As your small business is on the rise, you'll not only find yourself swimming in equal droves of responsibility and satisfaction; you'll find yourself wading through a whole lot of jargon, too. Among the least fun lingo is the kind that relates to business expenses – you know, terms like capital expenditures, appreciable assets, depreciation, secured debt and debt financing.
When someone slinging business jargon says "cash disbursement," the meaning boils down to simple cash outflow. In most cases – if you want to make your life easier – you could even just call it a payment, but the exact definition gets a little more specific than that.
What Exactly Is Cash Disbursement?
So we know cash disbursement is cash outflow or the payment of money. But what might that outflow cover?
Cash disbursements often go toward operating expenses, goods and services necessary to the business and the accounts you pay to carry out normal business activities, but they can also pay for interest on loans. Similarly, they may take the form of a dividend payment or the distribution of profits to shareholders. Those are the broad strokes, but in a small business's day-to-day, some of the most common types of cash disbursements are petty cash expenditures and even refunds to customers made straight from the cash register.
Though it sounds like an oxymoron given the term itself, cash disbursements don't have to take the form of paper cash; a cash disbursement can also be paid out in plastic, checks or electronic fund transfers.
The Cash Disbursement Process
Typically, businesses use an accounts payable system (including the various types of accounts payable software often employed by small businesses) to dole out cash disbursements. Likewise, your business's payroll system can make cash disbursements. Some businesses may outsource the cash disbursement process to their bank.
On the opposite end of the spectrum, cash disbursements can simply be paid out via petty cash from one hand to another. Petty cash is usually used by employees to make small, business-related purchases like minor office supplies, lunch with a client or a Lyft ride to the job site. These are the types of minor purchases that don't necessitate writing a check or making an electronic fund transfer.
Protect Yourself with Control Procedures
While petty cash disbursements are as easy as slapping some cash into an employee's hand, they require control procedures just like disbursing cash via check or bank transfer. The term "control procedures" might sound a little intimidating, but in this case, it just means that you should record your business's cash disbursements concretely, keeping records via a physical disbursement journal or digital accounting software (or both). This gives you a paper trail and helps secure your business's accounting data come tax season, all while helping you track your budget year round.
For petty cash, ensure that the recipients get a receipt for any business purchases made and keep that receipt on file alongside a petty cash voucher detailing the spender's name and a description of the purchase. In general, whether filed digitally or in an old-school analog fashion, each cash disbursement should be made alongside a report including information such as the type of expenditure, date, amount, payee, the form of payment and a memo describing any other relevant details. If you paid out a cash disbursement as a dividend payment, record it in your journal or software as a reduction in corporate equity. Similarly, cash refunds made from the till should be recorded as a reduction of sales.
It's best to keep cash disbursement records for seven years to maximize your protection in the case of a tax audit. Sure, it may take up a bit of office space (or hard drive space, or cloud storage), but it's more than worth its weight in peace of mind.