Non-cash transactions involve assets, liabilities, debt and equity and only impact investing and financing cash flows. Non-cash transactions offer myriad benefits, but the primary advantage is the zero net reduction of cash.

A secondary benefit is the cost savings tied to financing activities. These costs, if incurred, would further reduce cash. However, an important point you need to consider is how to manage these non-cash transactional with connection to your business, whether is customer support, technology, sales or marketing.

We will also consider what these types of expenses are with some examples.

• What Are Non-cash Transactions?
• How Does Non-cash Transactions Work
• Benefits of Non-cash transactions
• What is a Non-cash Item?
• How Non-Cash Items Work
• What is a Non-cash Adjustment?
• What is Non-cash Payment
• What Does Cashless Payment Involve
• Examples of Cashless Societies
• Advantages of Non-cash Payments
• Should Your Business Move to Cashless Payment?
• How to Prepare Your Business For And Manage Cashless Payment

What Are Non-cash Transactions?

Non-cash transactions are investing and financing-related transactions that do not involve the use of cash or a cash equivalent. When a company buys an asset or incurs an expense, but instead of using cash, writes a promissory note or takes over an existing loan, the company is involved in a non-cash transaction.

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If your company is a corporation and it issues stock that it uses to acquire another corporation, then that transaction is a non-cash transaction. Generally accepted accounting principles allow companies to exclude small non-cash transactions, but larger ones must either be included in the cash flow statement or in notes.

Some common noncash transactions include:

1. Depreciation
2. Amortization
3. Unrealized gain
4. Unrealized loss
5. Impairment expenses
6. Stock-based compensation
7. Provision for discount expenses
8. Deferred income taxes
9. Asset write-downs
10. Provisions for future losses

How Does Non-cash Transactions Work

Accounting

Accounting entries differ for non-cash transactions, so you should pay attention to the underlying economic event to determine which entry applies. To record depreciation, debit the accumulated depreciation expense account and credit the accumulated depreciation account.

The entry for amortization is as follows: debit the amortization expense account and credit the corresponding intangible resource account. To record depletion, debit the depletion expense account and credit the depletion allowance account.

Obviously, all these entries don’t involve the cash account. Any allowance account is a contra-account, meaning it reduces the value of the respective resource account.

Financial Reporting

Non-cash transactions, especially those related to a company’s operating expenses, flow into a statement of profit and loss. This is what accountants call a report that shows corporate revenues, expenses and net income — or net loss, if expenses exceed revenues.

Given that non-monetary items decrease a company’s income and taxes, accountants add them back to the net cash balance when they prepare a statement of cash flows. Also known as a liquidity report, a statement of cash flows displays three sections: operating, investing and financing activities. Financial managers incorporate non-cash transactions in operating cash flows.

Organizational Behavior

The fact that a company doesn’t pony up cash for some transactions doesn’t change the operational ethos that permeates its day-to-day activities, especially with record-keeping and financial reporting.

Operations managers diligently heed processes that revolve around non-monetary economic events to make sure employees follow company procedures and regulatory guidelines when executing tasks.

For example, bookkeepers who record depreciation and amortization exercise the same care as record-keepers dealing with cash transactions. By doing so, bookkeepers enable a company to report accurate and complete operational data summaries that are in line with industry practices.

Benefits of Non-cash transactions

Since non-cash transactions do not involve cash, they have a net zero impact on cash flow. Acquiring an asset will result in a net decrease in cash flow, while incurring a liability results in a net increase in cash flow. The both cancel the other out, resulting in zero impact.

Often, when acquiring assets, your company must use existing cash or obtain a new loan. In a non-cash asset acquisition, your company retains its cash instead of a net outflow for the asset.

Even if your company obtains a new loan, rarely does a company receive 100 percent debt financing, so your company would need to cover the down payment with cash in addition to the loan financing fees.

For example, If your company issued $1 million in stock to acquire another company for $1 million, this non-cash transaction saves the company the often significant expense of raising capital.

Instead of needing to raise $1.1 million to pay $100,000 to the investment bankers who helped raise the funds, your company is able to save $100,000 in financing expenses and reduce the dilution of its equity. A rapidly growing company acquiring a number of assets will have negative investing cash flow, which can be eliminated through the use of non-cash transactions.

What is a Non-cash Item?

A non-cash item has two different meanings. In banking, the term is used to describe a negotiable instrument, such as a check or bank draft, that is deposited but cannot be credited until it clears the issuer’s account.

Alternatively, in accounting, a non-cash item refers to an expense listed on an income statement, such as capital depreciation, investment gains or losses, that does not involve a cash payment.

How Non-Cash Items Work

Banking

Banks will often put a hold of up to several days on a large non-cash item, such as a check, depending on the customer’s account history and what is known about the payor (e.g., if the issuing organization has the financial means to cover the check presented).

The short period of time during which both banks have the funds available to them — between when the check is presented and the money is withdrawn from the payor’s account — is called the float.

Accounting

Income statements, a tool used by companies in financial statements to tell investors how much money they made and lost, can include several items that affect earnings but not cash flow. That’s because in accrual accounting, companies measure their income by also including transactions that do not involve a cash payment to give a more accurate picture of their current financial condition.

Examples of non-cash items include deferred income tax, write-downs in the value of acquired companies, employee stock-based compensation, as well as depreciation and amortization.

Depreciation and Amortization Example

Depreciation and amortization are perhaps the two most common examples of expenses that reduce taxable income, without impacting cash flow. Companies factor in the deteriorating value of their assets over time in a process known as deprecation for tangibles and amortization for intangibles.

For example, say a manufacturing business, let’s call it company A, forks out $200,000 for a new piece of high-tech equipment to help boost production.

The new machinery is expected to last 10 years, so company A’s accountants advise spreading the cost over the entire period of its useful life, rather than expensing it all in one big hit. They also factor in that the equipment has a salvage value, the amount it will be worth after 10 years, of $30,000.

Depreciation seeks to match up profit with its associated expenses. Dividing $170,000 by 10 means that the equipment purchased will be shown as a non-cash item expense of $17,000 per year over the next decade.

However, no money was actually paid out when these annual expenses were recorded, so they appear on income statements as a non-cash charge. 

What is a Non-cash Adjustment?

In accounting, a non-cash adjustment is a concept used when creating a Statement of Cash Flows under the indirect method of cash flow preparation.

The statement begins with the net profit or loss of the business and then adjusts the profit or loss figure for the effect of any transactions during the financial reporting period that did not involve the exchange of cash or equivalents.

In order to adjust to the cash flows from accrual basis to a basis that reflects the change in the cash position of the company, the cash flow statement compensates for the effect of all transactions that did not involve the use of cash during the period. This is what is known as a noncash adjustment.

The most common noncash adjustment involves depreciation. Depreciation expense is a write-down in the value of assets held by the business. However, while depreciation expense reduce the net profits of a business, it does not involve a cash outlay. As a result, a non-cash adjustment must be made to add back to net profit or loss the effect of the depreciation expense.

Other Common Non-cash Adjustments

Other common noncash adjustments include an add-back for amortization expense. This is similar to depreciation expense but reduces the accounting value of intangible assets. Income tax expense on an IFRS or GAAP basis differs from income tax actually paid.

A non-cash adjustment must be made for this difference. A third common difference involves foreign currency translation gains or losses. Foreign assets or liabilities must be often adjusted to the current value under IFRS or GAAP. This creates a gain or loss for which no cash is exchanged. As a result, a non-cash adjustment must be made to compensate.

What is Non-cash Payment

Payments made without the use of cash by transferring certain sums from the accounts of the payer to the account of the creditor (in a bank or savings office) or by offsetting mutual claims. Non-cash payments are characteristic of an economy with developed commodity and monetary relations and are a component of unified monetary turnover, which also includes the circulation of cash.

What Does Cashless Payment Involve

Without cash, payments happen electronically. Instead of using paper and coins to exchange value, you authorize a transfer of funds from a bank account to another person or business. The logistics are still developing, but there are some hints as to how a cashless society might evolve.

Credit and debit cards are among the most popular cash alternatives in use today. Cards alone may not be enough to support a 100% cashless society. Mobile devices may instead become a primary tool for payments.

Electronic payment apps, like Zelle, PayPal, and Venmo, are helpful for person-to-person payments (P2P payments). In addition, bill-splitting apps allow friends to split their bills easily and in a fair manner.

Mobile payment services and mobile wallets like Apple Pay provide secure, cash-free payments. Many nations that use cash sparingly have already seen mobile devices become a common tool for payments.

Cryptocurrencies are also part of the discussion. They’re already used for money transfers, and they introduce competition and innovation that may help keep costs low. However, there are risks and regulatory hurdles that make them impractical for most consumers, so they might not be ready for widespread use, yet.

Examples of Cashless Societies

Several nations are already making moves to eliminate cash, with the push coming from both consumers and government bodies. Sweden and India are two notable examples, with two different outcomes.

Sweden

It’s not uncommon to see signs that say “No Cash Accepted” in Swedish shops. According to the European Payments Council, cash transactions accounted for just 1% of Sweden’s GDP in 2019, and cash withdrawals have been steadily declining by about 10% a year.

Consumers are mostly happy with this situation, but those who struggle to keep up with technological developments continue to rely on cash.

India

The Indian government banned 500 and 1,000 rupee notes in November 2016, in an effort to penalize criminals and those working in the informal economy. The implementation was controversial, in part because roughly 99% of those banknotes were eventually deposited.

The fact that the banknotes were deposited means criminals weren’t punished for hoarding untraceable cash, which had been the intent of the move. The Economic Times cited the Reserve Bank of India as it reported that electronic transactions increased temporarily, but cash returned to pre-demonetization levels by the end of 2017.

Advantages of Non-cash Payments

As different countries move towards a cashless environment after demonetisation, the initial awe and confusion have given way to a flurry of concerns. Will the emphasis on online transactions provide convenience and tangible benefits or just add to stress and additional charges?

To incentivise the move towards a cashless economy, the government has come up with a rash of discounts and freebies on digital transactions. But will these be substantial enough and, along with other benefits, count the higher risk of identity theft once the currency notes are back in circulation? What are the gains and drawbacks of cashless or non-cash payment?

Convenience

The ease of conducting financial transactions is probably the biggest motivator to go digital. You will no longer need to carry wads of cash, plastic cards, or even queue up for ATM withdrawals. It’s also a safer and easier spending option when you are traveling. “The benefits are enormous if you leave out the low-income group, which will face a huge challenge,” says Kartik Jhaveri, Director, Transcend Consulting. “For the rest of the country, it is constructive and simple.

It will be especially useful in case of emergencies, say, in hospitals,” he says. Adds Jayant Pai, Head, Marketing, PPFAS Mutual Fund: “You have the freedom to transact whenever and wherever you want. You don’t have to be physically present to conduct a transaction or be forced to do so only during office hours.

Discounts

The recent waiver of service tax on card transactions up to Rs 2,000 is one of the incentives provided by the government to promote digital transactions. This has been followed by a series of cuts and freebies. It’s a good time to increase your savings if you take advantage of these.

For instance, 0.75% discount on digital purchase of fuel means that the petrol price in Delhi at Rs 63.47 per litre can be brought down to Rs 62.99/l with digital payment.

Similarly, saving on rail tickets, highway toll, or purchase of insurance can help cut your costs. Add to these the cashback offers and discounts offered by mobile wallets like Paytm, as well as the reward points and loyalty benefits on existing credit and store cards, and it could help improve your cash flow marginally.

Tracking spends

“If all transactions are on record, it will be very easy for people to keep track of their spending. It will also help while filing income tax returns and, in case of a scrutiny, people will find it easy to explain their spending,” says Manoj Nagpal, CEO, Outlook Asia Capital. “Besides the tax, it will have a good impact on budgeting,” says Pai.

Budget discipline

The written record will help you keep tabs on your spending and this will result in better budgeting. “Various apps and tools will help people analyse their spending patterns and throw up good insights over a couple of years,” says Jhaveri.

Controlled spending could also result in higher investing. If the same amount of cash does not flow back into circulation and people continue to use mobile wallets and cards, it is also likely to bring down the latte factor.

This means that the Rs 10 you spent on candy or chips, or that regular cup of coffee office is likely to take a hit since you will be short of loose change and smaller currency notes. There’s a lesser chance of budgetary leaks and unaccounted for spends sneaking into your budget at the end of the month.

Lower risk

If stolen, it is easy to block a credit card or mobile wallet remotely, but it’s impossible to get your cashback. “In that sense, the digital option offers limited security,” says Pai. This is especially true while traveling, especially abroad, where the loss of cash can cause great inconvenience. Besides, if the futuristic cards evolve to use the biometric ID (fingerprints, eye scan, etc), it can be extremely difficult to copy, making it a very safe option.

Small gains

It may not seem like much of an advantage, but being cashless makes it easy to ward off borrowers. Another plus is that you can pay the exact amount without worrying about not having change or getting it back from shopkeepers.

Disadvantages of Non-cash Payment

Depending on your perspective, going cashless might actually be more problematic than beneficial. Here are some of the major downsides associated with a cashless financial system.

Digital Transactions Sacrifice Privacy

Electronic payments aren’t as private as cash payments. You might trust the organizations that handle your data, and you might have nothing to hide. However, the more information you have floating around online, the more likely it is to wind up in malicious hands. Cash allows you to spend money and receive funds anonymously.

Cashless Transactions Are Exposed to Hacking Risks

Hackers are the bank robbers and muggers of the electronic world. In a cashless society, you’re more exposed to hackers. If you are targeted, and somebody drains your account, you may not have any alternative ways to spend money. Even if you’re protected under federal law, it will still be inconvenient to restore your financial standing after a breach.

Technology Problems Could Impact Your Access to Funds

Glitches, outages, and innocent mistakes can also cause problems, leaving you without the ability to buy things when you need to. Likewise, merchants have no way to accept payments when systems malfunction. Even something as simple as a dead phone battery could leave you “penniless,” in a sense.

Economic Inequality Could Become Exacerbated

Unless special outreach efforts are made, the poor and unbanked will likely have an even harder time in a cashless society. If smartphone purchases become the standard way to transact, for example, those who can’t afford smartphones will be left behind.

The U.K. is experimenting with contactless ways to donate to charities and homeless individuals, but these efforts may not be developed enough yet to substitute cash donations.

Payment Providers Could Charge Fees

If society is forced to choose from just a few payment methods, or if one app becomes the standard payment app, the companies who develop these services may not offer them for free. Payment processors may cash in on the high volumes by imposing fees, eliminating the savings that should come from less cash handling.

The Temptation to Overspend May Increase

When you spend with cash, you recognize the financial impact by physically taking the cash out of your pocket and giving it to someone else. With electronic payments, on the other hand, it’s easy to swipe, tap, or click without noticing how much you spend. Consumers may have to rethink the ways they manage their spending.

Negative Interest Rates Could Be Passed Onto Customers

When all money is electronic, negative interest rates could have a more direct effect on consumers. Countries like Denmark, Japan, and Switzerland have already experimented with negative interest rates.

According to the International Monetary Fund, negative interest rates reduce bank profitability, and banks could be tempted to hike fees on customers to make up that deficit.

In 2020, banks are limited in their ability to pass on those costs because customers can simply withdraw their cash from the bank if they don’t like the fees. In the future, if customers can’t withdraw cash from the bank, they may have to accept any additional fees.

Should Your Business Move to Cashless Payment?

Some businesses are inherently set up to be cashless, such as those that are ecommerce-only. Other types of businesses, like fast-food restaurants and retail, have traditionally accepted all different forms of payment, including cash.

Before you decide to take the leap to make your business cashless, there are a few critical things to consider.

1. You could lose many of your current and potential customers

Depending on where your business is located, what you do and who you serve, customers who use cash may still represent a significant piece of your current or potential business.

While it may seem like the majority of transactions today are already cashless, a 2018 report by the U.S. Federal Reserve, called the Diary of Consumer Payment Choice (DCPC), shows that people used cash for approximately 30% of payments and up to 55% of transactions under $10. It’s also estimated that approximately 21 million U.S. consumers don’t have bank accounts and, therefore, don’t have debit or credit cards.

Even if most of your customers pay by alternate means, you may alienate or prohibit access to a large portion of your target audience if you go cashless. Populations that are already vulnerable become even more so in a cashless society: Low-income people, immigrant populations and seniors often fall within this group.

For these reasons, cashless businesses are sometimes considered discriminatory. Some cities and states have already prohibited businesses from going entirely cashless, including Philadelphia, PA, San Francisco, CA, and the states of Massachusetts and New Jersey.

Even if your city and state don’t have prohibitions against going cashless, you should determine if this is the right move given the repercussions it may have on your business and community.

2. You could gain increased business efficiencies that boost volume and reduce losses

When determining if going cashless may be right for your business, it’s important to look at the types of transactions you have and how your bottom line is impacted, particularly regarding two of the leading arguments made in favor of cashless operations:

• Going cashless will set your business up for improved cash management: All transactions are recorded electronically, so there’s no manual counting of cash going in or out (and, thus, reduced miscalculated expenses) and there are fewer opportunities for employee or outside theft.
   
• Going cashless can improve customer convenience: Several businesses say that the differences in how long it takes to process cash exchanges versus electronic transactions can also make the difference between quick lines with more people served, or customers leaving due to delays.

Though these are advantageous aspects to going cashless, be careful to measure them against what you could lose in taking away the cash payment option from your business.

3. Cashless transactions may reduce – or increase – your per-transaction costs

While many businesses that go cashless say that it saves them significant costs on staffing registers, counting cash and making bank deposits, going cashless isn’t without its own costs, too:

• When considering going cashless, you need to figure out the costs related to processing every transaction, including associated bank or other fees. These fees can range from about 2-5% of each sale and may quickly diminish any savings. How does this compare to the cost of processing a cash transaction for your business?
• If your technology (or power) goes down, how will you continue to serve customers? According to the information technology (IT) company CloudRadar, businesses can lose up to $10,000 for each hour of downtime. Based on your business data, you can figure out how much you stand to lose given that figure. If you decide to go cashless, you need an alternate plan for those occurrences, or you may even need to temporarily close.

To make the best choice for your business, we recommend that you review any current or proposed local or state regulations and communicate with your accountant and your customers. Also, consider whether it makes sense for your business to continue accepting cash, which could become a distinct competitive advantage in your industry or neighborhood.

How to Prepare Your Business For And Manage Cashless Payment

The world is becoming increasingly cashless. People all over the world, have become accustomed to paying with their credit cards and other cashless methods including micro transactions, for which cash was traditionally used. In more and more countries it’s becoming rarer to see cash: Australia, Canada, Sweden, South Korea, China and the list goes on.

We’re going to look at the various ways you can prepare your business for the impending cashless world and how you can take advantage of the technology associated with cashless payments to make your business run more efficiently.

1. OFFER MULTIPLE PAYMENT OPTIONS

Not every person behaves the same and each country’s payment infrastructure and preferences are different. As a business you want to cater to every possible customer, appealing to a diverse market – all ages and walks of life, opening you up to more sales opportunities.

For any future payment system you choose to install you want the ROI to sustain your business, anticipating any upcoming payment trends. To do this make sure you futureproof your payment system with all the upcoming payment types.

2. THINK GLOBAL & OFFER A UNIVERSAL CASHLESS SOLUTION

Currency means money is not always interoperable wherever you go but cashless payments have opened up a lot of the world to cross-border transactions without needing to exchange currencies. For a small fee a consumer’s credit card company will take care of it for you, and this means people can travel more spontaneously and purchase items more spontaneously.

Your payment solution should be adaptable to local landscapes as well as universally understood so that sales are open to the biggest audience. To be prepared for the a more universal clientele your unattended machine business needs to be something everyone can approach. This includes catering to the payment preferences of a region and a locations’ regular customers. Common languages of a region or its frequent visitors should be considered.

Keep your finger on the pulse of other emerging payment schemes. It’s worth paying attention to the rest of the world and what payment methods and trends are popular outside your corner of the world. For example QR codes are the dominant payment choice for the Chinese and are an important payment method to integrate.

3. DON’T DISMISS CASH

Despite our speak of a cashless society, cash is not going away any time soon. While it is anticipated that cashless will supersede cash, as it has already been doing for decades, a lot of people like the unbanked, the underbanked, children and the elderly still use cash.

With this in mind, it’s important to offer as many payment options as possible, offering something that everyone is comfortable with. If your demographic prefers cash, it’s important to offer this and not to replace your cash capabilities with cashless completely.

To futureproof your business it’s better to cater to both needs. How can you cater to both audiences? You should hold onto your coin mechs and bill validators. Better than that, look for a device that combines both cash and cashless payments.

Even though cash use is on the decline, and we recognize that cash handling adds time-consuming activities to your business. To reduce the labor on these activities you can make use of services to make your daily operations with cash easier.

Take advantage of technology that provides cash accountability as well as notifications when a cash box is full or close to being full. This can make your operations more efficient and reduce hassles cash presents.

4. EMBRACE NEW PAYMENT TRENDS

Payment is becoming more diverse and being integrated into more everyday items for example wearables, and key fobs. New technology is also being integrated into existing payment methods like biometric credit cards to enhance functionality. These payment options also need to be considered when choosing a point-of-sale device as they can ensure every consumer is able to interact with your business.

Biometric payment – Biometric payment integrates physiological identifying factors into payment to reduce fraud and includes fingerprint scanning, facial recognition, voice recognition, eye scanning, and vein pattern among others. These sorts of identification also offer more frictionless authentication than PIN codes.

According to research by Goode Intelligence, it’s predicted that by 2023, 2.6 billion people will be using biometric payments and by the same year it’s expected that 579 million biometric payment cards will be in usage for higher value purchases globally.

The method with the most traction at the moment is fingerprint recognition, which provides a balance between security and convenience, offering a one second matching speed. This is significantly faster than the time a PIN code entry takes but not as fast as contactless payment, however this overcomes the spending cap that limits contactless payments.

Request to Pay (RtP) – Open banking in the EU and the UK will bring about new banking concepts that are expected to have a global affect. One service that will have an impact on businesses receiving monthly fees from customers is Request to Pay.

This service allows consumers to pay their bills in real time, either in full or partially, as well as to request to extend or postpone a payment date, refuse a payment and communicate with the processor. This messaging service will complement existing payment services, offering consumers more control, transparency and flexibility, allowing for smarter money management.

Read Also: Everything You Need to Know About 50-30-20 Budgets

Some of these new payment methods will fade into history while others can become mainstream. Some might become dominant in certain regions or with a group of customers.

Adopting these methods before they take off futureproofs your business and can nurture loyalty among early adopters. Advertise that you offer these innovative methods to appeal to the widest audience possible.

5. OFFER THE BEST SUPPORT

Be more than provider of products and services who sends a monthly bill. Stand out from your competitors by being there for your customers when they have questions or need help with your offering. There are several ways to approach this.

• Provide approachable support – Be available by means you know your customers to prefer. This could be phone support, email, texting, online, via social media or in-app support. However your customers like communicating, be there, be responsive and be prompt. Be friendly and don’t regard your customers as something to be “dealt” with.

• Impart technical know-how – Empower your employees with technical knowledge and they can educate your customers. Offer product training and keep customers updated with newsletters and technical documentation. Hold webinars explaining how updates work or release how-to videos about product changes to keep customers informed.

• Listen to your customer needs – Your customers are your best sources for ideas, giving you free insights into how your products and services are used in day-to-day life. Give your customers the platform to provide you feedback and use this to improve your offering and customer support.

Final Thought

Going cashless isn’t the right choice for every business, whether you are considering using non-cash transactions or cashless payments, and you do have to consider your customer base. But if your customers are savvy and loyal, they’ll stick around through the cashless revolution. Now that you’re aware of the benefits, you can make an informed decision for your business.