The Petty Cash Trap: 4 Simple Truths to Protect Your Business Cash Flow

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All business expenses should be managed through formal channels, such as cheques or bank transactions. This approach ensures transparency, helps reduce fraudulent payments, and simplifies the recording and accounting of financial activity. But what happens when the expense is so small that the formal process becomes a burden?

A friend was once offered a gift of 50 cedis via a cheque. He rejected the cheque. The reason was simple: his transport cost to get to the bank would have eaten up half its value.

This small story perfectly illustrates a common business problem. You wouldn't issue a cheque to a taxi driver or for a cup of tea. This is precisely where a petty cash system comes in - a simple, professional solution for handling the small, necessary expenses that keep a business running smoothly. While the idea is simple, managing it effectively involves a few powerful concepts that are often overlooked.

The "Imprest System" is Deceptively Simple - and Often Ignored

The most recommended method for managing petty cash is the imprest system. The concept is straightforward: a fixed amount of cash, known as a "float," is given to a designated petty cashier. As this money is spent on small items, the cashier collects vouchers or receipts. Periodically, the cashier submits these vouchers and is reimbursed for the exact amount spent, bringing the cash on hand back to its original fixed amount. The imprest amount can even be increased or decreased when necessary by adjusting the reimbursement.

This system is designed for effective control and is remarkably easy to implement.

It is a simple and straightforward system, yet many companies do not use it in practice and end up messing with their petty cash accounting.

Despite its simplicity, many organizations neglect to implement it correctly, viewing it as unnecessary for "small" amounts and thereby creating the accounting messes it is designed to prevent. Businesses mistakenly skip this formal structure, leading to difficulties in tracking cash and creating headaches that a simple imprest system would have solved.

There's No Universal Definition of "Petty"

As the name implies, petty cash is for small expenses. But what, exactly, is "small"? The truth is that the term is relative and depends entirely on the scale of the business.

For instance, GHC1,000 might be a perfectly adequate petty cash float for one company, while for another, that amount would be far too small to be practical. This point is crucial because it underscores the need for each business to establish its own sensible policies. There is no one-size-fits-all number. Instead of searching for an industry standard, managers should define what "petty" means for their own operations and set their float accordingly.

Perfect Control is Just Simple Arithmetic

The beauty of the imprest system is that it makes financial control incredibly simple. Verifying the account doesn't require a complex audit; it comes down to basic math.

The core formula for control is: The cash counted in the box plus the total value of the paid vouchers must equal the original imprest amount.

Consider the example of Company A, which has an imprest float of GHC400. A quick check reveals GHC200 in cash (composed of various notes) and GHC200 worth of paid vouchers in the cash box. Because GHC200 + GHC200 = GHC400, the account is perfectly balanced.

But the real power of this simple arithmetic is revealed when things don't add up. What if Company A’s imprest was supposed to be only GHC150? The count of GHC400 (GHC200 cash + GHC200 vouchers) would instantly reveal an excess of GHC250. Conversely, if the total was only GHC350, it would point to a GHC50 shortage. Any shortage or excess should be investigated and rectified. This simple check demystifies financial controls and transforms a simple cash box into a fully accountable fund.

To summarize:

  • Actual Cash Count + Total Voucher Value = Original Float Amount

  • If the total is Lower: You have a shortage (investigate).

  • If the total is Higher: You have an unexplained excess (investigate).

The Curious Case of the "Accountable Imprest"

In Ghana's public sector, the term "Accountable Imprest" is quite popular. Functionally, its application is not much different from a standard petty cash imprest system. A staff member is given a float, spends it on valid expenses, and then accounts for the expenditure with receipts to either receive a refund or return the unspent balance.

The curious part is the name itself. The term "imprest" inherently implies accountability. Adding the word "Accountable" seems redundant. I can only guess it’s meant to place extra emphasis on accountability, but it also raises a more critical question: Does it imply that some other kind of imprest exists for which you don't need to account? So there is Imprest, and then there is Accountable Imprest. But is that so? This serves as a pointed reminder to always focus on the underlying principle - in this case, accountability - rather than getting lost in jargon that may state the obvious or, worse, cause confusion.

Conclusion: A Final Thought on Simplicity

Managing petty cash effectively doesn't require a complex, burdensome system. It requires the consistent application of a simple and logical one, like the imprest system. By setting a fixed float, defining what "petty" means for your business, and using simple arithmetic to maintain control, you can eliminate a common source of financial frustration.

This leads to a final, thought-provoking question: Are there other simple, effective systems in your business that are being overlooked for something far more complicated?

Disclaimer: This article is provided for general educational and informational purposes only and does not constitute accounting, tax, financial, or legal advice. While every effort has been made to ensure accuracy, information may not reflect current standards or individual circumstances. Readers should consult a qualified professional before making financial or business decisions.

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