How Should Charities Manage Petty Cash

Petty cash might seem like a small administrative detail in a charity however poor handling of it can lead to financial loss, staff frustration, gaps in accountability and even regulatory concerns if the Charity Commission questions your internal controls. In my opinion petty cash is one of the most underestimated financial risks for smaller charities because it feels informal. People assume the amounts are too small to matter but weak systems often encourage mistakes and can create habits that undermine wider financial discipline.

This guide explains exactly how UK charities should manage petty cash. You will learn why controls matter, how to set up a proper petty cash system, what documents you need, how to record transactions, who should manage it, the best way to prevent fraud, alternatives that may be better for modern charities and the governance considerations trustees must understand. I will also share practical tips based on real life charity finance experience so you can run a system that is simple reliable and compliant.

By the end you will know how to manage petty cash confidently and avoid the common pitfalls that many charities fall into.

What Petty Cash Is and Why Charities Use It

Petty cash is a small float of cash kept on site and used for low value day to day purchases such as:

Office supplies
Refreshments
Emergency travel costs
Small maintenance items
Volunteer expenses
Minor community event items

Charities use petty cash because it is quick easy and avoids the need to reimburse staff for very small items. It also helps when a charity does not have the ability to make card payments for small purchases.

In my opinion petty cash is still useful although modern organisations often replace it with prepaid cards or digital expense systems because cash carries risk and is harder to audit.

Why Petty Cash Needs Strong Controls in Charities

Charities are held to high standards for transparency and accountability. Even small amounts of cash need proper oversight because:

Cash is easier to misuse than digital funds
Poor records can lead to audit challenges
Trustees must protect assets under charity law
The Charity Commission expects proper controls
Grant funders may inspect financial processes
Cash losses are hard to trace

Most fraud within charities occurs through poor controls, not malicious intent. People take shortcuts, lose receipts or assume minor items do not matter. A strong petty cash system prevents these issues.

Legal and Governance Standards Trustees Should Be Aware Of

Under charity law trustees must safeguard the charity’s resources. Although petty cash is small in value it still falls under this duty. Governance expectations include:

Good internal financial controls
Proper record keeping
Regular reconciliations
Clear authorisation
Separation of duties
Monitoring by trustees

The Charity Commission’s guidance on financial controls emphasises that even minor financial processes must be structured properly. In my opinion an organised petty cash system shows wider commitment to governance which reassures donors volunteers and regulators.

How to Set Up a Petty Cash System: Step by Step

Here is a practical framework that I recommend to most charities. It is simple, efficient and meets the expectations of both auditors and trustees.

1. Decide Whether You Need Petty Cash at All

Some charities no longer require it because they use:

Prepaid expense cards
Online purchasing
Staff reimbursement systems
Petty cash replaced with digital reimbursement apps

Before setting up a system ask whether cash is actually needed. Fewer charities rely on it now because digital systems reduce risk.

2. Set the Float Amount

If you decide petty cash is necessary set a fixed float such as £30, £50 or £100 depending on the charity’s size and activity.

The float should remain constant. When it reduces you top it up to the original amount and record the difference as reimbursed expenses.

Large floats increase risk so keep it small.

3. Appoint a Responsible Person (The Petty Cash Custodian)

Choose one individual to manage the float. This should not be a trustee. It should be a staff member or volunteer who is trusted and organised.

They do not approve their own spending. They simply hold the cash and track it.

In my experience the custodian role works best when it is held by someone already responsible for admin or front line operations.

4. Maintain a Lockable Box

Petty cash must be kept in:

A lockable cash box
A secure drawer
A lockable cupboard

Only the custodian and one designated backup should hold keys. Cash should never be left out in the open or stored in an unlocked desk.

5. Use a Petty Cash Log Book

Every transaction must be written down. The log book should include:

Date
Amount
Purpose
Name of person receiving or spending money
Receipt attached
Balance remaining

Whether you use a notebook, spreadsheet or pre printed petty cash forms the format must be consistent and easy to audit.

6. Require Receipts Every Time

No receipt means no reimbursement. This must apply without exceptions because once exceptions start the system breaks down.

Receipts must be:

Itemised
Dated
Attached to the petty cash slip
Reviewed during reconciliation

In my opinion missing receipts are the biggest cause of petty cash problems so set the expectation early.

7. Use Petty Cash Vouchers

A simple voucher system helps keep records clear. Each voucher should include:

Amount requested
Purpose
Signature of requester
Signature of approver
Receipt attached

Even though the amounts are small accountability must remain high.

8. Set Spending Limits

Common limits include:

Max £10 per purchase
Max £30 per person per month
Max £50 per reimbursement

Higher purchases should be made through normal procurement channels.

9. Separate Duties

The person who:

Approves spending
Should not be the same person who
Holds the cash

This prevents misuse and reduces risk.

In small charities complete separation may be difficult although even basic adjustments such as trustee reviewing reconciliations can make a difference.

10. Perform Monthly Reconciliations

At least once a month someone independent from the custodian must check:

Cash remaining
Receipts
Petty cash log
Reimbursements
Reconciliation balancing to the float

If the float is £100 and £65 of receipts exist, cash remaining should be £35.

If the numbers do not match investigate immediately.

11. Reimburse and Rebalance the Float

After reconciliation the finance officer or treasurer should reimburse the petty cash fund to return it to the original float level.

For example:

Float = £100
Spent = £42
Remaining = £58

You reimburse £42 back to the box from the bank account. This keeps accounting clean and ensures the float never dwindles or expands without recording.

12. Record Petty Cash in the Accounting System

Petty cash must be on the balance sheet. When you reimburse the float the total amount becomes an expense.

Accounting entries should reflect:

Reimbursement transactions
Petty cash balance on the balance sheet
Expense categories for items purchased

In my opinion charities should not underestimate the importance of clean bookkeeping for even minor transactions. Auditors expect proper coding, not shortcuts.

13. Carry Out Spot Checks

A trustee or finance officer should perform occasional unannounced checks. This keeps everyone alert and reinforces discipline.

A spot check should confirm:

Cash counted matches log record
Receipts are attached
Vouchers match entries
Keys are held by the correct person

Spot checks discourage misuse and show the board is paying attention.

14. Review the Petty Cash Policy Annually

Set a clear policy that outlines:

Who holds cash
What petty cash may be used for
Spending limits
Approval requirements
Reconciliation procedures
Storage and security arrangements

Review it annually in case your charity grows or needs change.

In my opinion policies protect both staff and trustees. When everything is documented misunderstandings are less likely.

Examples of Good and Bad Petty Cash Management

These examples illustrate real life scenarios that highlight why controls matter.

Example 1: Community Centre Charity

They use petty cash for tea, coffee and cleaning supplies.

Good practice:

Two people authorise spending
Receipts are stapled to vouchers
Monthly reconciliation
Cash locked away

Risk level is low and the system runs well.

Example 2: Youth Charity Running Events

Petty cash is used for snacks, arts supplies and urgent bus fares.

Weak practice:

Receipts often missing
Volunteers take cash without signing the log
The float regularly runs out
Reconciliations inconsistent

Outcome:

Unexplained shortages
Frustration among trustees
Charity Commission query during an examination

This is a common example where good intentions turn into poor controls.

Example 3: Charity Shop Without a Proper Float

Staff take change from the till instead of using petty cash.

Weak practice:

Transactions get mixed with sales
No audit trail
Difficult year end reporting

Solution:

Establish a separate float
Implement receipts and log book
Reconcile weekly

Example 4: Large Charity With Digital Alternatives

They eliminate cash entirely and use prepaid cards assigned to team members.

Benefits:

Better tracking
Reduced risk
Automatic digital receipts
Immediate transaction logs

In my opinion this is the future of most charity financial processes.

Fraud Prevention: Key Risks and How to Avoid Them

Common petty cash fraud risks include:

Skimming cash
Inflating amounts
Using cash for personal items
Creating false receipts
Borrowing cash with intention to repay
Losing receipts intentionally

To minimise risk charities should use:

Clear separation of duties
Dual authorisation
Secure storage
Frequent reconciliations
Spot checks
Strict receipt rules
Digital backups of receipts

People rarely set out to commit fraud. It often happens when weak systems make it easy. A strong framework protects everyone.

Should Charities Use Petty Cash at All

Many modern charities choose to eliminate petty cash entirely. Alternatives include:

Prepaid charity debit cards
Corporate credit cards with limits
Digital expense apps
Volunteer reimbursement systems
Online purchasing for small items

Benefits include:

Better visibility
Stronger audit trails
Less manual work
Less risk
Simpler accounting

In my opinion every charity should review whether petty cash is still necessary because digital tools make the process safer and more transparent.

Governance Responsibilities for Trustees

Trustees must ensure that:

Petty cash is appropriately controlled
Risks are managed
Systems align with Charity Commission guidance
Oversight is independent and documented

Trustees should:

Review petty cash use during board meetings
Ask questions if spending patterns seem unusual
Ensure internal controls remain up to date
Consider transitioning to digital options

Good governance requires trustees to be proactive not reactive.

What Happens If Petty Cash Is Mismanaged

If petty cash is handled poorly the consequences can include:

Financial loss
Loss of donor trust
Reporting inconsistencies
Unexplained variances
Audit findings
Charity Commission intervention

If losses occur the board must:

Investigate
Document findings
Strengthen controls
Inform the Charity Commission in serious cases

In my opinion early intervention prevents damage. Problems only escalate when boards ignore warning signs.

Conclusion

Petty cash seems simple but without a structured system it can quickly become a weak point in a charity’s financial controls. Managing petty cash properly protects the charity’s funds supports staff and volunteers and demonstrates strong governance to donors funders and regulators.

A good petty cash system is based on:

Clear policies
Secure storage
Strong documentation
Regular reconciliation
Independent oversight
Receipt discipline
Trustee involvement

In my opinion the best approach is to keep petty cash minimal, controlled and regularly reviewed or to replace it entirely with digital alternatives that offer greater transparency.