Petty Cash Management: Best Practices for Nonprofits
Petty cash is a convenient way to cover small, day-to-day expenses, but without proper management, it can quickly lead to mismanagement or fraud. For nonprofits, where transparency and accountability are paramount, establishing strong petty cash procedures is essential. Here’s how to manage petty cash effectively and maintain your nonprofit’s financial integrity.
1. Define the Purpose of Petty Cash
Clearly outline what petty cash can and cannot be used for.
Common Uses:
Small office supplies.
Postage or mailing expenses.
Emergency purchases under a set dollar limit.
Pro Tip: Avoid using petty cash for recurring or high-dollar expenses to minimize risks.
2. Establish a Petty Cash Policy
A written policy sets clear guidelines and ensures consistency.
What to Include:
Maximum petty cash fund balance.
Authorized uses and prohibited expenses.
Procedures for withdrawals and reimbursements.
Roles and responsibilities for managing the fund.
Pro Tip: Share the policy with all staff and volunteers who may use petty cash.
3. Assign a Custodian
Designate one person as the petty cash custodian to oversee the fund.
Custodian Responsibilities:
Approve and record transactions.
Reconcile the petty cash fund regularly.
Secure the petty cash box in a locked location.
Pro Tip: Rotate custodians periodically to strengthen internal controls.
4. Set a Cash Limit
Determine a maximum amount for your petty cash fund based on your nonprofit’s needs.
Typical Limits:
Small nonprofits: $100–$300.
Larger organizations: $500–$1,000.
Pro Tip: Replenish the fund only when it’s low, and document each replenishment.
5. Require Documentation for Every Transaction
Every withdrawal from the petty cash fund should be documented.
What to Include in Documentation:
Receipt for the purchase.
Date and purpose of the expense.
Amount withdrawn and remaining balance.
Signature of the person making the withdrawal.
Pro Tip: Use a petty cash voucher template to standardize documentation.
6. Reconcile Regularly
Reconciliation ensures that your petty cash records match the actual cash on hand.
Reconciliation Steps:
Count the remaining cash in the fund.
Total the receipts and vouchers for the period.
Ensure the cash plus receipts equals the original petty cash balance.
Investigate and resolve any discrepancies.
Pro Tip: Schedule reconciliations monthly or more frequently if the fund is heavily used.
7. Incorporate Petty Cash into Your Accounting System
Record all petty cash transactions in your accounting system to maintain accurate financial records.
How to Record:
Debit the relevant expense account (e.g., "Office Supplies").
Credit the petty cash account.
Replenish the fund by recording the withdrawal from your operating account.
Pro Tip: Treat petty cash like any other financial transaction to ensure transparency.
8. Minimize Cash Usage with Digital Tools
Consider alternatives to petty cash to reduce risks and streamline processes.
Digital Alternatives:
Use prepaid cards or expense management apps like Divvy or Expensify for small expenses.
Reimburse staff directly for minor purchases instead of using cash.
Pro Tip: Shift to digital tools where possible to reduce the need for physical cash handling.
Final Thoughts
Proper petty cash management is essential for maintaining trust and accountability in your nonprofit’s financial practices. By establishing clear policies, assigning responsibility, and reconciling regularly, you can ensure that petty cash remains a helpful, not harmful, resource.
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