Best Practices for Internal Cash Controls in Business

Proper internal cash control procedures start with designing a multi-step system that moves cash through the accounting process smoothly.

Source

Summary

In business, cash is the one asset most susceptible to fraud. The reasons for this truth are quite simple. Everyone has a need for cash; businesses may not keep close tabs on the asset; there are numerous ways to embezzle funds; and it is easily convertible to other items. With this in mind, business owners must create a strong accounting system and set of internal controls. These two elements should properly restrict access, limit necessary disbursements, and effectively reconcile various cash balances.

Two types of internal cash control points exist in an accounting system: cash receipts controls and cash disbursements controls. These two points have simple definitions, based on their names. Cash receipts controls cover any cash that comes into the business. Cash disbursement controls, on the other hand, dictate how a company handles any cash payments that leave its bank account. Though internal cash controls are somewhat similar for each activity, some differences do exist between the two.

Essential elements to internal cash control systems.

Internal Control
Cash Receipts Application
Cash Disbursements Application
Establish Responsibility
Only authorized personnel handle cash receipts.
Only designated individuals can authorize and /or sign checks.
Segregate Duties
Different individuals receive cash, record cash receipts, or handle deposits.
Different individuals approve and make payments. Check signers do not record cash disbursements.
Use Documents to Record Transactions
Use mail receipts, cash register tapes, and deposits slips.
Use prenumbered checks in sequence. Each check has its own invoice.
Physical Controls
Store cash in banks, or cash vaults, or safes. Limit access cash registers.
Store blank checks in a safe. Use printed checks with specific safety marks.
Independent Internal Verification
Supervisors cannot count daily cash recipts. Accountant reconciles deposits daily.
Compare checks to invoices. Reconcile bank statement monthly.
Human Resources Controls
Bond personnel in cash heavy departments; conduct background checks; require employee vacations.
Bond personnel in cash heavy departments; conduct background checks; require employee vacations.
 
 
 
*Source: Accounting Principles, 10e, Wiley
 
 

Cash Receipts Controls

Businesses usually collect cash receipts through one of two methods, or both. Over-the-counter cash receipts include sales made at the company’s location, often using a cash register or similar system. Mail receipts include monies collected through catalog sales. In today’s technological world, mail receipts often come through internet sales or other offsite business activities.

A few key points exist with internal cash controls. These include the establishment of responsibility, segregation of duties, proper documentation, physical controls, independent verification, and human resource procedures. Each of these sections has is important. And while they are all necessary, the most important cash control procedures include responsibility, segregation of duties, documentation, and physical controls.

To accomplish this accounting system, business owners should first designate certain workers to handle cash, whether over-the-counter or through external collections. Only these individuals handle the cash at these points. Then, a second employee writes deposit slips and sends the money to the bank (which is the primary physical control here). Documentation includes register receipts; electronic forms showing cash collected; and deposit slips, among other items. These items are part of the company’s accounting system. Qualified or responsible individuals should handle these papers in order to ensure all monies deposited match what the company collects from sales.

Source

Useful tips for preventing fraud in your small business.

Cash Disbursements Controls

The best cash disbursement control systems starts when a company pays by check rather than cash. In fact, a business should always have a checking account and use it to make 95% of its disbursements. By doing this, companies can then implement a voucher system, which is perhaps the strongest cash disbursement internal control system. Smaller cash disbursements can go through a petty cash system; these payments, however, should be for small, non-essential items.

Like the cash receipts control system, cash disbursements should have separate tasks. These include the establishment of responsibility, segregation of duties, proper documentation, physical controls, independent verification, and human resource procedures. However, the tasks in a cash disbursement internal control system are somewhat different. For example, only certain individuals have authorization to sign checks; companies should only use previously approved vendors; check signers do not record disbursements into the accounting system; pre-numbered checks are always in use; blank checks are locked away; and independent verification exists for checks and invoices. Although this internal control system has several steps, they are each necessary to prevent fraud and embezzlement.

Petty cash disbursements require less stringent controls. In many companies, petty cash is a small dollar amount, perhaps $50 or $100. Replenishment occurs at least every month, although some companies may balance and replenish petty cash more frequently. Petty cash controls include limited authorization to spend the cash, documentation to justify the expense, and physical controls, such as a lockbox to prevent free access to the cash.

Always consider the benefits and potential drawbacks to your accounting system and cash controls.

Source

Benefits and Drawbacks

Strong internal cash controls can help create a competitive advantage for businesses. Better accounting records and tight controls often ensure a company retains as much cash as possible. Businesses with high cash balances and/or good cash flow streams may make quicker decisions in a changing economy. For example, production increases, employee hiring, or competitor acquisitions are a few options for businesses with strong cash flow and flawless internal cash controls.

Failing to implement internal cash control procedures can lead organizations to unfavorable cash positions. This may require companies to engage in short-term loans or credit lines from banks. In some cases, less than reputable lenders may be necessary if a company cannot retain credit from standard banks. This kind of outside financing does not always have the most positive results for an organization. For example, interest rates are usually greater on credit lines as well as short-term bank loans. These rates may generate greater higher payments over time as the business continues to draw more funds on the account.

More by this Author


Comments

No comments yet.

    Sign in or sign up and post using a HubPages Network account.

    0 of 8192 characters used
    Post Comment

    No HTML is allowed in comments, but URLs will be hyperlinked. Comments are not for promoting your articles or other sites.


    Click to Rate This Article
    working