to specific vendors, locations and time periods to ensure central control of use.
  3. Accounting Software – Rather than shuffling through paper forms and receipts, accounting software allows this data to be input in a user-friendly format and scans uploaded in evidence. So, all expenses records can be maintained in a central location.
  4. Mobile Applications/Sites – Accounting apps exist to ease how business expenses are processed. Some apps can be linked to a business credit card, so transaction data can be transferred directly into accounting software or exported as a digital report. This saves time combing through statements or manually inputting data. Some vendors offer mobile-enabled ordering systems too, so your staff can order essential supplies on the move.

Implementing one or more of these tools could not only drive down the cost of these purchases themselves, you may also be able to reduce the time and resource required to process them – releasing both hard and soft costs.

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