Businesses keeping a petty cash account on hand is not unusual. In fact, most small- and medium-size businesses make a practice of maintaining petty cash. Yet carelessness can turn petty cash from a helpful tool into a serious liability. If companies are not careful, their petty cash practices can interfere with cash flow.
Despite both terms including the word ‘cash’, petty cash and cash flow are two separate things. Petty cash is a small amount of cash kept on hand to pay for inexpensive incidentals. The office manager might need to pick up rubber bands or paper clips. The maintenance manager might need a new mop head. Petty cash covers those expenses.
Cash flow is a term that describes the total amount of cash a business has on hand to maintain normal operations. It is so named because the cash flows in and out. As customers pay their invoices, cash comes in. It goes back out as the company pays its own bills.
Not for Big Purchases
Petty cash is not intended for big purchases, thus the term petty’. In addition, all the menial items purchased through a petty cash account shouldn’t add up to a substantial amount of money at the end of the year. If it does, you are likely spending too much on the things you buy.
Think about the maintenance supplies your company purchases. You can get better prices if you buy in bulk. You might have to buy a mop head on an emergency basis because you have no other choice. But if you can buy a dozen mop heads all at the same time, you get a better deal. A dozen mop heads would not be covered by petty cash.
Managing Cash Flow Is Crucial
By now you might be wondering what any of this has to do with account receivables factoring. Think of it this way: AR factoring companies help businesses like yours manage cash flow by converting unpaid invoices into cash. If your business needed access to the cash and didn’t want to raid the petty cash account, you could consider selling some invoices.
We operate on the principle that managing cash flow is crucial to successful business. Every company has a certain amount of cash coming in and going out. That cash is a tool for buying things, paying employees, covering overhead, etc. if it isn’t well-managed, companies can find themselves facing a shortfall when they can least afford it.
This goes back to a company’s petty cash account. Being reckless with incidental spending can lead to replenishing the petty cash account more frequently than normal. The more cash going into that account, the more restricted cash flow becomes. So it’s in a company’s best interest to use petty cash sparingly.
A Sign of Trouble
If you do find that your petty cash fund is consistently low and in need of replenishing, be careful. It is a sign of trouble. You are relying on petty cash to pay for things you ought to be purchasing through your normal accounts payable process. Constantly covering costs for petty cash suggests you are not managing cash flow very well.
If you do find yourself in a pinch for cash, you always have the option of factoring invoices. AR factoring companies like Thales Financial provide immediate, short-term financing by purchasing invoices as assets.
You can meet your short-term needs with AR factoring. Thereafter, take a good look at your petty cash account and why you seem to be spending so much money so freely. Do not let petty cash become a problem for your cash flow.