Imagine that you need to celebrate a colleague’s birthday at the office, that one of your branches has run out of toilet paper, or that you immediately need to reimburse a staff member for a small purchase. From where do you pay for these expenses? As a business owner, chances are that you do so from a small stash of money you keep for precisely these sorts of things and emergencies. It is this easily accessible stash that is known as petty cash.
We can formalize this definition and set up the scope of how petty cash should and should not be used.
What is Petty Cash?
Petty cash is the small amount of money kept readily available by a business for nominal, incidental expenses such as office supplies, snacks, client lunches, social occasions, etc.
Exactly how “small” this amount should be depends on the size of the business and its day-to-day operations. A larger business, for example, may require different funds to be maintained for petty cash expenses of different departments, at different locations, while a small business may be able to manage with a fixed amount replenished each month.
In scenarios where cheques or corporate credit cards present too much of a hassle, petty cash comes across as a quick fix because it does not entail a lengthy process or procurement system. That said, petty cash expenses will also require reconciliation like any other business transaction to avoid leakage and fraudulent practices. In cases where a business lacks a dedicated staff member to manage petty cash, or when petty cash has to be disbursed to multiple locations, it can become quite cumbersome to make sure that the entire amount is accounted for each month and all expenses are valid.
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Petty Cash: Pros and Cons
Whether it will be beneficial to keep a certain amount of money as petty cash can vary from business to business. Still, there are few clear-cut advantages and disadvantages to it.
First, the advantages.
- Paying for small expenses with petty cash is easiest and quickest.
- Using petty cash does not require multi-level permissions, making the fund most accessible for business expenses.
- It is extremely useful for urgent expenses as there’s no waiting time involved for getting money from the main business account.
- Small vendors and retailers who don’t accept cheques are most easily paid with petty cash.
Of course, like all easy solutions, petty cash comes with its own challenges.
- Being easily accessible makes petty cash an easy target for theft and fraud.
- Growing businesses find it difficult to manage it without a robust petty cash management solution to keep track of funds and reconcile them.
- Petty cash expenses can prove to be a hassle while accounting, especially if the cash is distributed at a bunch of locations and is handled by multiple people.
So, to keep petty cash or to not keep petty cash is, apparently, the question. The answer lies in recognizing the problems solved by petty cash and looking at better ways to manage it.
Petty Cash Management and Prepaid Cards
Getting a dedicated petty cash management software comes with its own set of challenges, the most obvious one being its integration with the rest of your accounting. Also, it may not make sense for smaller businesses to invest in a whole new solution to manage a small amount of cash that is supposed to make things easier, not more tedious. A better way is to look at alternatives to “cash” and tweak existing petty cash management procedures.
The simplest of these alternatives are prepaid cards, also known as expense cards, and their popularity is reflected in relevant statistics—according to Allied Market Research, the global prepaid card market size is projected to reach $6.87 trillion by 2030, growing at a CAGR of 18.2% from 2021 to 2030.
So, what exactly is a Prepaid Card? A prepaid or corporate expense card is a card for offline expenses that is preloaded with a fixed amount and can be swiped at multiple places, countless times until the limit gets exhausted. You can read about them in more detail in this extensive guide on managing offline business expenses.
Now, let’s look at how you can manage petty cash with prepaid cards in the most simple, hassle-free, and holistic way.
Using traditional ways of managing petty cash generally causes businesses to face these challenges:
- It is basically impossible to ensure ethical usage of the petty cash fund, especially when it is handled by more than one person.
- The unpredictable nature of small expenses may cause different business locations to run out of cash, causing delays in essential expenses, and requiring a new cycle of disbursement and reconciliation.
- Disbursing the cash physically to different branches or locations is time-consuming and risky. The transportation and logistics costs add up over time, causing a budget imbalance.
Prepaid cards meet all these challenges head-on and streamline the entire process in just 4 easy steps. As a business owner or manager, you can:
Disburse petty cash digitally in seconds to employees
You no longer need to give physical cash to your employees, or even make tedious bank transfers. Instead, just assign prepaid cards to them and load the necessary cash into these cards.
You can assign a card to each of your different branches, or different employees, depending on the nature of your business.
A construction company, for instance, can assign prepaid cards to its employees for small everyday expenses like food and office supplies to ensure that day-to-day operations keep running smoothly. Daily-wage workers can also be paid on time in a hassle-free manner with petty cash, and the same is true for smaller vendors needed for essential supplies.
Similarly, restaurants and shopping centers with multiple branches can assign prepaid cards to the managers at different locations for transactions typically done via petty cash. By doing so the business owner can rest assured that none of the branches will ever run out of funds and there will be no cash leakage or fraud.
Track the spending of your petty cash
You can see every expense made with prepaid cards in real-time and make business plans accordingly. This real-time visibility also allows you to analyze expenses and take steps to optimize your operations.
Stay in complete control of business expenses
You can set spending limits on prepaid cards to stay within the budget. In case you suspect cash leakage or fraud, you can also disable and enable cards with a single click.
Preset spending limits on the prepaid cards can also be modified by you to take into account sudden requirements or emergency expenses.
Say goodbye to tedious reconciliation
In addition to their ease of use and simplicity, business banking leaders such as Open further make the case for using prepaid cards to manage petty cash by offering integrated automated reconciliation.
All transactions made using prepaid cards are reconciled with your business accounting, saving hours of tedious work and ensuring that every business expense—no matter how small or urgent—is tracked and accounted for.
Due to the way that businesses have been operating for years, it is not a smart idea to completely overhaul trusted systems like petty cash. We can, however, leverage the technology now available in the market to augment age-old processes, aiming to optimize rather than replace them. Solutions such as prepaid cards, or digital expense filing, do exactly this and make petty cash an asset rather than a liability for your business.
So, go ahead and use the insights you gained while going through this blog to manage your petty cash better. If you enjoyed reading this, chances are you will also find useful this guide on things to consider before applying for corporate cards.
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