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Salt Lake City Bookkeeping Blog

How Succesful Businesses Handle Cash Flow & Petty Cash

Posted by Matt Roberge on Nov 21, 2019 6:45:00 PM

Cash is king, but without proper bookkeeping procedures in place, mishandling cash can cause business failure.

Weak bookkeeping systems that do not use the correct procedures for handling cash are vulnerable to internal theft and IRS audit failures.

Managing your small business cash flow properly can ensure that your bookkeeper is not stealing from you. Implementing a bookkeeping process for handling cash payments from customers and cash disbursements out of the business (petty cash), is essential to ensuring your small business is successful and profitable.

Cash flow refers to the money coming into a business. There are many ways money can enter a business and many ways for companies to add to their profits and revenues. However, understanding cash flow from operations is an important part of making decisions. If your business is creating a cash flow statement for an annual or quarterly report, cash flow from operations will play a key role.

Here we'll discuss the ways cash can come into and out of a company and how to implement a procedure for them:

  1. What is Cash Flow?
  2. Handling Cash Payments from Customers
  3. The Importance of Petty Cash
  4. Setting Up a Petty Cash Fund
  5. Tracking Petty Cash
  6. Balancing Petty Cash

 

What is Cash Flow and Why is it Important?

Sometimes called CFO, cash flow from operating activities, net cash from operating activities or operating cash flow, cash flow from operations refers to the money a company makes from its regular business activities.

It does not include investments or long-term capital. Cash flow from operations is calculated before taxes and interest and involves calculating depreciation minus any taxes.

Cash flow operating activities that count towards the CFO include:
  • Regular business activity, such as services or selling of products
  • Inventory increases or decreases
  • Short-term accounts payable
  • Short-term accounts receivable
  • Short-term Debt
  • Changes in working capital

Knowing your cash flow from operations lets you see how your business finances short-term capital. In addition, maintaining a strong cash flow from operations can be reassuring to investors and shareholders, who generally want to see a business making money from its stated mission.

A good cash flow can also be an effective selling point if you're considering setting up your business bookkeeping for an exit strategy.

If you’d like to calculate your operating cash flow, you can do so with this formula:

Operating earnings (revenue minus expenses, excluding tax and interest) + Depreciation - Taxes = Cash flow from operations

How does your small business cash flow look?

Good cash flow from operations shows a company is on track. If you own a restaurant and you are getting a healthy profit from making and serving food, and in fact most of your cash flow comes from these activities, that is one indicator your business is healthy.

On the other hand, if your cashflow doesn't seem to be adding up, or you're not sure if your calculations are correct, then it's time to implement a better cash flow management system.

How to Properly Handle Cash Payments From Customers

Cash payments typically come into the company from a customer paying a bill. These are part of your daily sales summary.

Best practices for handling cash payments in your restaurant or business are as follows:

  • If you are using QuickBooks and you receive a payment against an invoice in the form of cash, then that payment goes into the Undeposited Funds account and shows up in the "Record Deposits" window.
  • If you are recording sales off of a daily sales summary, you should link the cash payments to the "Undeposited Funds" account in the journal entry.

This procedure will accomplish two things for you:

  1. First, it will set up a bookkeeping system that allows cash to be tracked accurately so you can make sure all the cash is ending up in your bank account.
  2. Secondly, it will also allow you to take a group of cash deposits to the bank and make one lump deposit for several invoice payments or several days' worth of cash payments from your sales summary.

Why Petty Cash is Important

Some business strategists have begun to question the need for a physical petty cash fund. After all, secure and streamlined purchasing alternatives like mobile apps, digital wallets, and even prepaid debit cards are making the practice of paying by cash obsolete.

Making it easier to spend, however, isn’t always a good idea when it comes to running a restaurant.

Keeping petty cash on hand offers some valuable benefits:

  • It limits discretionary spending, and can help to prevent a lot of smaller purchases from adding up to one larger annual expense,
  • it makes cash available to employees for certain authorized expenditures without the need to process time-consuming expense reports,
  • it reduces the likelihood that owners or managers will pay for purchases out of their own pockets, then forget to allocate those purchases as company expenses,
  • it cuts down on bookkeeping since multiple petty cash receipts get consolidated and processed as part of a single journal entry, and
  • it’s still more convenient in many situations to pay for a purchase in dollars and cents!

Whether your company takes care of its own business bookkeeping, or outsources those duties to an off-site professional, it’s in your best interest to understand what’s involved in setting up and accounting for a petty cash fund. 

Setting Up a Petty Cash Fund

Many restaurants keep a small amount of money on hand to pay for expenses that can't be paid by a check or credit card.

An example of this might be a reimbursement to an employee who picked up business supplies on the way to work and paid with their personal funds.

Another example may be a product that is delivered and can be paid by Cash on Delivery only.

While smaller companies usually require only a single source of petty cash, some larger organizations will have separate cash funds for each of their various departments.

In either case, to SET UP a petty cash fund you’ll need to:

  • Set up a petty cash bank account to track these funds.
  • The petty cash amount should be a set amount and should be able to be balanced out each time the replenishment of cash is needed.

OR, another option is to:

  • Set up an offline tracking system and then cut a check to replenish the petty cash back to its starting balance.
  • Attach copies of receipts to the check stub and you have a very clean and traceable petty cash system. It is not a good practice to replenish petty cash from customer cash payments.

Tracking Your Petty Cash

Tracking your petty cash is particularly important for keeping your bookkeeping under control. Remember, where there’s money, there’s also potential for theft and abuse. As much as we’d like to believe it doesn’t happen, stealing cash is one of the most common forms of employee theft.

Once you have your Petty Cash account set up, you can TRACK your petty cash by:

  • add a Petty Cash account to the asset section of your Chart of Accounts,
  • determine how much money your petty cash float should contain (usually one to several hundred dollars, depending on the size and needs of your business),
  • clarify which types of expenditures qualify for petty cash status, and make sure receipts are collected for every purchase,
  • allocate a secure location for your petty cash holdings (a locked cash box inside a locked drawer or cabinet is best), and
  • assign a custodian to disburse, record, reconcile, and safeguard your petty cash

There are some business purchases – think coffee runs, staff birthday cards, and one-off postage costs for example – where it’s impractical to pay by credit card or check.

As a matter of fact, it was smaller business expenditures like these that first gave rise to the term petty cash!

And they’re still the reason why most companies find it useful to keep funds on hand for minor, last-minute, or cash-only expenses.

But just because the dollar amounts flowing through your petty cash fund are typically minimal, doesn’t make it any less important to manage them properly.

Tracking petty cash transactions is part of an efficient bookkeeping system. Especially when it comes to maintaining accurate journal entries, keeping personal purchases separate from business, and capturing every possible tax-deductible expense.

Balancing Petty Cash

Managing your petty cash fund successfully from an accounting perspective starts as soon as you issue that first check made payable to cash. If you’ve decided to carry a float of $200 for example, your journal entry will involve a debit of $200 to your Petty Cash account, and a credit of $200 to your regular Cash (Bank) account.

From there, every time your custodian doles out money from the petty cash fund, it should always be in exchange for a purchase receipt. That means that at any point in time, the money and receipts in your petty cash box will equal the starting amount of your float.

Once the cash balance in your fund gets too low to be useful, the receipts should be summarized, tallied, and exchanged for a new company check equal to their total.

Cashing this check - and adding the funds to your petty cash holdings - will bring your float back to its original level.

There are two important bookkeeping steps required to complete the replenishment process for petty cash:

  1. A journal entry to record the petty cash purchases (this consists of a debit to each of the individual Expense accounts involved - Postage, Office Supplies, etc. - and a credit to your Petty Cash account for the receipt total)
  2. A journal entry to account for the new check you’ve cut (as already discussed, this consists of a debit to your Petty Cash account, and a credit to your regular Cash (Bank) account)

They may be small, but petty cash receipts are important source documents for backing up your bookkeeping transactions. Be sure you keep and file them accordingly.

Summary of How to Properly Handle Cash

  • All cash payments should be physically deposited into the bank account to match your sales records.
  • Petty cash reimbursements are best accounted for by a separate account or by actually cutting checks for the reimbursement.
  • Do not take a portion of your customer cash payments to replenish petty cash. This is a poor business practice and you want to keep cash deposits and petty cash separate.

By following these procedures, you will have a system in place for handling cash that is traceable. At any point in time, you will be able to prove to the IRS that you are handling cash correctly and you will be able to prove to yourself that there is no internal theft going on.

Cash flow management can prevent the loss of money and also provide valuable insight into the overall health of your business. Don't neglect to implement a simple system for tracking petty cash and cash payments going into and out of your business.

Not sure if your petty cash is in order? Need more help implementing effective bookkeeping strategies for your multi-location business or small business? Outsourcing your bookkeeping with SLC provides more than just clean books. We can help with financial forecasting, consulting, and specialized planning to help your business be successful. Get in touch and see how we can help grow your business.

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Topics: Cash Flow Management, Outsourced Bookkeeping