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  • How to Handle Paid-Outs

    It's noon. Everyone is working hard. No one has time to stop to take a lunch break.

    So, you open the cash register, pull out $25, and send your driver off to get some pizza. A little treat to thank the team for their hard work.

    It's an easy solution to a common problem. However, how should you handle the transaction from an accounting standpoint?

    If you do nothing, your cash register will be short at the end of the day. That's no problem if the person who balances the register was in on the party. But if he or she doesn't know what happened, it may look like someone has stolen money or made a major error in counting out change.

    Every shop needs a procedure in place to handle paid-outs.

    Use petty cash only for small purchases that must be made quickly. Sometimes it's just not practical to fill out a special check or find the right person to sign it. Maybe a designer runs out of tape in the middle of a busy day. Perhaps a driver sees the van is unexpectedly out of gas. Or, as in the example above, you decide to spring for a lunchtime pizza. You only need a few dollars, and you need the cash right now.

    The simplest solution is to go to the cash register and pull out the necessary cash. However, without the necessary controls, that action can create more problems than it solves.

    Over time, a poor system for handling paid-outs can hurt the shop more than you may realize.

    Three Kinds of Cash

    To truly control paid-outs, you first have to understand all the types of cash in your shop.

    1. Cash Receipts

    Every day, cash and "cash equivalents" (checks and credit cards) come into the store. There are two sources for these receipts. First, customers make and pay for that day's purchases. Second, other customers send in payments for charges on account.

    You can ring up all of these receipts, put the cash directly into your cash register or point of sale (POS) system, and deposit the money in the bank. Each transaction is keyed to either ROA (received on account) or the appropriate product sale category.

    2. Change Fund

    The change fund ensures that you have money in the drawer before you ever make a sale. Even a small shop should start the day with $50 to $100 in small bills and change. The volume of walk-in sales you typically experience will be your guide to the correct amount.

    The change fund doesn't vary from day to day. Before you make your daily bank deposit, you should first count out the change you started the day with and set that money aside to begin the next day.

    3. Petty Cash

    That brings us to petty cash — paid-outs. As suggested above, it's not convenient to write a check for every single purchase. A petty cash fund is one answer. This is an amount of cash that you keep separately in a box or moneybag. To use it properly, you take out the money you need, make your purchase, and then put a receipt and change back in.

    In reality, most small businesses don't want to be bothered with a separate petty cash fund. They merely go to the cash register or POS drawer and take what they need. As a result, cash receipts and change fund money get mixed up with petty cash expenditures. It's hard to tell what came in and what went out.

    Paid-Out Problems

    The first issue is documentation. Whether you take money from a petty cash fund or a cash drawer, you need proper documentation — a receipt.

    Good information is the essence of good control. When you pay for purchases by check, this is easy. The cancelled check or bank statement gives all the data you need. Cash purchases require a little more effort. It's up to you to record what you spent and why you spent it. Taking cash out of the petty cash fund or cash drawer without proper documentation makes tight control impossible.

    At the end of the day, a florist who doesn't account for petty cash purchases will simply show that the store's cash is under. That's not good enough.

    The second problem with paid-outs is theft. A lack of controls on cash for paid-outs is an invitation to steal. A proper paid-out system should create obstacles — not invitations — to theft.

    Controlling Paid-Outs

    In general, you should restrict access to the shop's petty cash. You don't want every employee to take cash as needed. To limit your risk, it's best to funnel all paid-outs through one or two people.

    Also, limit the number of times petty cash is used. Whenever practical, use checks instead of cash. When you write a check through your normal payables system, you ensure proper documentation. You know what you bought, whom you paid, and what the expense was for.

    Finally, when you do authorize a purchase with petty cash, always get a receipt. A good paper trail will discourage casual theft.

     

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