Cash General Controls

Cash Controls

I hope my cartoon fella with the bag of cash doesn't represent any of your employees. Most people are honest but you don't need to provide them with any temptations.

Internal Controls
So you know what the fancy term Internal Controls means right away it's just the policies, activities and safeguards that are in place to provide reasonable assurance that things are going as planned. Internal Controls as they apply to Cash are just the policies, activities, and safeguards that are in place to provide assurance that Cash is properly being protected, managed and controlled.

The Real World

Most small businesses don't have the luxury of having a full scale accounting department or a full time accountant for that matter so although it would be nice to be able to have different individuals (division of duties) responsible for authorizing, recording, and handling cash in the real small business world it's just not normally possible. Small businesses consider themselves lucky if they just have a capable bookkeeper who might also due double duty as a secretary. That being the case, who do you think needs to assume a more active role in the control function ? Yep, the owner.

What exactly is Division ( Segregation) Of Duties ?

The underlying concept is that no one person should:

Initiate a transaction
Approve the transaction
Record the transaction
Reconcile balances
Handle Assets
Review Reports

So what's a small business to do in order to provide adequate cash controls ?

There's actually quite a bit that you can do by just applying some good ole fashion common sense principles to managing and controlling your cash.

Cash Control General Guidelines

Set up good records, forms, and files. How can you manage anything if you don't know what's going on ? Written procedures (no you don't have to have a fancy procedures manual) but you do need to write up some guidelines on how cash and other financial activities are handled and by whom.

Maintain Separate Bank Accounts

If you don't do anything else at least open a separate bank account for your business. If you have more than one business open a separate account for each one. Do not co-mingle (mix) your personal expenses or receipts with your business expenses or receipts.

Deposit all your business receipts into your business accounts(s) and write checks for your major business expenses from your business checking account(s). If you need money from your business for personal expenses write yourself a check from your business checking account(s) and deposit it in your personal checking account. Just doing this simple task will make it much easier and save you money when you prepare or have someone prepare your year end tax return. It also gives you a rough idea as to whether or not your business is making a profit.

Another benefit of your bank account is that it provides an independent record of your business activity that can be used to verify the accuracy of your internal business records and as an aid in correcting any omissions and errors by either the bank or your business.

Separate Payroll Bank Account
If you employ over five employees, I also recommend that you open a separate bank account(s) for your payroll. Transfer funds from your regular business account(s) to cover your payroll and write all checks to your employees from your payroll account(s). I would also write my checks for my required payroll deposits from these account(s). The disbursements (checks written) from your payroll account(s) will give you a good estimate of what your employees are costing you.

Set up separate Cash General Ledger Accounts for each Bank Account.

Separate the duties of the authorizing, recording, and handling of cash as much as possible.

Set up a P O Box for all payments to be mailed to and assign an individual the task of picking up this mail and preparing an initial listing of all the cash received.

Consider implementing a Lock Box System.
I knew you were going to ask - what's a lock box ? A lock box is just a special P O Box where you have your customers mail their payments to. Earlier you recommended this didn't you ? Yes, but we're going to carry this one step further. Instead of one of your employees picking up the mailed in checks, your bank's couriers (pick up people) have a key to the box and they pick up the checks and deliver them directly to your bank for processing. Your bank prepares your deposit and sends you a listing of all the payments that were received.

Only grant credit to those customers deserving of this privilege.
I know you want to make the sale but do your homework. Subscribe to a service such as D&B -it only costs about $25.00 for a credit report. A small investment that can save you from future headaches.

Use pre numbered checks and account for blank checks (owner's have a bad habit of carrying these around).

Make all disbursements by check whenever possible.

Approve and check out suppliers.
What does this have to do with cash controls ? This helps prevent having phony suppliers that checks can be issued to.

Prepare Daily Cash Status Reports and Count and Balance Cash Drawers and/or Registers.

Establish A Petty Cash Fund

Designate an individual and a backup person as custodian of the fund. In this case "many hands do not make light work" . This fund is used for minor and unanticipated expenses where a check can't be written or the amount is so small that you don't want to write a check. Some examples include buying pizza for the staff, postage stamps, minor office supplies, paper towels, and cleaning supplies.

A pre-numbered voucher or ticket should be filled out and approved for each expenditure. When the balance in the fund becomes low a check from your regular bank account should be issued and cashed to replenish the fund and the expenses recorded in your accounting records. Surprise counts of petty cash should occasionally be done to make sure that employees are not "borrowing" from this source of cash. Counting the fund is very easy. The total amount of the tickets and the cash on hand should equal to the fund's established balance.

Don't Store Cash on the premises overnight.
This should be a "no brainer" recommendation.

Prepare Customer Ageing Reports
Review Customers With Past Due Balances and Take Action
The longer you wait the harder it is to collect-the early bird does catch the worm in this case. Credit is a customer's privilege not right. You need your cash to pay your own employees and bills. If you sell to "deadbeat" customers what good is the sale if you have to wait to you know what freezes over to get your money ?

Prepare Supplier Ageing Reports
In order to keep your cash flowing you also need to keep your suppliers happy. Review what you owe your suppliers and work out solutions for making payments where you are running late.

Get The Unopened Bank Statement(s)
This is a task that is simple and does not require a lot of time. Review all your canceled checks to make sure they have all been signed by an authorized signer and that the signature appears legitimate. Pay special attention to any checks made out to CASH. Also look for checks made payable to any person or company that you do not recognize. Also check your bank statement and look for any high numbered checks that appear to be out of sequence. This could be an indication that a check was misappropriated. If you find questionable items ask questions and get the supporting documentation in order to determine if the expenditure is proper.

Prepare and Review Monthly Bank Reconciliations.
You won't believe the number of "bookkeepers" I've run across that can not do a bank reconciliation. In all fairness, I've run across some situations where the owner's recording and banking practices have made a normally simple job into a hair pulling task. All businesses should not only know their actual balance in the bank on a monthly basis but on a daily basis as well. You wouldn't believe the number of small businesses that call the bank to see how much money they have. Keep in mind that your records normally reflect cash increases and decreases before the bank processes and records them.

As an owner you don't have to actually do the reconciliation (although that would be great), but do occasionally check to see that this task is actually being performed preferably by an individual with no other Cash responsibilities.

Prepare and Use Cash Forecasts
Anticipate problems before they occur. Besides your employees, cash is your most critical asset. Believe it or not many profitable businesses have had to shut down because of poor cash management. Analyze your cash needs and prepare Cash Forecasts / Budgets to help identify possible future cash shortages and allows you the time needed to take corrective action(s). Compare actual and budgeted amounts.

Next, we're going to group our Cash Controls into two Main Groups.

What's next ?

Cash Receipts Controls