Cash Disbursements: Overview - Part 1
This is the 1st article in a series about Cash Disbursements. This material is adapted from The Automated Accounting Systems and Procedures Handbook (John Wiley, New York 1991) Chapter 7.
7.1 Cash Disbursements Overview
Accounts payable systems pay approved and due vouchers using features and capabilities for cash disbursements processing. Figure 7-1 shows the segment of the accounts payable system involved with cash disbursements. Figure 7-2 shows the material covered in this chapter in much more detail. It presents the three basic procedural steps involved in cash disbursements processing:
1. Voucher payment selection.
2. Check printing and distribution.
3. Bank reconciliation.
Cash disbursements is a cyclical business process whose frequency depends primarily on four factors:
- The cost and effort to set up and process cash disbursements.
- The need to satisfy vendors with timely payments.
- The opportunity to capitalize on expiring discounts.
- The availability of cash.
Considering these factors, most organizations decide to cycle cash disbursements either weekly, biweekly, or semimonthly.
The accounts payable system disburses cash for approved vouchers that exist on the accounts payable master file. A particular voucher may arrive from one of two different sources:
1. Through the accounts payable procedures described in the previous chapter.
2. Through sources outside of the accounts payable system.
VOUCHERS CREATED THROUGH ACCOUNTS PAYABLE PROCEDURES
With respect to vouchers created through accounts payable procedures, consider that the entire transaction—the voucher's creation and its payment—is contained within the accounts payable system. This is the normal manner in which payments for vendor invoices and employee expense vouchers are processed. The previous chapter describes this process in detail.
SOURCES OUTSIDE OF THE ACCOUNTS PAYABLE SYSTEM
However, in many businesses the cash disbursements process extends beyond paying vouchers created from vendor invoices to incorporate disbursements created/row other business processes. The best examples of this vary by industry: insurance claim payments made by an insurer, payments to contracted medical providers for prepaid health providers, refund checks paid to mail order buyers in mail order distribution, etc. Dividend payments to stockholders also fall under this category but to not apply to any specific industry. These disbursements all stem from systems that have a separate base of payee data: claimants, contracted health care providers, stockholders, etc.
The ability to channel all cash disbursements through a single system has the advantage of concentrating all the necessary software and manual procedures into a single cash disbursements process. This way, one organizational unit is responsible for printing checks, controlling check stock, signing checks, and mailing them. This approach offers compelling intangible benefits, including centralized control and cash management. Tangible benefits exist as well: processing all of the organization's cash disbursements through the (accounts payable system's) cash disbursement procedures relieves the organization of having to involve different systems (and departments) in cash disbursements.
Figure 7-2 conceptually illustrates how voucher records prepared by other systems are posted to the accounts payable master file. These voucher records enter the cash disbursements process already loaded with information supplied by the system that built them: voucher number, voucher status, payment due date, approval, amount, and a reference number that uniquely identifies the source. Usually the voucher number comes from a different sequence of numbers used for regular (accounts payable) vouchers. This can separately identify the vouchers according to their source. For example, an insurance company may use claim payment voucher "numbers" that start with a "C," stockholder dividend vouchers that start with an "S," and accounts payable vouchers that start with a "P." Once they are posted to the accounts payable master file, these voucher records will be processed just as other disbursements—appearing on the prepayment register, being selected for payment, etc.
7.2 Voucher Payment Selection
Voucher payment selection is basically an iterative process of preparing prepayment information, reviewing this information, and making any required holds and adjustments. Normally this cycle occurs only once, but, if necessary, it can be repeated any number of times.
Prepayment Review
To start cash disbursements processing, the accounts payable department pre-pares a prepayment register (also called a precheck journal). This is a preliminary report of vouchers selected for payment (Figure 7-3). This report allows accounting management to identify checks that should not be paid at this time, gauge the availability of required funds, or note how vouchers for the same vendor are combined by the system.
As a variation of the format shown in Figure 7-3, the system may report all open vouchers for each vendor, differentiating those that will be paid from those that will not. This can help give accounting management a broader view of the vouchers owed to each vendor vis-a-vis those that are being paid during this run.
Payment processing must occur in a manner consistent with internal policies for cash management and for meeting vendor demands for payment. For the most part, the prepayment review process becomes a control point over the flow of funds out of the organization. To some extent, this also controls which vendors get paid when only a fixed amount of funds is allocated for disbursements.
For the cash disbursements to occur efficiently and effectively, accounts payable management and the accountant responsible for preparing cash disburse-ments must understand how these payment mechanisms work in the automated system. An important part of this includes understanding what automated features are generally available and how these features work.
Next Month's topic: Automatic Voucher Selection
| About this article and the author: |
Doug Potter is the owner of The Newport Consulting Group a professional management consulting organization that provides clients with information systems planning, selection, and implementation services. He can be reached at dpotter@newportconsulting.com or through his Web site, http://www.newportconsulting.com.
Note: The contents of this article were excerpted from Mr. Potters book "Automated Accounting Systems and Procedures Handbook" Copyright 1991 by Douglas A. Potter, published by John Wiley & Sons, Inc. New York
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