||Hello it's Dave again. For those
of you that took my free So you want to learn Bookkeeping!
Introductory Tutorial or any of my other bookkeeping tutorials
we've already met. In order to benefit from this tutorial, you do
need not any prior bookkeeping knowledge.
If you do want to brush up on some
basic bookkeeping concepts and haven't already done so take my free
So you want to learn Bookkeeping! Introductory Tutorial.
This tutorial is geared to
business owners, managers, and individuals responsible for cash
management including preparation of bank reconciliation's and cash
forecasts and budgets. Even those not responsible for cash can also
benefit by at least becoming familiar with what is involved in
properly monitoring and controlling cash.
A menu of all the lessons is presented at the top and bottom of all
the lessons. A back and next arrow also allow you to go back to the
prior lesson or on to the next lesson.
In addition, some lessons have
links to other pages that display schedules and other information
discussed in the lesson. These pages have a Return To Tutorial link
at the top and bottom of the page to allow you to return to the
||What's Covered ?
This Introduction provides
you with a quick way of determining what this course offers,
discusses, and provides. In other words, what the course is about.
Also, it discusses and provides you with some introductory
concepts, definitions, and information about what makes up the
"world" of Cash Management.
Lesson 1 Recording Cash Transactions discusses and
reviews the different journals, records, documents, and forms used
to record and keep up with the cash coming in and going out of a
business. Sample journals, records, and forms are illustrated and
discussed to show you what journals, records, and forms to use and
how to use them.
Journals, records, documents, and forms discussed include:
- Check Book
- Cash Disbursements Journal
- Payroll Journal
- Cash Receipts Journal
- Daily Cash Form
- Deposit Book and Slips
- Credit Card Slips
Lesson 2 Petty Cash explains what Petty Cash is and how
you set up, control, operate, and replenish the fund when it "runs
out of cash". In addition, samples of the various forms and records
used are illustrated and explained. A detailed example is also
provided as an aid to understanding how to operate a Petty Cash
Lesson 3 Bank Reconciliation defines, explains, and
illustrates common banking terms that you need to understand in
order to accurately prepare a bank reconciliation. The lesson also
discusses and explains what's involved, what records are used, and
the detailed steps taken to properly prepare a bank reconciliation.
In addition, the lesson has you, with a little help
from me, actually prepare a bank reconciliation for a
Lesson 4 Cash Controls attempts to take the mystery out
of what accountants call Internal Controls - specifically the
internal controls that involve Cash. So you know what the fancy
term internal controls means right away it's just the policies,
activities and safeguards that are in place to provide reasonable
assurance that things are going as planned.
Internal Controls as they apply to Cash are just the policies,
activities, and safeguards that are in place to provide assurance
that Cash is properly being protected, managed and controlled. By
the end of this lesson you'll realize that a small business can
adequately monitor and control it's cash just by implementing some
good ole common sense procedures.
Lesson 5 Cash Forecasts / Projections / Budgets discusses
and explains what a Cash Forecast is, what's involved in preparing
one, why you need one, how it benefits you, and what information
and tools you need in order to prepare one. The lesson also
provides you with a free Simple Cash Forecasting
Template (Excel or free Open Office Spreadsheet needed
to use). The Cash Forecasting Template is explained and used when
you prepare an actual Cash Forecast
for a fictitious business. Don't worry, I provide help and
guidance along the way !
In addition, other useful references and sources of information
about cash flow and cash forecasts are provided in order for you to
continue your education and also acquire some useful tools that can
simplify the task of managing your cash.
Lesson 6 Review, as in the case of all of the last
lessons in my tutorials, summarizes and reviews the major topics
and concepts that we covered.
In order to clarify and use examples to illustrate key concepts,
we'll be using my fictitious business called Ma and Pa's Antiques
which is a sole proprietorship (Ma's the owner and Pa works for
Another practice I used to run across was where businesses issued
checks to suppliers or employees knowing that they didn't have the
cash available to pay them in order to get the supplier "off their
back" or get the employee to come to work. They would then hope and
pray that some customer(s) would mail them a check(s) so that they
could deposit the money they needed to cover the checks that they
had already written and issued. Some businesses even had fancy
"schemes" where they had more than one business checking account
and would write a check from one of their bank accounts with no
actual funds available to another of their bank accounts and then
write a check back from another of their bank accounts. I'll have
to say that they were managing their cash, but not in a proper,
responsible, and legal manner. In the old days, they might could
get away with these practices but today with the modern
computerized banking systems these practices are sure to bite you
in your tail.
||I've been around quite a few
businesses where my little cartoon buddy is the way they determined
how much cash their business had available to spend. Calling the
bank to determine your cash balance can get you into trouble as it
is only an estimate of what your true cash balance is. Your
balance in the bank could be much less than you were told by the
bank due to the fact that not all the checks that you have written
have been presented to your bank for payment by your employees and
creditors. On the other hand, you might be pleasantly surprised due
to the fact that not all the money you have collected has been
deposited or posted to your account by the bank. These differences
are called timing differences. Where should you be looking to
determine the cash balance that your business has available for
paying its obligations ? Your own business records such as your
check book or your cash reports. The bank should only be used to
provide you with an independent method of determining that the
balance you have is correct. This is done by doing a monthly
bank reconciliation. Hopefully calling the bank is not the
method you use to determine what your cash balance is.
Most small businesses at times have been confronted with what is
normally referred to as a cash flow problem. This simply means that
they didn't have the funds on hand that they needed to pay their
bills or employees when due. The cash coming in is out of synch
with the cash going out. What are some possible causes ? Customers
not paying on time, a big customer check returned by your
bank as not paid (bad check), an increase in sales (which is great
but needs to be planned for), seasonal fluctuations in sales, poor
customer credit policies, and the business operating at a loss all
are factors that can contribute to a cash shortage or also called a
Will good cash management eliminate all cash flow problems
Probably not, but at least it alerts you to potential problems
ahead of time and allows you to consider alternative
solutions (such as short term borrowing) that may correct the
What exactly is Cash ?
I know you're saying what a dumb question, but I was told in life
there's no such thing as a dumb question. Cash is the balance of
your bank accounts, savings accounts, money market accounts,
certificates of deposit, currency on hand, undeposited receipts,
and even your business' petty cash fund. Note that some forms of
cash may have restrictions on how fast the funds are available for
you to actually spend. Even your regular bank accounts may have
what are called uncollected funds which means you may have to wait
a few days before you can actually spend this money.
Can a business making money (profit) also have cash flow
You bet your bottom dollar they can. Profit and Cash
are two different concepts. Technically, if you're maintaining your
books on the cash basis instead of the accrual basis your profits
and cash flow will match more closely, but they still may have some
differences resulting from accounting for such items as inventories
and equipment depreciation. Even a very profitable business can
have cash flow problems which without corrective actions taken may
have to close their doors. Of course a business continuously
operating at a loss will more than likely reach a point where they
are unable to pay their obligations and have to shut their
What's the difference between cash flow and profit ?
Profit is calculated by subtracting costs and expenses from sales
and revenues. The recording of sales and their associated costs and
expenses often do not coincide with when the resulting cash
collected from sales and the cash spent for costs and expenses
occurs. In a nutshell, we have a timing difference resulting in
part from credit granted to our customers and credit from our
suppliers granted to us. These timing differences often result in
cash collections being delayed even though profits have been
recorded on our books resulting in a short term cash shortage. In
other words, we haven't yet converted all our profits into cash. So
while profits are definitely important to the success of a
business so is the management of cash. The lack of either of
these can result in a business failure.
Let's use a simple illustration to illustrate how a business
making profits can still have a cash flow problem and also
illustrate the difference between profit and cash flow. The
following simplified income statement shows a profit of $100,000
earned during the month.
Not too shabby a month if you ask me ! But as the newsman Paul
Harvey would say - wait for Page 2. In other words, wait to you see
our cash position presented below.
Collection and Payment Assumptions:
- 10 % of Sales during a month are cash sales and are collected
in the month of the sale.
Month 1 Collections
10 % X $250,000 = $25,000
- The remaining sales of $225,000 (250,000 - 25,000) are credit
sales with payment terms of 60 days which is customary for the
90 % of the sales on account are collected when due and the
remaining uncollected sales are collected in the following
Month 3 Collections
90 % X $225,000 = $202,500
Month 4 Collections
$225,000 - 202,500 = $22,500
- 40 % of the costs are payroll costs are paid in the current
Month 1 Payments
40 % X $150,000 = $60,000
- 10 % of the costs are cash purchases and other costs.
Month 1 Payments
10 % X $150,000 = $15,000
- The remaining costs of $75,000 (150,000 - 60,000 - 15,000) are
costs that have payment terms of 30 days. In other words, our
suppliers (creditors) have allowed us 30 days to make the payments.
We normally pay all our bills when due.
Month 2 Payments
Resulting From Month 1
|Payments To Suppliers, Employees,
Resulting From Month 1
|Net Cash Flow
|Cumulative Net Cash
||Wait a minute - what happened ?
My little cartoon buddy has the
answer. It's all timing ! Our example shows that although we
made a profit of $100,000 during Month 1 we had to wait to Month 3
to be in a positive cash position. Because of the credit terms that
we granted to our customers we were unable to immediately convert
our sales into cash. We had to wait 60 days for most of our
customers to pay us . Take a good look at Month 1 and Month 2. We
have to find a way to come up with an extra $50,000 for
Month 1 and an extra $75,000 for Month 2 or a total of
$125,000. If we had done a cash forecast, we would probably be
alerted to this problem and have adequate time to secure a short
term loan of $125,000 from our friendly banker.
Let's extend our analysis and include another month of the same
sales, costs, and profits and see what this does to us. Wow ! Now
were going to have a profit of 100,000 for Month 1 and Month 2 for
a total profit of $200,000. Can we go out and have a lobster dinner
to celebrate ? Let's see.
Wow it looks like we're getting rich with this business ! As
earlier, before we get too excited, we need to take a look at the
timing of the cash flows resulting from these profits.
Using the same assumptions that we used earlier here are our
Resulting From Month 1
and Month 2
|Collections From Sales
|Collections From Sales
|Payments To Suppliers, Employees,
Resulting From Month 1
|Payments To Suppliers, Employees,
Resulting From Month 2
|Net Cash Flow
|Cumulative Net Cash
More profit even made our situation temporarily worse.
We're in the hole $175,000 after two months instead of $125,00 and
it takes us four months instead of three in order to reach a
positive cumulative cash flow. When we finally collect the cash for
all our profits; however, it's time to celebrate.
What's your point ?
Making a profit does not guarantee that you'll have all the
cash you need to pay your bills. Profits and Cash Flow are
both critical elements needed for a business to survive and
be successful ! Good Cash Management is also just as important as
making a profit. Great cash management is even better.
What is Cash Flow ?
A businesses' cash flow is simply the money (cash) flowing in and
out of the business during a period of time. The major inflow of
cash to a business results from the sales to customers and the
immediate payment (cash sale) or the later payment (sales made on
credit) resulting from these sales. Other cash inflows may result
from investors contributing cash, bank or other loans made to the
business, and the sale of equipment and other fixed assets.
Major cash outflows are purchases of inventory, manufacturing
costs for products, and payroll. Some other outflows are repayment
of loans and interest and purchases of equipment and other fixed
What type of Cash Flow would you like your business to
experience - Positive or Negative ?
I know I insulted your intelligence - of course all businesses
strive for a positive cash flow. A positive cash flow
results when the cash coming in exceeds (is greater) than the cash
going out during a period. The opposite case which you want to
avoid is a negative cash flow where the cash going out
exceeds (is greater) than the cash coming in.
What is a Cash Flow Forecast / Budget ?
Another term often used to refer to a cash forecast is a Cash
Flow Projection. Whether we use the term cash flow forecast,
cash flow budget, or cash flow projection we're talking about the
same business tool used for analyzing our cash. A cash flow
forecast (projection or budget) is simply an estimate of the
cash coming in and going out of a business during a period of
What does it do for me ?
A cash flow forecast helps identify possible future cash shortages
and allows you the time needed to take corrective action(s). No it
doesn't have to be prepared using a fancy cash management or
spreadsheet computer program although in my humble opinion these
tools if used properly make the job easier and less time consuming.
Preparing the forecast whether manually or with the help of a
computer program does require you to analyze your business'
financial records and future plans in order to come up with any
meaningful estimates and assumptions used for preparing the cash
flow forecast. As with most things, your cash forecast tool is only
as good as the data and assumptions used in preparing the
If I had only one business tool to recommend to my
clients, aside from preparing monthly financial statements, the
cash flow forecast would be my pick. The importance of
managing your cash is one area of business that can not be
over emphasized. Lesson 5 is devoted to and illustrates and
guides you thru the process of preparing and using this business
What's actually involved in good cash
Actually it really only involves applying some good ole fashion
common sense. A few of the basics are:
- Maintain an accurate check book, register or cash summary
- Make daily bank deposits and deposit your receipts
intact (don't pay bills with cash out of your cash
- Make all disbursements by check whenever possible.
- Prepare Monthly Bank Reconciliations.
- Establish procedures for handling cash and insuring that all
cash is properly accounted for and timely deposited in your
- Establish relationships with banks and other lending resources
so you already have in place a source you can go to for help if you
experience a temporary cash shortage.
- Strive to pay your suppliers and creditors on time. By building
a good credit record and establishing a good relationship they are
more inclined to work with you if you encounter a temporary cash
- Establish Credit Terms and Policies applicable to your trade or
business and investigate and continue to monitor customers
that you sell to and grant credit terms. Notice I said continually
monitor your customers credit status. Do you know why ? Few things
in life stay the same. Just because a customer had great credit
when you approved them does not necessarily mean that their
business can't experience a down turn. If that happens their
problems might also cause your business some problems in collecting
what they owe you.
- If you have quite a few cash related transactions each day, you
may want to prepare a daily cash status report. If you don't have a
lot of daily banking transactions, you may just want to prepare the
report on a weekly basis.
- Analyze your cash needs and prepare Cash Forecasts /
Budgets to help identify possible future cash shortages and
allows you the time needed to take corrective action(s).
Lesson 4 Cash Controls provides additional information and
guidance on what steps to take to properly manage and control your
Is there such a thing as having too much cash ?
Believe it or not there is, but this is a "problem" that every
small business wishes they had. I wish I had more cash than I knew
what to do with, don't you ? On the down side, excess or idle cash
sitting in a bank does not make your business any money. You are in
the business to make a profit aren't you. This is no different than
a manufacturing plant sitting idle and not producing any products.
What should you do with these funds? If you're a conservatives type
you could invest in certificates of deposit (CD's) and at least
earn something on these idle funds. You may, however; have better
alternatives for the use of this cash. What are they ? I don't
know. No I'm not copping out on you, I just am not familiar with
what type of business you have. You and your financial advisors are
the ones in a position to be able to answer this question.
||Checklist For Improving Cash
- Sell for cash or take credit card payments whenever
- Establish a line if credit with your bank.
- Consider using a Lock Box to speed up collections and
- Establish and Monitor good credit policies.
- Prepare Accounts Receivable Ageing Reports and use this tool to
follow up on late payments from your customers.
- Likewise prepare Accounts Payable Ageing reports and use this
tool to schedule your payments to your suppliers and creditors. Pay
when due but not early !
- Send Monthly Customer Statements.
- Be aggressive in your collection efforts when you have
- Cutoff additional credit sales to customers who are behind on
their account payments (put a hold on their account).
- Bill promptly and accurately.
- Offer early payment discounts to your customers.
- Reduce inventory levels and sell off obsolete, slow moving, or
damaged merchandise even at a loss (below cost) if you have
- Lease instead of buy equipment.
- Purchase inventory, supplies, and equipment only as
- Increase sales.
- Increase selling prices.
- Tighten or reduce your credit terms extended to your customers
if you can.
- Take payment discounts on your purchases whenever
- Sell off unused equipment and other assets not necessary or
being used by your business.
- Use accounts receivable financing or factoring to speed up the
collection of your sales made with credit terms.
- Negotiate and obtain lower payments and interest rates on
outstanding loans from banks and other financial institutions.
- Review costs and expenses and reduce whenever possible.
- As bad as you hate to, if you experience a lull or downturn in
your business, you may need to consider temporarily laying off
excess (unneeded) employees.
- Keep on the lookout and check out new suppliers to see if you
can obtain any cost savings or better payment terms without giving
up any quality.
- Renegotiate for longer credit terms with current
- Analyze products and divisions to determine if any product
lines should be eliminated.
- Be alert to any new high margin products that will fit
into your "line".
- Add late charges or finance charges to late paying
Note:If you do this, be prepared to follow up and have your
customers actually pay these charges. Most customers try to ignore
and not actually pay these charges.
- If you have to, borrow but have a plan for paying back these
short term loans.
- Follow up promptly and resolve any "bad checks" received from
- Get "up front" deposits for customer special orders or any
orders you can.
- If possible, and you as an owner feel comfortable about your
business invest more money as a loan or capital or if a corporation
sell additional shares of stock.
- Prepare and use Cash Flow Forecasts as a tool for
monitoring how well your cash planning is working.
Note:These cash management tasks
are continual and on going. Sorry you don't get to perform them
once and forget about them.
What cash related terminology do you need to be familiar with
before we dive in to the remaining lessons?
- Bank Statement is the record that the bank maintains that
records all the deposits and deductions that increase or decrease
your bank balance during a specific period of time (see
Cutoff Date). The statement is mailed out by the bank to its
customers at specified time intervals usually one a month.
- Cutoff Date is the date that the bank determines and uses to
prepare your bank statement as of a specified date. All your
banking transactions (deposits, checks, and other adjustments) that
the bank has processed that have occurred prior to and including
this date are included in your current monthly bank statement.
All transactions that occur after this date are included in
your next month's bank statement.
- Check Book is a record that is used to keep up with the balance
in your bank account and in which you record all your deposits,
payments, and deductions that either increase or decrease your bank
- Bank Draft is a document that authorizes a deduction to be made
from your checking account. A common example would be a draft that
is taken out of your bank account each month for insurance.
- Check is a document used to transfer funds from one business or
individual to another business or individual. The check is made
payable to the payee (individual or business receiving the funds)
and is signed by the payer (individual or business paying the
funds). The check is "drawn on" a bank or financial institution
where the payer maintains their checking account and the funds are
- Deposit Slip is a document used to summarize and record checks
and cash received that are deposited in the bank.
- Deposit Book is a record that contains the blank and
completed deposit slips used for preparing the individual daily
deposit slips. Usually the slips are treated so that a "carbon"
copy is provided. The original is used for making the deposit in
- Bank Fees are fees that a bank charges for providing various
services to their customers. A common example of a bank fee is the
monthly statement charge.
- Credit Card Fees are the fees that a business encounters in
order to provide the capability for their customers to use their
credit cards when making a purchase. The credit card service
provider charges various fees to the merchant such as a monthly
statement fee, processing fee for each transaction, and usually a
percentage amount for each transaction processed.
- Direct Deposits are deposits that are sent to and directly
deposited in your bank. The bank usually sends a notice to their
customers to alert them that the deposit has been made on their
behalf. A common example that many businesses should be familiar
with is the daily transmittal (deposit) of all their customer's
credit card sales processed by their credit card provider.
- Outstanding Checks are simply checks written by a business or
individual that have not yet been processed and cleared by the
bank. In other words, they are checks written that have not yet
gotten to the bank.
- Deposits In Transit are deposits made by a business or
individual that have not yet been credited to your account by the
bank. Usually, this results from making a deposit for a day late in
the afternoon or evening. When referred to when preparing a bank
reconciliation, the Deposits In Transit are the deposits that have
been recorded in the business's records but have not yet been
recorded in the bank's records.
- NSF is an abbreviation for Non Sufficient Funds. This occurs
when a check you receive and deposit in your bank account is later
returned to you because the check was "no good". In other words,
your customer or whoever wrote the check did not have enough money
in their bank account to cover the amount that the check was
- Bank Reconciliation is a record that is normally prepared each
month after you receive your bank statement from the bank for the
month. The record compares what you recorded in your cash records
with what was recorded by the bank in your bank statement and
provides proof as to the accuracy of your cash balance.
- Cash Forecast (projection or budget) is simply an estimate that
you prepare of the cash coming in and going out of a business
during a period of time.
- Petty Cash is a special fund that is set up to handle special
payments. The special payments are small cash payments for
unexpected expenditures or payments where access to a check is not
- Cash Payments (Disbursements) Journal is a special journal
(record) that is used to record all cash that is paid out by a
business except for payroll. Small businesses sometimes also use
this journal to record their payments for payroll.
- Cash Receipts Journal is a special journal (record) that is
used to record all receipts of cash.
- General Journal is the record used to record unusual or
infrequent types of transactions.
- General Ledger is a book containing the accounts for all of a
business's assets, liabilities, equity, revenue, and expense
- Subsidiary Ledger Records keep up with the details of a General
Ledger's account balance such as the details that make up the
amounts that customers owe the business or amounts the business
owes to suppliers. Two of the main subsidiary ledgers maintained by
a business are the Accounts Receivable and Accounts Payable
- Accounts Receivable Ageing- report used to age and analyze how
old the amounts are that customers owe a business and what amounts
are late and may need attention.
- Accounts Payable Ageing-report used to age and analyze how old
the amounts are that you owe to your suppliers and what amounts are
late and may need attention.
Don't worry, many of these terms are discussed and explained in
more detail in the following Lessons.
||What should you now be aware of ?
A very important business concept - profits and cash flow are two
different "animals". In addition, you should have learned a little
about what's involved in good cash management, and some actions you
can take to possibly improve your Cash Flow.
Now, that you know some of the
basics about Cash, let's dive in to Lesson 1 and find out about
what records are used by a business to monitor and control