Learn something new every day
More Info... by email
Cookie jar accounting is a term that refers to the practice of storing back excess financial reserves during periods of high production for use in later periods when income is not sufficient to meet expenses. While this general principle can be used in both a household and corporate environment, the actual term tends to be utilized in business circles. By creating reserves against losses that may take place in the future, the company is able to fortify itself in a way that will allow continued operation without borrowing resources, or selling off property in order to generate cash to cover normal operating expenses.
The basic approach to cookie jar accounting is relatively simple. If at the end of an accounting period the company is found to have realized net profits above and beyond the amount projected in the operating budget, this creates what is known as surplus. The company is then able to place the surplus profits into some sort of interest bearing account. When and as there are budget deficits in later accounting periods, the surplus can be utilized to cover operating expenses without disrupting or having to cut back on production.
Cookie jar accounting is understood to hearken back to a common practice that was used in residential settings in years past. When the cash intended for the monthly budget was not completely utilized to cover the various bills and regular expenses of the household, the extra cash was housed in a cookie jar that resided in the kitchen. If the following month was beset with an unexpected expense, the unused cash in the cookie jar could be used to handle the situation without throwing the current month’s budget into turmoil.
Private companies today continue to make use of the basic cookie jar approach. However, public companies are not always free to make use of this type of corporate accounting practice. In several countries around the world, publicly traded companies are not allowed to engage in cookie jar accounting. This is because corporate trading practices of this type can be employed to create the impression that a public company is in better financial condition that is actually the case. Because this false impression could possibly create the wrong impression for a prospective investor, government regulations normally limit the use of cookie jar accounting to privately held businesses.
There are a lot of opportunities for people to fudge on the accounting when employing the cookie jar method, so someone has to be able to give an exact record of every penny when called upon to do so.
Financial shenanigans are easier to conceal when there's a lot of petty cash floating around. Suddenly, it becomes very easy for someone to take a few dollars here and a few there, and before you know it, there's a significant amount gone, and no one knows where it went. In my opinion, this kind of money should be put into some sort of interest bearing account, where it will be accessible, but also where all transactions will be recorded electronically and ideally, audited by two separate persons who do not communicate with each other. That way, the money can be tracked more easily, and every transaction can be accounted for.
I wish the family-owned company I worked for had used a little more cookie jar accounting in years past. If they had, the company would probably have weathered the 2009 recession much better.
Instead, they squandered a lot of money in paying fat salaries and bonuses to the department heads and contracting for talking head "experts" to come in and do clinics with us that didn't really improve anything about how we worked, our productivity, quality or anything else. Everything he did was to make himself look like the forward-thinking boss, rather than saving up for a rainy day.
Well, when the rain hit and turned into a hurricane, we were busted. Layoffs, shortened hours, furloughs -- it has all added
up to a shocking lack of foresight in years past. Even though the owner was warned the blitzkrieg was coming, he didn't save any of our profits. Now, we're really struggling.
When it's practiced rigorously, cookie jar accounting can save a business. It could have saved ours.