Bookkeeping – Cash Disbursements (Lesson 45)

Cash disbursements is the process of remitting payment to vendors, suppliers and third-party contractual obligations. Better managed offices pay bills in regular cycles including weekly and monthly obligations. Preparation, reconciliation and actual check writing is commonly referred to as cash disbursements. For the bookkeeper, this is a function of the day-to-day routine of duties. This lesson explains the various third-party cycles, the preparation of bills, the reconciliation process and the final cash disbursements step.

The primary goal of cash disbursements is timely and accurate use of cash to prevent unnecessary penalties and interest charges. Furthermore, this process when correctly conducted maintains an excellent rapport with third-party providers of service and product. It maintains an excellent image of the company.

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Third Party Cycles

Traditionally bills received from vendors allow 30 days for payment. In good operations all bills are paid weekly, i.e. those that are posted after the approval process (Lesson 41) by a certain day each week. But not all bills cycle through the system in the old fashion process. Some bills have short windows of payment periods such as credit cards, insurance and bank loan payments. There are multiple cycles occurring within a calendar month. Worse, some forms of liability have one time action and may occur outside of the weekly or monthly cycle. Let’s take a look at a typical current liabilities structure and the corresponding cycles.

Current Liabilities                                          Cycles
Accounts Payable – Vendors (Production)   Allowed 30 Days to Pay
Accounts payable – Operations                    Some are monthly (rent, utilities); others have on-demand relationships (insurance,
                                                                      assessments, etc.) Credit Cards 14 – 21 Days for Payment.
Accrued Expenses                                       Triggered by an event; thus cycles vary
Accrued Taxes                                             3 to 15 days depending on the respective  authority
Line of Credit                                              Interest payment is on demand.
Current Portion of Long-Term Debt            Monthly principle payments; approximately 1/12 is due within 30 days.
Unearned Revenue                                      Triggered by contracted dates
Deposits Held                                              Triggered by certain events

These various cycles and triggering events require constant attention from the bookkeeper to accurately pay them in a timely manner. To consistently keep up with the various time restrictions the bookkeeper must prepare the bills correctly.

Preparation of Bills

One of the steps involved in bill entry is identifying due dates. Every vendor/supplier/third-party obligor identifies the due date for payment of their respective bill. Most accounting software packages have a date field in bill entry identifying the due date for the bill. By entering this obligation date, the accounting software provides a search method to identify bills due within the designated time period. In order to successfully pay on time, search for all bills due within two weeks of the current cash disbursement run. Why two weeks?

If you think about timing, it takes several days to utilize the mail system, subtract from this several days to process the cash disbursement run and then seven more days for the cycling of payments and you’ll get upwards of 14 days to timely pay a bill. To illustrate, let’s assume a bill is due on the 28th of the month. In effect you want this check in the vendor’s office no later than the 27th.

Assume it takes the postal service 3 days to pick up and deliver the mail. Given this, the physical check must be in your outgoing mail the day before. For purposes of proper timing, the check must be in the outgoing mail on the 23rd day of the month.

Since there are seven days in a week, what if this 23rd date is one day prior to the standard weekly check mailing date? If so, the check has to be ready the week before. Now the preparation of checks must be complete at least 11 days prior to the 27th. Since accounts payable management processing (Lesson 43) requires at least two days to complete, this means any bill due within 13 days of the start of the weekly cash disbursement must be included in the batch of checks. Therefore, 14 days is a good minimum period of time to ensure all bills due within this time frame are paid on time.

The accounting software has a built-in search feature to find any bill within the current liabilities section due within the time frame you designate. Once you pulled your list of outstanding bills it is time to confirm the bill’s correct balance. This is done by reconciling to the vendor’s customer statement.

Reconciliation Process

Just like the process used in accounts receivable management whereby customer statements are mailed at regular intervals; the vendors mail their customers (your company) statements too. These statements identify the balance and recent payments as of the date printed on the statement.

The reconciliation process follows three simple steps to complete.

Step I – Pull up on the monitor the particular vendor’s ledger which identifies all bills and payments to date. The look back period is customarily 60 days. You should now have the bill to be paid in one hand, the vendor statement in the other and the vendor ledger on the screen.

Step II – Verify the account’s balance in your ledger matches the balance with the customer statement through the date of the statement. In addition, the bill for payment may or may not exist on the customer statement. Furthermore the customer statement will not include receipt payments. Your goal is to reconcile through the customer’s statement date. Once completed, identify if the bill in question is still outstanding or has a partial payment as a credit on the account.

Step III – Mark on the bill the correct amount to pay. It should match the amount in the accounting software, if not, fix the discrepancy.

Once all bills due within 14 days are identified and reconciled, you are ready to create the cash disbursements batch.

Cash Disbursements

Remember the goal of cash disbursements is to issue timely and accurate checks to all vendors/suppliers/third-party obligors. The process of preparing bills and reconciling ensure timeliness and of course accuracy. Now it is time to issue the physical checks.  For this process refer back to Lesson 43.

Once all checks are in the mail, it is time to verify proper ledgers via sampling. Just as in Step 1 of the reconciliation process bring up a vendor ledger on the screen. Confirm that the correct disbursement check number for that vendor is in the respective vendor ledger. Sample several vendor accounts to gain confidence that the cash disbursements run is accurate.

This entire process works well, but sometimes the process doesn’t match the small business operational flow.

Helpful Tips

In my experience, the smaller the business the more likely vendor payments deviate from the formal cash disbursements process. Often it becomes a day-to-day payment process. Management of the entire company is also responsible to do the work (production) too. This necessitates preparation of cash disbursements daily. This is OK, but inefficient due to the nature of resources (time) expended. My suggestion is to monitor the bank balance carefully. When time allows, reconcile the respective vendors and place bills in order of due dates. This greatly reinforces the need to attend to the oldest bills first and minimize giving preference to certain vendors over others.

Other situations require a large cash disbursements run due to a sudden influx of money. This is common in the construction industry. Here the contractor receives a draw and suddenly is flush with cash. It is tempting to pay all the bills. However, I caution you and management about this urge. You have to plan out the money to ensure there is adequate cash available to address a multitude of possible scenarios that exist in this industry. Only pay those bills necessary to safely operate until the next construction draw.

Sometimes a sudden surprise obligation pops up. A good example is a performance bond or deposit requirement. This may require more cash than planned and so it is always a good idea to have some reserves (gross working capital) available.

One last helpful tidbit, the cycles are your best source of information to plan out cash disbursements. As you enter the information a routine schedule begins to develop. Organize your information. If you need to, run two separate cash disbursements per week. One is focused on production based bills and the other is operational bills and other liabilities. Create your style to ensure timely and accurate payments.

Summary – Cash Disbursements

Cash disbursements is a process of remitting timely and accurate payments to vendors, suppliers and third-party obligations. The process includes preparation of the bills by entering data and identifying those that must be paid by a certain due date. The second step in the process is reconciling the bill to the accounting software vendor ledger and the vendor’s customer statement. Once the bills’ correct amount is established it is included in the cash disbursements run. The cash disbursement run includes authorization by management to pay the bills, the physical cutting of checks, signature and recording of information to the vendor’s file and the accounts payable folder.

For the bookkeeper the most important aspect is paying attention to the various liability cycles and making sure all bills that need paying are included in the cash disbursements. Act on Knowledge.

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