What small business owners need to know about cash disbursement
- What is a cash disbursement?
- Why cash disbursements matter for business
- Impact of industry-specific factors on cash disbursements
- How to do a cash disbursement
- How to create a cash disbursement journal
- Types of cash disbursements
- The role of automation in cash disbursements
- Internal controls for cash disbursements
- Long-term financial health and cash disbursements
- Combine payments and disbursement tracking with Ramp
Cash disbursement refers to any payment your business makes to settle financial obligations. Whether you’re paying vendors, employees, or suppliers, managing these payments efficiently is critical to maintaining a healthy cash flow for your business.
What is a cash disbursement?
A cash disbursement is the outflow of money used to pay off liabilities, including purchases, salaries, and bills. You can make these payments by check, electronic funds transfer (EFT), or credit card. Every disbursement affects your general ledger, impacting its balance sheet and overall financial health.
Key terms to understand when managing cash disbursements:
- Debit: An entry that records an outflow of cash
- Credit: An entry that records an increase in liabilities or expenses
- Payee: The person or business receiving the payment
- Payable: An amount owed by the business
Why cash disbursements matter for business
Cash disbursements play a crucial role in bookkeeping and overall financial transactions. Tracking these payments accurately helps ensure proper cash flow management, allowing you to:
- Pay off payables on time and avoid late fees
- Maintain a cash balance that is sufficient to cover operational costs
- Prevent financial discrepancies by keeping detailed records
Without accurate cash disbursement tracking, your business can come up against issues such as cash shortages, missed payments, and even legal trouble. Managing these disbursements ensures financial stability and increases your ability to scale.
Reconcile your bank statements regularly to make sure you account for every cash disbursement and don't overlook any transactions.
Impact of industry-specific factors on cash disbursements
Cash disbursements can vary by industry. Different sectors face unique challenges that require tailored approaches to managing payments. In each case, understanding the specific payment methods and optimizing disbursement tracking helps you maintain smooth financial operations.
- Retail: Retail businesses often have high transaction volumes with frequent vendor payments and credit card disbursements. Without a streamlined system, managing petty cash and reconciling cash register sales with disbursements can be challenging.
- Manufacturing: Manufacturers typically deal with large-scale vendor payments for raw materials and long-term loan repayments. Managing these disbursements requires tracking both short-term and long-term liabilities and reconciling bank statements regularly to maintain a healthy cash flow.
- Service-based businesses: Service industries, such as consulting or tech, may not have significant product-based purchases, but they can still face challenges in managing employee salaries, reimbursement requests, and vendor payments for software licenses or cloud services
How to do a cash disbursement
These are the steps to processing cash payments for your business:
Step | Action |
|---|---|
Select a Payment Method | Choose how the payment will be made--by check, ACH, EFT, or credit card. |
Record the Transaction | Enter the payment details into the cash disbursement journal. This step includes the payee name, payment amount, and the purpose of the payment. |
Make a Journal Entry | Each payment must be recorded in the general ledger. This includes debits to the appropriate accounts, such as accounts payable, and credits to the bank account. |
Track the Payment | Once the payment is processed, ensure it's properly tracked in your accounting software or journal. This helps you keep an accurate record of all financial transactions. |
Reconcile Accounts | Compare the recorded payments to your bank account statements and ensure all disbursements are accurately reflected. |
How to create a cash disbursement journal
A cash disbursement journal is a record of all payments that allows you to track every disbursement for proper bookkeeping. Maintaining this journal keeps you organized so you can reconcile your bank accounts and monitor cash flow. Follow these steps to create one:
Set up the journal format
- Choose a method for recording your journal entries: Digital, via accounting software such as Ramp or QuickBooks, or manual, using a spreadsheet or paper ledger
- Include key columns: Date, payee name, payment amount, payment method, payment purpose, and account affected
Record each disbursement
- Every time you make payments, such as recurring expenses, enter the relevant details in the cash disbursement journal
- Ensure each entry’s associated with a specific journal entry in the general ledger, which helps tie it to your balance sheet
Review and reconcile
- Regularly review your cash disbursement journal to confirm all entries are accurate
- Compare the recorded disbursements with your bank statements to make sure there are no discrepancies and prevent any errors or fraud
Automate where possible
- If you're using accounting software such as Ramp, set up automated journal entries to help keep your cash disbursement journal updated with each payment. This minimizes the risk of human error and reduces the time spent on manual entry.
Cash disbursement journal example
Here’s what a simple cash disbursement journal might look like. This table shows key components such as the date, payee name, payment method, and purpose of payment. Each entry ties back to an account in the general ledger so that everything aligns with your broader financial records:
Date | Payee Name | Payment Amount | Payment Method | Purpose of Payment |
|---|---|---|---|---|
01/05/2025 | XYZ Supplies | $500 | Check #1234 | Office Supplies |
01/10/2025 | John Doe | $1,000 | ACH | Employee Salary |
01/15/2025 | ABC Corp | $2,500 | Credit Card | Vendor Payment |
01/20/2025 | Sarah Johnson | $150 | Check #1256 | Reimbursement for Travel |
Types of cash disbursements
Each type of cash disbursement calls for a different management process:
Type of Disbursement | Description | Example |
|---|---|---|
Vendor Payments | Payments made to suppliers for goods or services | Paying a supplier for office supplies |
Employee Salaries | Regular payroll disbursements to employees | Paying salaries through direct deposit |
Petty Cash | Small, everyday expenses that don't require a formal process. | Reimbursing an employee for office coffee |
Loan Repayments | Paying off business loans and credit lines | Monthly repayment to a business lender |
The role of automation in cash disbursements
Automation is revolutionizing the way businesses handle cash disbursements. By integrating accounting software with payment systems, your business can:
- Streamline the payment process, reducing manual errors
- Automatically update bank accounts and general ledgers with each payment method used
- Save time by scheduling recurring payments
Many businesses now use automated systems to process EFT, ACH, and credit card payments, ensuring faster, more efficient financial transactions. This automation minimizes errors and saves valuable time, making it easier to stay on top of cash disbursements.
Adrift Hospitality used Ramp to automate its expense management, saving 5-10 days on month-end close and cutting 8-10 hours per month on manual reconciliation. The company saved 5-25 hours per month company-wide by switching to virtual cards and replacing manual processes with automated coding.
Internal controls for cash disbursements
Implementing strong internal controls helps prevent errors and fraud in cash disbursements. Best practices for your business include:
- Segregation of duties: Different employees should handle different parts of the disbursement process to reduce risk
- Approval workflows: Ensure a manager approves all disbursements before processing
- Regular audits: Periodically audit your disbursement processes to correct errors
Long-term financial health and cash disbursements
Properly managing cash disbursements doesn’t just impact day-to-day operations—it plays a significant role in your business’s long-term financial health. Efficiently tracking and reconciling payments can help your business:
- Maintain a stable cash balance
- Reduce reliance on short-term debt, leading to better credit scores and financial stability
- Plan effectively for future growth by understanding how disbursements impact overall cash flow and business expansion
Combine payments and disbursement tracking with Ramp
Managing cash disbursements helps keep your business’s finances in check. By understanding the types of disbursements, the steps involved in processing payments, and how automation can streamline the process, you can promote smooth financial transactions.
Remember to track every disbursement in your cash disbursement journal and keep accurate records to avoid cash flow issues. The easiest and most accurate way to track and manage cash disbursement is to combine the means of payment with payment tracking.
With Ramp, you log relevant details automatically when you make payments. There’s no manual work.
Find out how Ramp can help you save time and create more accurate reports.
Brad Gustafson leads the Accounting Partnerships Channel at Ramp. With over a decade of experience, including managing Top 100 firm partnerships at Xero, he’s passionate about building a strong, engaged community of accountants connected through innovative technology and shared opportunities.
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