Why do small businesses use cash? (2024)

Why do small businesses use cash?

"Paying in cash typically saves the small business owner between 2% and 3% of the transaction price in interchange fees. Interchange fees are the fees charged by the bank, the processing company and card network to process a credit or debit card transaction," Johnston said.

Without generating adequate cash to meet its needs, a business will find it difficult to conduct routine activities such as paying suppliers, buying raw materials, and paying its employees, let alone making investments. And it should have sufficient cash to pay dividends and keep its investors happy.

Many small businesses opt to use the cash basis of accounting because it is simple to maintain. It's easy to determine when a transaction has occurred (the money is in the bank or out of the bank) and there is no need to track receivables or payables.

There are several reasons why some stores say "cash only". One reason may be that the store owners want to avoid credit card processing fees, which can be costly for small businesses. Another reason may be that the store is located in an area where there is limited access to credit or debit card payments.

Some employers pay wages in cash as a way to avoid their tax obligations, which is why receiving pay stubs from your employer is extremely important. First, it demonstrates that your employer is making the appropriate deductions for unemployment, payroll taxes, and other items.

"Paying in cash typically saves the small business owner between 2% and 3% of the transaction price in interchange fees. Interchange fees are the fees charged by the bank, the processing company and card network to process a credit or debit card transaction," Johnston said.

Day-to-Day Operations: Small businesses need cash to cover daily expenses such as rent, salaries, and inventory. Without cash, it's difficult to keep the business running smoothly. Expansion and Growth: Cash is also essential for expanding and growing a small business.

Cash accounting method is ideal for small businesses which prefer a straightforward way to measure income and expenses. However, revenue won't appear on the ledger until the payment is received.

Most experts agree that the accrual method gives you a better picture of your financial outlook because it accounts for money that flows in and out of your business.

Which states ban cashless businesses?

The total is now up to 12 states – Arizona, Illinois, Kentucky, Montana, Maine, Missouri, New York, both North and South Carolina, Ohio, Oklahoma, and Tennessee. New York City implemented such a ban in 2020.

In short, companies hold cash because it helps them avoid premature failures that decimate shareholder value.

The Drawbacks of a Cashless Society

Without cash, we would be forced to leave a record of everything we buy. While this may not bother some, there are many who worry that governments and/or corporations could use our purchasing histories as a way to track us, monitor us, and even intimidate us.

Cash offers no protection from loss, theft or fraud that you are afforded with credit and debit cards. You may also miss out on potential warranties and purchase protection if you use cash to make an expensive purchase, McBride says.

It's Easier to Budget with Cash

By only spending the money you have at your disposal at any given time, you tend to be more thoughtful about what you spend your money on. Planning purchases in advance encourages saving when you know you'll pay with cash only.

Cash payments of $600 or more to an independent contractor should be reported on a 1099 form, regardless of the payment method. Neglecting to issue the appropriate tax forms for cash payments can lead to tax implications and penalties.

But, can a business only accept cash? Yes, running a cash-only business is a viable option for entrepreneurs. There are no federal laws saying you must accept other payment methods from customers. Limiting customer payments to cash is common in some industries.

So, if you are one of the 55% of small business owners that don't accept credit cards, then you're missing out on 64% of the population that doesn't have any cash in their wallet. This means that if you're a cash-only business, then you could be alienating a large percentage of the population.

Accepting any form of electronic payment will lead to your business incurring fees. These fees are charged by the credit card unions, merchant service providers, and so forth. These charges are generally calculated as a small chunk per transaction. Cash-only businesses are paid immediately.

How much cash should a small business keep?

As a general rule of thumb, it's recommended that businesses have at least three to six months' worth of cash on hand to cover operating expenses if possible, though you should make sure your business can afford whatever amount you set aside.

By holding on to excess cash, business owners miss out on opportunities to generate additional income, resulting in a lower return on assets (ROA) for their company.

You Don't Want a Record of Your Transactions

Using a credit card or digital payment method to buy something means creating a record of that purchase. Consumers who are very concerned about privacy may opt to use cash to avoid leaving a trail of how and where they spend their money.

Cash payments pose risks such as theft and loss, as physical currency can be easily stolen or misplaced. Additionally, there's a higher likelihood of human error in counting and handling cash, leading to discrepancies in financial records.