Petty cash reconciliation: how to manage company cash payments
Published on January 11, 2024
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Like a lot of corporate finance processes, petty cash seems like a good idea at the start. It’s a relatively simple and efficient way to make small payments around the office.
Unfortunately, that word “relatively” is doing a lot of work in the previous sentence.
Because also like most finance processes, teams often find themselves in administrative debt sooner or later. Merely reconciling payments can turn finance teams into detectives, taking too much time away from their “real” work.
You don’t want that. So in this article, we’ll look at the essentials for good petty cash management and reconciliation. And then we’ll offer a clear upgrade over this old fashioned system, for those companies who want the best internal processes.
New to petty cash? Learn more about petty cash box processes and procedures.
Petty cash reconciliation
Payment reconciliation is the accounting practice of reviewing all transactions and payment records. Companies need to reconcile all payments to ensure that the payments recorded actually took place, and that records are accurate and complete.
Thus, petty cash reconciliation is the process of assessing petty cash payments and making sure that company records are up to date.
Reconciling petty cash can be particularly challenging, given the small and inconsistent nature of these payments. Many employees believe that petty cash doesn’t need to be tracked closely - that this is simply a disposable fund.
Of course, accountants don’t see it this way. They need a clear understanding of every transaction, regardless of the reason for spending or the payment method used. Whether made by credit card, cash, or employee expense claim, it’s all company money and needs to be treated with care.
Important terms to know
We’ll use a few terms and phrases in this article, so it pays to make them clear first.
Float: Petty cash boxes usually contain a starting balance so that teams have cash to spend. This is typically replenished every month or quarter, in what is called an imprest system.
Disbursements: The slightly technical term for payments made using petty cash. Cash is “disbursed” to different spenders, and hopefully recorded along the way.
Log: The petty cash log should show all payments made using petty cash.
Vouchers: Part of the log system, these show each individual payment. They’re typically filled out by employees as a sort of purchase order. One voucher = one transaction.
Keyholder/custodian: Typically only one person will have keys to the petty cash box. This person is responsible for distributing cash appropriately, and preventing abuse.
How to reconcile petty cash
The actual process of reconciling petty cash is theoretically very straightforward. We’ll get to the potential challenges in a moment, but here it is in a nutshell:
Ascertain the float. What's the starting amount?
Count the cash. At the end of a given period, this should be lower than the float amount.
Add up the recorded transactions (via vouchers and the log). These should equal the difference between the float amount and the remaining cash.
Categorize disbursements. These will then be assigned to your corresponding expense accounts.
Identify and investigate the differences between vouchers and the expected balance. As we’ll see, this is the biggest sticking point for finance teams, and the main cause of headaches around petty cash.
Record transactions in your general ledger. This is part of the typical financial close process.
Replenish the float for next month.
So in theory, that’s all there is to it. But as with most company finance processes, theory doesn’t always match reality.
Problems with petty cash reconciliation
Reconciling any kind of company payment can take longer than desired. The idea is simple: you check your internal records of what was spent against other sources - usually credit card or bank statements.
But when the two don’t line up, accountants have to find answers. And this can take a lot of precious time.
The big issues come in steps 4 and 5. First, it’s not always clear why a disbursement was made. Vouchers may be incomplete or vague, and team members may not understand the reasons why expense accounts need to be precise.
But of course, the biggest issues occur around missing cash or missing documentation. Cash, by its very nature, is harder to track than card payments. A successful petty cash program relies on a diligent custodian, and on the rest of the team following the rules.
At best, there’s a high likelihood of human error. And at worst, there’s potential for theft and fraud. Either way, finance teams tend to spend undue time investigating issues with relatively small payments, instead of adding value to their companies.
Overcoming these issues
As long as you stick with the physical petty cash box - and cash payments in general - you’ll always have problems. Whether these are serious or a mild annoyance really depends on your processes.
There are a few simple things you can do to protect yourself from the worst of the worst:
Reconcile petty cash regularly. Once a month is probably fine, but waiting longer than just makes the investigation more difficult later on.
Choose and train your keyholders wisely. These people may even be members of the finance team, which creates more work but also ensures that the keyholders have the best incentives to do the job well.
Keep a digital log, and scan receipts. This places a little burden on the custodian, perhaps, but reduces the likelihood that receipts go missing or that amounts are in error. It also makes the eventual reconciliation process much faster, as the data entry has already been done.
Set a maximum disbursement amount. This doesn’t prevent annoying admin or mistakes, but it at least mitigates the damage.
But of course, you’re still going to have issues. The petty cash box, while common, is really just a workaround for employees who don’t have access to company funds. So rather than continue this dance, we suggest another option.
Employee debit cards: the clean upgrade to petty cash
Employees need to spend from time to time to do their best work. A lucky few are given company credit cards, which give them direct access to money. But as we’ve written, company credit cards come with their own issues.
And you can’t replace petty cash with corporate cards for the simple reason that not every employee has one. Why? Because they’re seen as risky, and they’re too expensive to only use occasionally.
But employee debit cards - like the ones Spendesk offers - don’t have these same drawbacks. We already wrote a whole post about the differences between these prepaid expense cards and the classic corporate card. Here’s a quick refresher.
Traditional corporate cards
No matter the provider, these old-fashioned cards always have a few things in common:
Expensive to roll out (and therefore don’t scale well)
Hard to track
Finance teams wait for statements to reconcile credit card payments
No real-time visibility over spending
No easy way to prevent abuse, misuse, or fraud
All the reasons why you should be careful with your own credit card at home apply at the office too.
Debit expense cards
Smart debit cards provide an easy fix for most of the above issues. They let you:
Track every payment by each employee in a central dashboard
Set custom limits for each team, job title, or right down to the individual employee
Pay online with virtual cards, or in-store with plastic
See what’s spent in real time - not at the end of the month
Reconciliation is almost instant. The system checks payments and receipts for you, so your books stay up to date.
But the key reason they’re an upgrade over petty cash is that every employee can have one. Because they’re debit - not credit - there’s no risk of overspending. The rules are clearly set, and team members have no choice to follow them.
Which means everyone can have safe access to funds, and there’s no need for a petty cash box at all.
Learn more about Spendesk’s employee debit cards.
Get smart about petty cash reconciliation
Hopefully after reading this article, a few things are clear:
Petty cash needs to be monitored closely, and payments should be reconciled often.
Manual reconciliation adds extra work and headaches for finance teams, especially where errors exist.
The less petty cash, the better.
Smart solutions exist for companies ready to evolve.
Your next steps will depend on how much time and effort you’re losing to reconciling all payments today. If you don’t have too many expenses, company cards and a petty cash box are probably fine.
But spending is usually an essential part of growth. And the more you spend, the more the administrative burden becomes an issue.
If you’re starting to feel that burden today, it’s time to consider better options:
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