Advantages & Disadvantages of the Cash Receipts & Disbursements Method

The cash receipts and disbursements method is a budgeting process. Companies use actual information for cash collections and payments to create a budget. In some cases, a company can even use this process to create income statements and other reports for future use. Companies must weigh the advantages and disadvantages of this method to determine its usefulness for them.

Accurate

Using the cash receipts and disbursements method provides more accurate reporting. The ability to use actual cash receipts and cash payments provides better information on a company’s cash use. In some cases, a company may operate under the cash basis accounting method to ensure the cash information is accurate. This accounting method only records transactions when cash changes hands. Accurate cash balances typically provide more assurance a company does not have cash poor operations.

Increased Control

Budgets typically are business tools that provide constraints on a company’s operations. Using actual cash receipts and payments place the greatest restraints on freewheeling managers who overspend capital. The budget usually has no room for excess because actual cash balances allocate all resources to a department. Increased control through the cash receipts and disbursements method can improve profitability.

Short Periods

The cash receipts and disbursements budget only works well for a short period. In most cases, any budget using this method will last no longer than six months. Short periods result in companies spending more time creating budgets. Time spent on the budget process means a company has less time to complete normal work activities, potentially reducing profitability.

Difficult to Manage

Cash accounting and cash-based budgets can be difficult to manage. More time is necessary to ensure accuracy and relevance for the budget. Accounting departments may need to provide at least one worker to complete the cash receipts and disbursements budget. More oversight may also be necessary to ensure managers and others do not manipulate the budget, creating distortions in the data. Operational changes can also have significant effects on the budget, as the company must account for the changes in real cash terms.

References

  • "Accounting"; Charles T. Horngren, et al.; 2007

About the Author

Kirk Thomason began writing in 2011. In addition to years of corporate accounting experience, he teaches online accounting courses for two universities. Thomason holds a Bachelor and Master of Science in accounting.