The cash disbursement cycle constitutes part of the business accounting process. Some business accounting resources consider this cycle a process in and of itself, while others rate it as one part of a larger accounting process. Understanding the cash disbursement cycle entails examining its purpose, the steps of the process and the various employees involved in that process. The chief financial officer (CFO) helps set cash disbursement procedures in corporations.
The cash disbursement cycle is the process by which a business buys items, from parts for a manufacturing process to goods for commercial sale, with cash resources. This process relies heavily on the decisions and approval of the accounting department of a company. In a large or bureaucratic business, the cash disbursement cycle involves a handful of departments other than accounting, including purchasing, receiving and production. Cash disbursement can involve not only physical cash, but all cash resources, such as checks and lines of credit.
The starting point of a cash disbursement cycle depends upon the accounting plan of a specific business. Explained linearly, the cycle basically works like this: A company decides to purchase an item or group of items. The purchasing department places a purchase order, which the accounting department approves based on available cash resources. The receiving department receives the order from the supplier on credit. The accounting department creates all the necessary paperwork for the purchase and pays the supplier. The payment of the supplier constitutes the actual cash disbursement.
Author James A. Hall argues in his book “Accounting Information Systems” that the cash disbursement cycle constitutes part of a larger process called the Expenditure Cycle. According to Hall, the cash disbursement cycle and the purchases/accounts payable system constitute the two elements of the first part of the Expenditure Cycle. In this cycle, the purchases/accounts payable system determines the material needs of a business, and it purchases materials based on those needs. This system records all incoming purchases as inventory and creates accounts for each supplier. During the cash disbursement cycle, the accounting department collects information on all open accounts and pays off those accounts via cash disbursement. This cycle is more or less identical to the standard cash disbursement cycle, but breaks it down into subcycles.
Cash disbursement in small businesses works very differently. An independently owned shop, for instance, may employ one person who makes all purchases, handles all receiving and balances all accounts through cash disbursement. This individual also handles petty cash for purchases.
In some instances, a cash disbursement system may have nothing to do with the purchasing of materials by a business. The state of California, for instance, calls the system by which it pays out winnings from the state lottery a cash disbursement cycle. Technically, any cycle by which an entity disburses money as cash or check constitutes a cash disbursement cycle.