Cash may be tight, yet I sometimes see companies still go ahead and cut more checks than what they have in cash to pay for them in their bank account.

I’d like to see that practice stop.

Cutting checks has gotten a lot easier these days. Technology has brought great power into the hands of our people. There’s no reason that checks can’t be cut frequently in small batches as needed. It’s not the big deal that it used to be. Certainly, I prefer to see it done on a regular basis, such as once a week to be more efficient. However, when cash is tight, you have to be more flexible and operate differently.

One reason I don’t like it is what it does to the financials. At month end, there’s a negative balance in the cash account and accounts payable is at a lower level. A journal entry needs to be made to put cash back into a positive balance and to put the corresponding balance back into accounts payable. Accounts payable isn’t paid until there’s money in the bank to pay for it.

Another reason I don’t like it is that usually there’s a time lag between when the checks are cut and when the checks are mailed. Think what will be the action of your supplier when they receive a check and notice that the check and, perhaps, even the enveloped were marked many days ahead or even several days ahead. When that happened when I was CFO, we would notice that and make a note of it in the customer’s files. It sent out a big red flag to keep the company on a close watch. Usually, cutting checks and having to hold them is a sign of not only current financial trouble, but likely that there’s going to be deeper financial trouble coming on at the company.

So, when cash is tight and you don’t have enough money in the bank to cut all the checks that you want to cut, operate differently. Decide what checks you will cut from the cash that you do have in your account and only cut those checks. Do more check runs and never let your cash on the books go below a positive balance. Hopefully, it’s only a temporary situation and you will work your way out of it. But, show good discipline during this tough time and don’t get sloppy by cutting checks for more than what you have in your account.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value