So, you want to learn
by Bean Counter's Dave Marshall
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Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
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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.

Tutorial Navigation
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 Main Tutorial.

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
  • Checks

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 Fund.

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 fictitious business.

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 Ma).


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.
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.

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 "cash crunch".

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 problem.

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 problems ?
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 doors.

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.

Income Statement Month 1
Sales 250000
Costs 150000
Profit 100000

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:

  • Collections
  • 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 industry.
    90 % of the sales on account are collected when due and the remaining uncollected sales are collected in the following month.
    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.
    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
Cash Flows
Resulting From Month 1
Month 1 Month 2 Month 3 Month 4 Total
Collections From Sales 25000   202500 22500 250000
Payments To Suppliers, Employees, and Others
Resulting From Month 1
75000 75000     150000
Net Cash Flow <50000> <75000> 202500 22500 100000
Cumulative Net Cash Flows <50000> <125000> 77500 100000 100000
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.

Income Statement Month 1 Month 2 Total
Sales 250000 250000 500000
Costs 150000 150000 300000
Profit 100000 100000 200000

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 results.

Cash Flows
Resulting From Month 1
and Month 2
Month 1 Month 2 Month 3 Month 4 Month 5 Total
Collections From Sales
Month 1
25000   202500 22500   250000
Collections From Sales
Month 2
  25000   202500 22500 250000
Payments To Suppliers, Employees, and Others
Resulting From Month 1
75000 75000       150000
Payments To Suppliers, Employees, and Others
Resulting From Month 2
  75000 75000     150000
Net Cash Flow <50000> <125000> 127500 225000 22500 200000
Cumulative Net Cash Flows <50000> <175000> <47500> 177500 200000 200000

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 assets.

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 time.

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 forecast.

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 "tool".

What's actually involved in good cash management ?

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 record.
  • Make daily bank deposits and deposit your receipts intact (don't pay bills with cash out of your cash receipts).
  • 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 bank.
  • 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 shortage.
  • 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 cash.

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 Flow
  • Sell for cash or take credit card payments whenever possible.
  • Establish a line if credit with your bank.
  • Consider using a Lock Box to speed up collections and deposits.
  • 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 to.
  • 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 to.
  • Lease instead of buy equipment.
  • Purchase inventory, supplies, and equipment only as needed.
  • 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 possible.
  • 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 suppliers.
  • 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 customers.
    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 customers.
  • 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 balance.
  • 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 transferred from.
  • 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 the bank.
  • 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 written for.
  • 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 readily available.
  • 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 accounts.
  • 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 Subsidiary Ledgers.
  • 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 Cash.

Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
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