How does your business pay for small transactions? If your business is like some, you may have a petty cash fund to pay for small expenses. A petty cash fund is a small amount of money (usually $100 or so) that can be used to pay for small, daily expenses such as parking meters, toll fees, or even a package of light bulbs. This money is usually kept in a locked box or drawer and is normally accessed by just one or two people.
A petty cash fund makes it easier to track expenses and separate out business costs from personal. It can also help lower the risk of theft, a lesson that our family business learned a little too late.
How we lost thousands of dollars
When a close family member was hired to do a little bit of remodeling work for our business, our bookkeeper set up charge accounts at a couple of local building supply stores to handle large purchases. For smaller purchases, she made the mistake of giving this person a debit card.
Suffice to say that this person purchased thousands of dollars in tools and supplies over a three month time span, many which were returned for a cash refund only hours later. Also debited from the business checking account were charges for groceries, gas, eating out, and nearly $1,000 in ATM withdrawals for cash. Why didn't the bookkeeper catch the issue sooner? Because of the extremely high volume of debit and credit transactions that were occurring each day.
Having a petty cash fund would have prevented this misappropriation of funds from happening. It would have also limited the amount of money that was taken and ensured that receipts were returned before any more funds were advanced.
Setting up a petty cash fund.
Because of this incident, our family business now has a different bookkeeper and a petty cash system in place.
To start the petty cash fund, I drew $100 out of our business checking account which was recorded as "petty cash" in our chart of accounts. The cash was placed in a locked box along with a small notepad. Now, when someone needs a bit of cash for a small expense, he is handed $20 from the cash box. Once the receipt and the change are returned, the transaction is recorded in the journal with the receipts paper clipped to the page. While maintaining a petty cash fund does require a bit of work, it does mean that any money that does turn up missing is limited to just what's in the cash box.
There's no arguing that debit cards are amazingly convenient for a small business owner. Unfortunately as our family discovered the hard way, debit cards make it much too easy to steal from the company which is why we've switched to an old fashioned petty cash system for handling small transactions.
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