“Take it from the petty cash”. Admittedly, with credit cards now increasingly being used for smaller payments, this refrain isn’t quite as prevalent as it used to be, but that doesn’t mean petty cash funds have become extinct, far from it. Many businesses have one simply because it provides a quick and convenient source of cash for small everyday expenses.
But setting up a petty cash fund isn’t simply about putting some money in a box and using it when you feel like it. In fact, there are quite a number of things to consider.
We take a look at all the things you need to know about petty cash, so you can decide if setting one up would be right for your business.
What is petty cash?
Petty cash is a small amount of cash put aside by a business to pay for small, unplanned, and infrequent expenses. The amount of money kept in the petty cash box will vary from business to business but is normally in the region of £100. You will need to work out what is a reasonable amount for your business so that you have enough cash readily available without having to top it up too often.
The advantage of having a petty cash fund is that it’s convenient, easy to use and saves an employee needing to pay for something out of their own pocket and then completing an expense form to be reimbursed. Although, as you’ll find out, they could be paid out of the petty cash!
What can petty cash be used for?
Petty cash is used to pay for those small, everyday expenses that occasionally pop up during the working week. These include:
- Local travel such as short taxi journeys
- Postage
- Refreshments, such as milk or coffee
- Office supplies
- Birthday gifts for employees
- Lunch with clients
- Reimbursing employees for small work-related expenses.
The maximum amount for a petty cash transaction varies between companies, so you should decide what is reasonable for your business.
Are there any rules for petty cash?
Whilst there aren’t any set rules for having a petty cash fund, there are a few things you should do to keep the money safe and secure and make sure it’s managed properly:
- Always store it in a locked box, drawer or cabinet and ensure the key is kept safe
- Only give suitable people access to the petty cash. You may decide it’s better to just have one person to act as the petty cash custodian with a stand-in when they’re not in the office
- All petty cash transactions must be recorded and entered into the petty cash book with the amount checked against the receipt
- Consider introducing petty cash vouchers. These are completed by the employee requesting petty cash and clarifies why they want the money and how much they want. This request can then be approved or denied. If approved, you then have a record of the request for the files.
- Put in some controls to confirm that any money spent is for business purposes and not someone stocking up on office supplies for their own personal use.
What about recording the transactions for MTD?
All petty cash transactions must be recorded, but the good news is HMRC realises it would be a bit onerous to have to enter every single one separately. So, while any transactions above £50 have to be entered individually, smaller ones can be recorded as a single entry up to a monthly limit of £500. This is their guidance in full:
Where a business uses petty cash to pay for small value items, these do not need to be individually recorded with digital records. The business can record the total value and the total input tax allowable. This applies to individual purchases with VAT inclusive i.e. gross, total value below £50 and a total value of petty cash transactions recorded in this way cannot exceed a total gross value of £500 per entry.
Downsides to having a petty cash fund
Of course, having a petty cash fund isn’t suitable for every business, especially as it does come with a few downsides.
- You’ll need to put processes in place: as already outlined, it’s important to have the right controls in place to ensure your petty cash fund is appropriately managed. But while these processes might ensure the money is spent and recorded properly, it does make using petty cash more difficult, which rather defeats the object of it being a quick and convenient source of cash. And you’ll also have to consider training your staff on how to use the petty cash fund properly.
- It can be hard to manage: even if you have processes in place, it won’t necessarily stop people from forgetting to get a receipt or logging a transaction. And all it takes is for a few errors and suddenly your petty cash account won’t balance, and you’ll need to waste time and resources investigating why.
- It all adds up: whilst petty cash won’t contribute a significant amount to your business expenses, over time it all adds up, so unless you have a set budget in place there is a real risk of overspending without realising it until it is too late
- Misappropriation of funds: while having a pot of cash on your premises makes it easy to buy things, it also means it can be easily stolen or even used for personal reasons. And of course, you also have to rely on change being put back into the pot!
Having a petty cash fund won’t be right for all businesses, especially since company credit cards or pre-paid cards offer a viable alternative. But then do you really want to use a credit card for a pint of milk or a book of stamps?! The choice is yours, but if you do need any advice on how to set up a petty cash fund or how to ensure your petty cash books always reconcile, just give us a call.
