Read out to find everything you want to know about the cash disbursement procedures, fees and formula supported by examples.
The process through which a business or any commercial company buys different items with cash resources is called a cash disbursement. These items can range from a simple raw material needed for manufacturing things to huge machines needed for industrial purposes as well as consumer goods.
The accounting department of a company plays a great role in making decisions and getting approvals for the cash disbursement procedures. The only exceptions are in bureaucratic companies where the accounting department is not completely responsible to carry out the cash disbursement process and few other departments like receiving, production, purchasing, etc also lend a helping hand to successfully complete the task.
Cash disbursement does not only mean physical cash but it also includes other cash resources, like line of credits and cheques. Let’s explore more details about cash disbursement.
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Cash Disbursement Procedures
Cash disbursement cycle procedures are initiated from the accounting department and depend on the accounting plan of the business. Let’s understand how the cash disbursement cycle works.
First, the company makes a purchase decision to buy the required item. Now, the purchase team creates a purchase order and sends it to the accounting department for approval. The accounting team checks for the available cash resources and then approves on its basis. Then, the receiving team takes the order on credit from the supplier.
The accounting team is responsible for all the paperwork required for the purchase. After that payment is made to the supplier. This payment comprises of the specific cash disbursement.0:4209:16
Examples of Cash Disbursements
Now that you have gained understanding of cash disbursement, let’s look at a few examples below to understand the concept more clearly.
Third Party Cash Disbursements
Let’s suppose that Penny-pincher Co. is a company that helps healthcare physicians and other experts who have their own clinics in collecting debts from their clients.
When a commercial client visits these physicians, they are charged through credit. As the Penny-pincher is an accounts receivable company, it provides complete assistance to physicians in getting back the overdue debts from their clients.
The cash disbursement schedule is simple. After the passage of 60 days, Penny pincher company becomes responsible to pay back the debt. Now the company’s responsibility is to contact the commercial clients and ask them to pay their respective overdue credit amounts.
For the commercial clients, the expense has already been incurred and recorded at the time when the client received the medical treatment. However, in order to fulfil the commitment, the commercial client needed to issue the cash disbursement but it has not been completed yet.
Student Loan Disbursement
When a loan proceeds are paid to a borrower who is a student, then this type of loan is called as student loan disbursement.
The loans issuers and educational institutions send a notification in writing to students about cash disbursement. This includes the exact date when cash was disbursed as well as the amount of loan along with the expected disbursement date.
The loans of both federal and private students are disbursed twice or more in one year. Once the credit goes in the student’s account, he is liable to pay for his tuition fees. Students choose the method of getting the balance out of the available options like direct deposits or cheques or any other method which suits them better.
It is not necessary that disbursement should be positive. It can be negative too. The difference between positive and negative cash disbursement is very small. The outcome of a negative cash disbursement is in the form of account debit, whereas the results of positive cash disbursement comes in the form of account credit.
An example of a negative cash disbursement is when a specific amount of money is taken out of a student’s account. This mostly happens if the student was paid more funds than the financial aid limits.
Cash Disbursement Report
A company needs to update its records to maintain data related to important transactions. A cash disbursement report helps in keeping records of all kinds of transactions in which cash goes out of the company. Most companies use softwares to generate this report as manual report creation has a high risk of possible errors.
A cash disbursement report can be used for multiple purposes. Some of its major uses are listed below:
Helps Keeping Better Internal Controls
The report helps in keeping better internal controls over cash. For instance, when the cash got out of the company to ensure it is in the right hands at all times.
There are other internal aspects as well that the cash disbursement report maintains really well. These include different things like division of responsibilities among employees to ensure that employees are not over burdened and that the load of handling financial transactions is equally divided.
Provides Useful Information
The cash disbursement report provides useful information about past and present expenditures to the business teams working on cash disbursement procedures. These expenditures can include different items like, employees salary expense, lease expenses, total inventory expenditures for a month, rental amount for outside services, etc.
Ensures Cash Safety
A cash disbursement report helps in preventing the cash from going in the wrong hands by providing in-depth and quality reports that help in tracking cash payments.
For instance, if a business owner reviews reports of different periods for comparison purposes, he can easily determine any loopholes that direct to a suspicious activity. The business person can further perform double-checks to confirm disbursements of large amounts to stay confident about their legitimacy.
It is important to choose significant, trustworthy people for singing cheques who have some level of authority within the organization. One important thing is to limit the number of those people in your company who are responsible to sign cheques. The maximum number can be 3 – 4. In case you notice a discrepancy, you can easily verify the transaction by tracing the person assigned to sign cheques.
Assists in Developing Cash Management Plans
The report also helps business owners in preparing plans to create better cash management decisions in future.
Cash disbursement procedures vary from one business to another. For example, a small business like a bakery shop may have a single employee responsible for a variety of tasks like making purchase decisions, receiving payments, managing clients accounts, taking care of petty cash and other planning activities.
In few business cases, there is a clear line between purchasing of different items and cash disbursement system. For instance, in the California state of America, a cash disbursement cycle is used to pay out lottery winnings amount to the lucky winners.
So, as an endnote, you need to remember that any cycle through which a company or an organization disburses money in the form of a check or in cash becomes part of a cash disbursement cycle.