Cash transactions have been on the decline for decades and plummeted even more in recent years due to the pandemic. Even so, some businesses still choose to keep a petty cash fund.
But are petty cash funds necessary in the era of digital banking?
In this article, we'll go over the purpose of having a petty cash fund, its uses, and potential alternatives. With this information, you’ll be better equipped to decide whether to start or continue with this business practice.
What is a petty cash fund?
A petty cash fund is a nominal amount of money held by a business for small expenses. This is often kept in cash in amounts up to $500. Larger corporations often separate petty cash by department, so each team is in charge of their own funds.
Unlike recurring bill payments, petty cash usually covers infrequent expenditures such as taxi rides, coffee, office supplies, gifts for clients, or lunch for employees.
Note that having a petty cash fund is not the same as having a cash register or other cash system where large volumes of money is transacted. In theory, petty cash funds do not amount to a significant amount of company spend.
Why should businesses have a petty cash fund?
Petty cash funds are a holdover from an era when credit cards were not used for small transactions. Having cash on hand was convenient for times when merchants didn’t have card readers.
Imagine a scenario where you find out it’s a client’s birthday. If your business has a petty cash fund, you could grab a $10 bill from the cash drawer, run to the convenience store and purchase a card. This is a more common and convenient practice than an employee paying out of pocket and requiring reimbursement.
When you return to the office, you put the change from the purchase back in the cash drawer and register the amount spent in a cash log (this could be digital or paper). If all goes according to plan, this cash log is included when accounting closes the books.
This used to be a frequent occurrence for offices. Nowadays, petty cash is most typical for brick-and-mortar businesses or businesses that often transact in cash.
For other businesses, automating accounting and bookkeeping is usually simpler without a petty cash fund. This is especially true for teams with remote employees.
To establish a petty cash account , the business writes a check to a petty cash custodian. The petty cash custodian is in charge of cashing the check and maintaining the amount of cash in the cash box.
This person is responsible for determining when it is appropriate to use the petty cash fund. They are also in charge of collecting receipts and making sure the cash log is up-to-date.
5 reasons to avoid petty cash funds
Because credit cards and online transactions are now common, petty cash funds are no longer necessary for a healthy spend culture. In fact, it is an antiquated practice and often brings more risks than benefits, especially to businesses that mostly operate online.
Here are five reasons not to have a petty cash fund.
They make it hard to keep records
Unlike other payment methods, cash is virtually untraceable. Keeping track of a petty cash fund requires time and attention. For this reason, it’s subject to human error.
To properly maintain the total amount of cash in a cash box, team members must receive training on appropriate uses for the petty cash fund, cash management, and how to register transactions in a cash log.
Small transactions add up
In theory, petty cash does not make up a significant amount of business spend. But spending a few dollars here and there quickly adds up, particularly on a growing team.
For example, let’s say you have a team of five people in an office. Each person drinks an average of two cups of coffee per day, for a total of 10 cups of coffee per person per week. If the office is open 50 weeks of the year, this amounts to 500 cups of coffee per person per year.
That’s 2500 cups of coffee for an office in a year! Even if you’re purchasing bulk coffee, this will still amount to hundreds of dollars. If your office opts for individual coffee pods like K-cups, you’re likely spending thousands of dollars—just on coffee.
Petty cash transactions make it difficult to see where spend is really going, which makes it hard to make spend policies that align with business goals.
They're subject to theft and oversights
Because cash is hard to keep track of, petty cash funds are liable to disappear. This can often be unintentional, like if a team member forgets to return change to the cash drawer or does not register a purchase on the cash log.
Cards are commonly accepted
Petty cash funds are a holdover from a time when paper cash was preferred over card transactions. At this point, most major retailers accept—and even prefer—cards.
And with the advent of online shopping, it’s often more cost-efficient to buy items like office supplies, birthday cards and coffee from online retailers. These purchases can only be made with cards, making petty cash funds obsolete.
There are better alternatives
Credit cards, debit cards, and online transactions all automatically register in a neat summary. This avoids the major pitfalls of petty cash funds and gives you more visibility over company spend. We’ll cover these alternatives in the next section.
Alternatives to a petty cash fund
Alternatives to petty cash funds are vital for businesses concerned with how to save time and capital. As discussed above, dealing with petty cash is an antiquated practice and most businesses benefit from using other methods.
Debit cards or gift cards
One alternative to petty cash funds is a debit card or Visa gift card. Similarly to a cash fund, this requires putting a small amount of money onto the card and then appointing a custodian to oversee the use of the card.
The benefits of this method include an automatic log of transactions, which better safeguards your cash by reducing human error and the risk of theft. On the other side, debit and gift cards do not accrue points or other perks and do not typically come with anti-fraud measures.
Gift cards also have to be registered in an expense management software. With Ramp, this is as easy as uploading a receipt and letting the automation take care of registering the spending and reimbursing employees as needed.
Physical credit cards
One of the best alternatives to cash is business cards. These are physical cards you can issue to employees and they can then use for business-related expenses.
The biggest perk to using a business card is that it automatically syncs with payment management software. No uploading receipts or assigning cash custodians to update the spreadsheet. Every transaction is neatly accounted for.
With a Ramp card, you can also set limits on spending categories. This reduces the need for employee training or constant reminders about spend policies.
This also gives you more granular control over how money is spent. Instead of having a general fund for small expenses, you can set limits for specific purchases. For example, you can create a category for client gifts and set the limit at $50 per month.
This ensures that spending aligns with business objectives and prevents small expenses from building up over time.
The main drawback to physical cards is the potential to lose or damage the cards. Luckily, Ramp allows you to issue unlimited cards to your team. In the case of loss or theft, it’s easy to freeze the card and review transactions for fraud.
Add another layer of anti-fraud protection to your company spend by using virtual cards to pay for online purchases and tap-to-pay transactions.
While physical cards are convenient for purchases made a brick-and-mortar locations, virtual cards protect your business and allow employees to make online purchases with confidence.
With Ramp, you can issue unlimited virtual cards that can easily be used online, as well as added to your Apple Wallet or Google Pay. By issuing virtual cards, you gain more precise control over how much your team spends on specific categories and vendors.
21st century spend management with Ramp
Instead of having petty cash on hand, your team can use Ramp corporate cards to cover everything from recurring bills to the smallest expenses.
With real-time spend updates and built-in spending limits by category, you can access all the benefits of a petty cash fund without the risk of human error, fraud or theft. Best of all, you won’t need a cash custodian to overview every little transaction.
Our AI will alert you of spending that falls outside of company policy and your dashboard will give you insight into curbing unnecessary expenses.
It is considered an asset because it can be used to pay for what the company needs.
The business writes a check to the petty cash fund custodian. This is entered into accounting records as the establishment of a petty cash fund.
The remaining cash amount is deposited back into the business bank account. This is entered into accounting records as the closing of the petty cash fund.