Handling Cash, Credit & Checks ...

Starting & Operating a New Small Business
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Cash, Credit, Credit Cards, Checks, Trade Credit, Credit Terms

Handling Cash

Cash and handling cash is not as simple as it might seem. Cash comes in many forms, it must be deposited, it must be accounted for, it must be accessible when needed, it must be reported, and it is often replaced for a while by credit.

How Do Customers Prefer to Pay for Goods & Services?

As the dollar amount charged for goods & services rises, customers shift away from using cash and more towards using checks and credit/debit cards for purchases and then towards credit/debit cards and away from checks.

Based upon U.S. Census Bureau 2000 data

2010 Trends:

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Debit Vs Credit | BUild a Better Credit Score

Based upon U.S. Census Bureau 2005 data

There are basically five ways that customers pay, depending upon whether it is a retail sales to the consumer (B2C) or a busines-to-business sale (B2B):

  • Cash
  • Check
  • Manual Credit Card
  • Real Time Credit Card
  • Invoice and Bill (Net 30)
  • Cash Incentive Billing:
    Invoice and Bill (2/10, Net30)

B2C - Retail Sales
B2C & B2B; MOTO; eCommerce
B2C & B2B; MOTO; eCommerce
B2B; MOTO; eCommerce
B2B mostly

What is Cash?

Cash and cash equivalents are generally kept in several places by a business and are depositable into a bank account. When discussing cash we usually make a distinction between what is cash and a cash sale and what is credit and a credit sale. Common forms of "Cash" include:

Cash is any Asset including cash on hand, money on deposit, and any items that banks will accept for immediate deposit.

A. Cash on Hand - petty cash, register drawers, deposits in transit, etc.

B. Cash in Bank - checking account(s), savings, some marketable securities, etc.

C. Items accepted as cash - coins, paper money, checks, money orders, traveler's checks, some charge slips (credit for the customer and a cash receipt of payment for the business), etc.


You are required to report large cash transactions to the IRS. The main purpose is to deter money-laundering schemes and other illegal activity.
Form 8300 - http://www.irs.gov/publications/p1544/index.html

You must file Form 8300 when you receive payments larger than $10,000 in cash in one transaction, or in two or
more related business transactions. Cash, as the IRS defines it, includes U.S. and foreign coin and currency. It also
includes other common forms used to pay suppliers, such as cashier's checks, traveler's checks, and
money orders. This form is due to the IRS 15 days after the date of the transaction and to the payer by February

See IRS Publication 1544: Reporting Cash Payments of Over $10,000 (Received in a Trade or Business).

The IRS requires that you report to when:

1) If you receive greater than $10,000 cash, traveler's checks or money orders (not certified, cashier's checks, or business, or personal checks) in one transaction or two related transactions; you must report the name, address & SS# of buyer.

2) If you're a retailer and the transaction is greater than $10,000 in installment payments within 1 yr. - OR - if the transaction is greater than $10,000 where part is cash, traveler's checks or money orders; AND any "suspicious transaction" no matter what the amount.

Where is Cash Kept?

  • Petty Cash - small cash fund for making disbursements; usually in a cash box or small safe
  • Registers - Keep cash & coins sufficient to make change; keep current sales receipts
  • Safes - keep change for the registers & receipts for later deposit in a safe.
  • In the Bookkeeper's office - hopefully briefly and on premises
  • Deposit sacks - considered in transit

Keeping Track of Cash

A smart business owner will either do a bank reconciliation or ask the bookkeeper to do one monthly to check for errors and make corrections. Other activities are also expected to be done regularly to keep an account of cash.

  • Bank Reconciliation - used to identify & reconcile differences between your cash account vs. the bank's records.
  • Regular Bookkeeping, sales and expense records
  • Preparation of financial records

NOTE: see lesson on Bookkeeping

What is Credit?

Credit occurs when the business allows the customer to take or receive delivery of goods without immediately paying for them. Instead, the customers makes some form of promise to pay, usually at a specified time with specified terms. The terms may allow some modification of when payment can be made and how much will be eventually paid.

These promises are called Receivables:

  • IOU's
  • Accounts Receivable
  • Notes Receivable
  • Postdated Checks
  • NSF
  • Store credit cards
  • Some non-store credit cards (credit for the customer and a delay in receipt of payment for the business)

Credit Cards

Credit Card transaction occur in several ways:

  • Manually with an imprinting machine and signature
  • by telephone approval
    • no signature necessary; real time transfer
    • approval and signature
  • Internet
    • keypad approval and printed for signature
    • real time secure transfer

Credit Card sales slips are treated differently depending upon who issues the credit card; a private company or a bank.

  • Credit Cards - issued through banks, i.e. VISA, MasterCard; the credit slips can be treated as cash for deposit and fees are paid to the bank card company by the merchant.
  • Credit Cards (aka Charge Cards) - issued through a private company, i.e. American Express, Diner's Club; credit slips are held and mailed to the individual company for reimbursement to the merchant, less the fees.

Some considerations regarding credit cards are

  • Customer Preferences
  • Reimbursement time
  • Charges 1.5-6%
  • who absorbs loss for nonpayment, stolen cards, etc.
  • Restrictions on recording personal info. - generally not: Do not allow your credit or charge card account number to be written on your personal check. A number of states forbid merchants to record credit or charge card account numbers on personal checks. amex privacy | Can't refuse wo ID | Driver's License Privacy | Merchant Rights | States that Prohibit recording a CC on Checks | ID when paying by check
  • Can you charge your customer a fee for using a credit card for payment?

    Law: California is one of 17 states that make it illegal to charge a surcharge for credit card purchases. (Section 1748.1(a) of the California Civil Code…”no retailer… may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means.

    Policy: All major credit card companies have a policy against this kind of charge regardless of whether you’re a manufacturer or retailer or what you call it.

    Exceptions: Governments agencies are excepted. For instance, if you pay your taxes by credit card the company that handles your payment can charge you a fee.

    You can give a discount for cash payments both by law and cc company policy. Even some gas stations do this. You can’t make credit card customers pay more than list price.

    What are your risks if you do this anyway? A customer could take you to small claims court and collect up to 3 times the amount of the surcharge; a credit card company could stop doing business with you. Customers will get angry and take their business elsewhere.

How Do Credit Card Fees and Interest Work?

First, the Credit Card companies charge fees for the merchant for accepting credit card purchases and charge the customer interest fees for using the credit cards. The fees vary by company and are are all over the map.

In addition, the merchant needs to sign up for a credit card service. These are often known as Gateway, cash settlement or Credit Card Clearing companies. This service is a clearing house that verifies the credit card and its status and okays the transaction; but charges additional fees for this service. These companies will generally provide you with:

  • a swipe/printer machine connected to the Internet
  • a manual machine
  • call in verification of card status
  • direct transfer of money from credit card company bank account to the merchant bank account
  • an Itemized statement showing all transaction and the credit card used


Your expenses and fees will include:

  • Credit Card company transaction fees 0.05%-5%
  • Merchant Clearing Service transaction fees
    • monthly fee $30
    • transaction fee, aka discount fee, 0.05%-5% (%1.85% is good) of sales -OR- base fee plus smaller percent
      Note: the fee is lower if you call in
    • credit card company fee is included in the merchant service company fee structure
  • buy or rent machine
    • swipe/printer machine purchase $400 - $1,500 (laser printer); manual machine often free
  • buy credit card slips or paper for machine
  • always on phone line (optional)
  • Statement fee $5
  • Merchant Bank Account fees $5/month and up or based on transactions

Restaurants and other businesses's that process the card and allow tips to be added when the server brings the bill to the table often use a batch system with their cash register and credit card processing machine. The card is run and each ticket is tracked to match later with the tip added by the customer to the amend the card transaction. At the end of the day all the transactions are submitted to the cash settlement company as a batch file.

Tableside pay systems are becoming possible and popular, first in Europe. They allow the customer to keep the card in sight and to avoid employee fraud and "skimming" scams where handheld devices are used to record customer information and sell it later or perpetrate identity theft.

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Credit Terms and Trade Credit

When cash, checks and credit cards aren't used, a merchant can give a customer credit through what is known as trade credit. This is usually done for sales that are considered B2B sales (business to business) but may be applied to customer sales.


2/10, net 30
10/2, net 60

Modifiers to the basic terms include:

2/10, net 30; fill in term below

  • EOM - End of Month
  • ROG - Receipt of Goods
  • Extra Days
  • Allowances
    • Goods
    • Cash Back
    • Credit on Future Purchases


Layaways are not credit sales and are not cash sales. They allow a customer to have merchandise held for and make payments. When payments are completed the customer gets the product. At that time the merchants bookkeeping system records the sale. Prior to that, it is a liability, a promise by the merchant to deliver the good.

Handling and Avoiding Bad Checks

What can a merchant ask for and record when a customer pays by check?

The merchant requesting to see a credit card must inform the
consumer that the credit card is not required to write a check.
This can be done by either posting a notice that states "Check
writing ID: credit card may be requested but not required for
purchases," or by training and requiring the employees to inform
the consumer that the credit card does not have to be shown to
write a check.

Further, the merchant can:

o Require the consumer to show and record identification such
as a driver's license.

o Require, verify and record a consumer's name, address and
telephone number.

o Require a check guarantee card and record the number,
whether or not the check guarantee card is also a credit card.

Full Info

Accepting payment by check is riskier than accepting cash (unless it's counterfeit) and accepting credit cards (the credit card company guarantees payment).

Checks that bounce are sent back to the merchant stamped NSF for Non-Sufficient Funds. AND, your bank usually charges you $20 or more for the bounced check. You should check with the customers bank before trying to redeposit it. You should then ask the customer to reimburse you for the bounced check fee.

Checks may bounce because:

  • NSF in the account; unless the customer has overdraft protection, the check will be returned to you and a fee charged to your account
  • the customer's account has been closed
  • The customer's account never existed
  • the signature of the person signing the check is a forgery; the bank refuses payment
  • a third-party check, like a paycheck, the names or dollar amount have been altered or the endorsement is a forgery
  • a person signing or endorsing a check on behalf of a corporation or partnership doesn't have the legal authority to do so

Some businesses adopt a "no checks" policy. This can cause you to lose the business of perfectly solvent customers who like the convenience of writing a check. Also, with checks, there is no transaction fee like there is with credit cards, thus the merchant may prefer checks.

Your best business decision is to adopt a policy that makes sense and stick to it. Here are some policies to consider:

  • Require checks to be written and signed in your presence
  • Accept only checks drawn on local banks
  • be sure the checks have pre-printed customer information
  • don't accept checks written for more than the purchase price; don't give change
  • wait until the check has cleared before giving cash refunds for returns
  • don't accept third-party checks (paychecks, Social Security checks and checks someone else has made out to the endorser)
  • don't accept post-dated checks
  • set a liimit on the check amount you will accept
  • call the bank to verify the check before accepting larger checks
  • require a manager's approval for checks over a certain amount
  • write the customers phone number on the check or driver's license if your state allows it
  • ask to see ID, something that contains a photo and a signature; record allowable information
  • post a fee you will charge the customer for bounced checks; this is a deterrent and in some states it's a requirement or else you can't collect
  • stamp the check immediately with an endorsement stamp (available from your bank) and deposit it right away; the longer you wait the riskier it is

Note: under the U.C.C. a check is considered "stale" six months after it is issued. However, most banks will still cash it if the account is still solvent.

Dealing with Bad Checks

Try as you will, you will still get bad checks.

Step 1 - Call the customer and ask that they make good on the check or pay in cash. Call only between 8 a.m. and 9 p.m. to avoid legal problems and don't call too often (State's have protections for consumer from harassment and nuisance) It is illegal to threaten that you will publicize his or her name or that will notify their employer.

Step 2 - Write a letter, "return receipt requested" making the same demand. This benefits you if the case goes to court, especially if their was a criminal intent to defraud you. In California and 35 other States, the law is particularly favorable to the merchant if you send the written notice. You may collect the amount, NSF fee and two to three times the value in extra damages. handout

Step 3 - If the customer's bank account is still active, wait a few days and then check to see if the check can now be covered. You can call the bank and say you are holding a check for a certain dollar amount and ask if there is enough to cover it. An alternative is that some banks offer "enforced collection" whereby the bank will hold the check and next time money is deposited it will go to you.

Step 4 - Request Prosecution. It is a crime to intentionally write a bad check. Usually you need to have already given the check writer a written notice before going to a prosecuting attorney or local district attorney for help. Don't threaten the check writer as that may be construed to be harassment or extortion. Some police departments and sheriffs offices are more helpful than others. The best have BAd Check Programs under which they contact the check writer and give a chance to avoid prosecution

Step 5 - Go to Small Claims Court. Most states have limits between $2,000 and $5,000 dollars. California's limit is $5,000. You may be entitled to the amount, bank fees, 2-3 times the amount in damages and the court-filing and service-of-process fees. If the check writer has a job you will be able to get paid out of the wages, the bank account or other deposit accounts. Usually can also put a lien against the debtor's real estate

Step 6 - Use a Collection Agency. Collection agencies take a big cut on collected debts but it may be favorable, especially for many small checks, as opposed to the time and effort of going to court. The alternative is to write it off as a bad debt expense against your state and federal income taxes.

What if a customer stops payment? If a customer stops payment claiming defective goods, they may get a reduction in price or an escuse of the debt in extreme case from a court for their good faith. If however, they are found to be making a trumped up claim they will be fully responsible. However, in dealing with a customer that is unhappy with the merchandise, the best policy is to simply have the customer return the goods.

What if the check writer writes on the check "Payment in Full." Be careful about accepting it. You may be barred form collecting if the check writer owes more. In some states you can cash the check and reserve your rights by writing the words "Under Protest" or "Without Prejudice" on the check. California allows you to cross out the "Payment in Full" cash the check and sue for the balance.