Cutting and issuing a check always is an extended, multistep process. One must match a supplier invoice to a purchase order and receiving document, enter the invoice in to the computer, await the deadline, and then print the check, own it signed, and mail it to the supplier. For small payments where the supplier turns up at the company offices, there is an easier way. It’s much easier to cover a supplier from the petty-cash box. This approach eliminates the whole process needed to cut a check. However, there are several severe limitations on the use of petty cash that limit its effectiveness to a small number of situations. First, since the intention is always to bypass the most common checks and balances of the accounts payable process, it must only apply to those payments which are so small that no-one cares if the system is bypassed. Generally in most companies, the amount which can be paid with minimal controls is usually below $100. For amounts bigger than this, the usual check-paying process might be better, since it requires tighter control over payment approvals. Another problem is that it makes little sense to stuff money into a package and mail it to the supplier, since the money could be intercepted and removed at many points as you go along, causing no payment. Consequently, it is much better to hand the cash straight to a supplier representative, who must certanly be on the organization premises to sign for the money. By limiting the utilization of petty cash to small amounts and on-site payments, one can effectively reduce this option to a tiny percentage of the sum total amount that many companies pay out. Nonetheless, it is a simple and effective approach that will result in some decrease in the quantity of transactions flowing through the normal accounts payable system.
Some control will become necessary if petty cash is used as a typical type of payment. One key item is always to require a signed receipt for all moneys passed out, preferably having an accompanying invoice from the supplier. This provides sufficient proof of why an expense was incurred and covers the company if the supplier claims that it was never paid. Also, there should be a monthly reconciliation of the petty-cash box to ensure that all expenditures and replenishments are accounted for. It is specially important if you find a high level of payments going from the petty-cash box, while there is a possibility of tens and thousands of dollars to disappear as time passes when there is not a constant reconciliation. Finally, given the high volume of usage, it is very important to provide control of the petty-cash box to an individual individual who encourage responsibility for the money. When accompanied by storage in a locked container, these measures present a successful pair of controls over continual petty-cash disbursements.