The term ‘petty’ has been carried over as legacy, but the volumes have become a sizeable percentage of the ‘Operational cash-flow’ of a business. It’s funny it is still called petty cash, but now it needs to be controlled and tracked with equal (if not more) sophistication as other Business Expenses.
By Varun Rathi, Co-founder of Happay
Every modern business owner knows that PETTY CASH is like that leaking hole in your water tank (bank account). It is small and hence doesn’t justify the ‘huge effort’ required to measure it. But as it keeps accruing, it becomes big enough to always keep nagging at the back of your mind, acquiring unnecessary mental bandwidth and not allowing you to close your accounts.
If you are a Finance Controller / CFO / Business Owner / Startup Founder, then you already know where the problem is, and maybe are looking for a solution. To get to the solution, let’s first understand the origin of the problem.
The word ‘petty cash’ originated in the early 17th century and was used to describe the “small amount of cash that was kept aside for trifling purchases, too small to require the effort of the making out and cashing of a cheque.” During those days most of the businesses were either run by individuals or a family. The key to the cash locker alway remained with the owner / family members. The business owners used to be involved in all major business expenses directly. Only the minor day-to-day expenses like tea / snacks / stationery were left to the ‘office boys’, hence the name ‘petty cash’, which hardly summed upto 3% of total business spends.
As businesses kept growing, the ad-hoc cash requirements kept increasing – e.g. repairs & maintenance, small one-time vendor payments, local travel, offline marketing, lunches for the executive meetings, celebrations, printer paper, ink etc. Given the easy availability and low accountability, employees started using petty cash for making these one-off payments and then it became a norm. The “leaky hole” kept on getting bigger. When petty cash started amounting to double digit percentages, it could no longer be left un-accounted for, hence it gained recognition as a proper accounting term in the balance sheets. But still the detailed tracking was missing.
Petty cash for a distributed business
From then to the present day, the Indian businesses have grown multi-fold / massively. They have operations spread across the city / state / country and have multiple branches. Now each of these branches need ‘petty cash’ to run their daily operations (which includes all sorts of expenses mentioned earlier). The business owner can no longer hold the key to the pettycash locker for all these branches, and it has to be handed over to respective branch / store managers. Now the problem got much bigger.
It is like the tank of water with multiple big holes. The leakage starts affecting the cash flow soon. It was time to control and track the flow through the holes.
That’s when the Imprest system became popular among accountants. In simpler terms, the imprest system allowed putting some rules and accountability on petty cash. Broadly, the rules were:
– The Imprest Account will be replenished upto Rs X every month (or week)
– Each expense must be supported by a receipt
– At the end of month all the receipts will be reconciled. The total amount as per the submitted receipts will be credited to the Imprest account in cash.
It is like assigning one person to measure the flow through one or more holes of the tank and keep reporting it back. Not scalable. As business grows the leakage grows too, and required resources grow too. The Imprest system helped in hiding the pain, but hasn’t alleviated it.
Did we realize petty cash is not petty anymore, it’ s a part of Operational Cash – flow for distributed and scaling business.
The term ‘petty’ has been carried over as legacy, but the volumes have become sizeable percentage of the ‘Operational cash-flow’ of a business. It’s funny it is still called petty cash, but now it needs to be controlled and tracked with equal (if not more) sophistication as other Business Expenses.
The business owners still don’t have much control over the spends, get delayed visibility into expenses (almost 30-45 days later). If the total spends don’t match the reported spends, the time spent in reconciliation is disproportionate to the amount being accounted for. There is generation of false receipts / vouchers just to close the books. This also leads to trust issues and unnecessary cohesion over small amounts. Even though everyones intentions are good, it has been humanely impossible to manually track each and every penny being spent.
The modern businesses need a digital and scalable way to manage cashflows, which gives them control, real time visibility, mobility and minimal dependence on manual data entry.
The holes in the tank need to be fixed with a electronically controlled tap and digital meters. The finance controller should be able to control the outflow (taps) and get instant visibility (meters) from a remote location.
Are you struggling with petty cash? Tell us more in the comments section below.