About 20% of new businesses fail within the first year of operation, and by the second year, this percentage rises to 30%. One of the primary reasons businesses fail is money problems.
One of the biggest challenges for businesses is managing small daily expenses. Having a petty cash account is the easiest way to pay small expenses and presents a unique challenge for financial tracking.
Follow this guide to setting up and managing a petty cash account for your business.
Set Up a Petty Cash Management System
Petty cash makes handling small expenses fast and simple. Traditionally, this would be an envelope of cash in a secretary’s drawer. Modern times have caused the petty cash system to evolve to a digital format.
However, it doesn’t matter if you use paper or digital money; you need to have a system to record and monitor this spending.
Appoint a Manager
The first step is to appoint a single person to e responsible for the petty cash fund. This person is the single point of contact and is wholly responsible for managing the petty fund account. Doing this will create accountability and reduce the risk of error or fraud.
Create a Fund
Establish a separate account where you allocate your petty cash. Then take money from your primary business checking account and put it in this new account. This makes managing your petty cash account easier and reduces the risk of mistakes.
The amount you allocate to your petty cash fund will depend on your business needs. However, it should be enough to support the expected activity and spending.
If you have actual cash in the office, secure it in a lockbox or drawer. Only the specified people should have access to the money.
Establish a System
Create a system for requesting the use of petty cash for your employees. Then create a system for the manager to record and track spending. It’s helpful to adopt the use of a management platform like Bento to make management easier.
Identify the types of purchases the petty cash can be used for. Outline how employees can request petty cash. Establish record or proof requirements that must be submitted post-purchase.
Monitor and Verify
This isn’t a set it and forget it type of system. Once you have your petty cash in place, you need to regularly check-in and monitor its operation. Take an active role in spend management by regularly reconciling and reviewing the petty cash expenditures.
Challenges to Look Out For
Unfortunately, a business’ petty cash fund is vulnerable to error, mindless spending, and fraud. Spending management is crucial to ensure you know where the money gets spent. When reconciling the account, pay attention to the details and look for an adequate paper trail.
Create manager responsibility by separating the tasks. For example, one person could manage the money while a different person manages the records and proof of spending. This helps to reduce misappropriation as the two people can hold each other accountable.
Set Up Your Petty Cash System
Business spending can quickly get out of control when you don’t have a solid petty cash system in place. Following these steps can help you budget and monitor the small daily expenses that can quickly accumulate.
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