Although many businesses are conducted almost entirely with computers, most businesses have some good-old-fashioned paper money lying around. The total amount of cash that a business has access to -- meaning paper money, not money in the bank -- is known as the business's cash on hand. By contrast, money used for incidental expenditures is known as petty cash.
Petty cash is anything but petty. It's a serious, useful fund that your business uses for purchases too small or too informal for a check or credit card. Whether you're plugging coins into a parking meter or buying an emergency roll of tape, a petty cash drawer gives you the flexibility to quickly access the money to pay while still documenting the transaction for bookkeeping purposes. Petty cash makes up part of your cash on hand, but cash on hand also includes all the other funds you have easily available, such as sums you haven't yet deposited in the bank and straps of smaller bills that you use for cash register change.
TL;DR (Too Long; Didn't Read)
Petty cash is a fund your business keeps on hand for small purchases, while cash on hand is the sum of all your available cash.
Cash on Hand Definition
The term "cash on hand" actually has a dual meaning. It can be used literally to mean the actual bills and coins you have available to spend, including the amount in your petty cash fund. On a balance sheet, however, the same term refers not only to physical cash but to all of the liquid funds your business has saved and borrowed, including money in the bank and big bills in your safe. It is called "cash on hand" even if you don't have physical cash because this terminology distinguishes it from assets that aren't actually on hand, such as accounts receivable or the number in the asset column of your balance sheet, which represents amounts you're still waiting for your customers to pay.
Petty Cash Definition
Petty cash is a sum your business keeps on hand to cover purchases that are paid with cash rather than with a check or credit card. Creating a petty cash fund with a journal and a petty cash float, or standard amount of starting funds, allows your business to track small purchases that could otherwise fall through the cracks, such as paying your postal carrier a few cents' worth of postage due on a letter with insufficient stamps.
How Petty Cash Works
To set up a petty cash fund, start with a petty cash float, or sum of money that will cover your company's short-term petty cash needs for a reasonable amount of time, such as a week or a month. The sum should be large enough to actually pay for your small cash purchases but small enough to make sense for petty cash purchasing rather than other types of spending. If you run to the office supply store for paper and paper clips several times a week, you should consider making a list and buying larger amounts of office supplies at once. Alternately, you may be able to open an account with the office supply store so you can pay for all your small purchases together.
Most companies keep their petty cash funds in a dedicated box or container such as a metal cash box or a large envelope. Whatever you use, it should be large enough for your cash and your cash log, and it should be easy to access. If you're using a metal box you can keep it locked, depending on your company culture and how many employees you have. Although it is important not to invite employee theft, the sum you keep in your petty cash fund is small by its very definition, and your fund will also include a log that makes it easy to see whether any money is missing.
Your petty cash setup should also use a journal that tracks incoming and outgoing funds. Use a pad, small notebook or even a piece of paper with a hand or computer-generated spreadsheet. You can easily find templates online for a petty cash log, although you probably won't be able to print them onto a pad or notebook. Your petty cash log should have a column for the date and another for the details of the expenditure, such as what you bought and where you spent the money. It should also show a running tally with the starting amount, the sum you withdrew for your purchase and the amount remaining in your fund after you spent the money.
Other Types of Business Cash
The difference between cash on hand and petty cash boils down to where you keep the money and how you use it. Petty cash belongs in your petty cash box or envelope. Other types of cash may be kept in a drawer, a safe, a cash register or even in the bank if you're using the accounting definition of "cash on hand," which measures your company's liquidity rather than the physical dollars you keep handy.
- Cash Register Funds: If you run a retail business, you'll most likely take some cash from customers even if you run the bulk of your transactions on customer credit cards. The bills in your cash register will include not only the day's cash earnings but also the sum you keep in the till to make change for customers. Your starting till should be made up of small bills, although you may find yourselves with mostly larger bills by the end of the day as you take larger bills from shoppers. Your starting till should be sufficient enough to not run out by the end of the day or by whenever you typically go to the bank to get more change. However, it shouldn't be so much that you tie up sums you may need for other expenditures.
- Undeposited Cash: Even if you run a business that handles plenty of cash, you're unlikely to go to the bank and deposit it every day. It's best to keep undeposited cash in a secure location at your place of business. You can buy a safe at an office supply store for a relatively small investment or at least an investment that is small compared to the value of the funds you'll likely be storing in the safe. It's a good idea to deposit your cash at least once a week, though, because responsible businesses document all of their income and expenditures, and a bank account is more dependable than a cash log for documenting these transactions.
Bank Account Balances: Although the sums in your bank accounts aren't physical cash, they do represent funds that your company has available. You can spend the money you've deposited on day-to-day operation expenses such as materials, rent and payroll. When you make any of these expenditures, you convert your cash on hand in the bank into other types of business assets. You can also use your checking and savings balances to pay down principal on loans. These payments don't necessarily
convert into assets, but they do still factor into the net worth expressed by your balance sheet but reducing the amount of liabilities your business owes.
Why Cash Is King
The old business adage states that cash is king, and this wisdom refers to the inescapable reality that fluid cash gives you the power and flexibility to leverage opportunities and field emergencies. Your company won't be able to buy the inventory you'll need for future earnings unless you have the money to pay for it. You can use business credit up to a point, but if you aren't earning cash to pay back the sums you've borrowed, it's just a matter of time before you run out of options. Whether your cash comes from your petty cash fund or your company checking account, it keeps your company running smoothly and helps you to stay out of trouble.