By Holly DeVito, owner of Sum of All Numbers

Keeping track of your finances is one of the most important tasks as a small business owner. The key to successful record keeping requires a commitment to a sound accounting system which includes operational methods as part of your company’s internal control procedures. This is particularly important when establishing a petty cash fund for your business.

The purpose of a petty cash fund for your small business is to have cash on hand for the payment of various small expenditures. It is important to implement a petty cash system to protect not only your business but also the employees. Petty cash can be kept in a cash register or a petty cash lock box for occasions where you have an expense of a small amount. Although the petty cash fund is usually only $100, it is important to keep control of the fund and to be able to account for it and reconcile it, both to make sure all expenses have been accounted for and also to make sure the cash doesn't disappear.

Setting Up a Petty Cash System

1. Designate one or two authorized employees to keep the petty cash lock box or keep it in a safe. Put the key in a location known only to you and perhaps one other employee. Store it in a location where it will not be found unless someone is specifically looking for it - not in your desk drawer.
2. A set amount, such as $100 is established by withdrawing the cash from the bank and placing it in the lock box. Most businesses operate well with a $100 petty cash float. You can always increase it later if you find you are replenishing it frequently.
3. Establish a petty cash system in which every transaction, no matter how small, is recorded in a book with the amount, date and purpose of every withdrawal, along with the receipt returned after the purchase is made. Be sure that whoever handles petty cash is disciplined about recording the journal entry for each replenishment, debiting Petty Cash (or Office Supplies, or Miscellaneous, etc.) and crediting the source (e.g.,Cash-in-Bank) every time. This recorded amount and the remaining amount of cash in the box must total $100.
4. When cash is removed from the lock box, the exact amount is recorded and signed by the person removing the cash. Require each employee who receives cash to also sign the book--and make it an ironclad rule that no employee can obtain a loan from petty cash under any circumstances.
5. Have your bookkeeper audit and reconcile the petty cash every month at the same time as the other bank accounts.

By establishing a fool-proof internal controls process for your petty cash, you can prevent employee theft and protect your company’s assets.