|I hope my cartoon fella with the
wheel barrow doesn't represent any of your employees. Most people
are honest but you don't need to provide them with any
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
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.
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
- Approve the
- Record the
- 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
- 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
- Maintain Separate Bank
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
- 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
- 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
- Consider implementing a Lock Box
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
- Use pre numbered checks and
account for blank checks (owner's have a bad habit of carrying
- Make all disbursements by
check whenever possible.
- Approve and check out
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
- Don't Store Cash on the premises
This should be a "no brainer" recommendation.
- Prepare Customer Ageing
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
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
- Get The Unopened Bank
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. No you don't have to put them in numerical order. I
hate to do that too ! 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
- Prepare and Review Monthly Bank
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
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
- Prepare and Use Cash
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.
Now, we're going to group our Cash
Controls into two Main Groups.
- Establish procedures for handling
cash and insuring that all cash is properly accounted for and
timely deposited in your bank.
- Capture and Record the receipt of
cash ASAP (as quickly as possible) using cash register or computer
terminal receipts, credit card machine, receipt book, or a log
listing the checks received.
- Endorse all checks received
immediately as FOR DEPOSIT ONLY with a stamp.
- Individuals who handle and/or
collect the cash (has temporary custody or access to cash and/or
checks) should not also prepare sales invoices, and/or record or
have access to the journals and detail customer accounts used to
record the cash receipts.
- Individuals who prepare the
deposit slip and make the bank deposit should not prepare sales
invoices, and/or collect cash, and/or record or have access to the
journals and detail customer accounts used to record the cash
- Make daily bank deposits and
deposit your receipts intact (don't pay bills with cash out
of your cash receipts). in order to reduce the risk of money being
lost or stolen. Use your petty cash fund to pay expenses or
advances that require currency. You should not keep large
quantities of cash on your premises. If you need cash (currency)
for a specific purpose go to the bank and cash a check when it is
- Credit Cards
If you accept credit cards for payments you will also need to
monitor and record these transactions. No deposit slip is
prepared for this type of transaction. These receipts are directly
deposited into your account and you need to provide procedures for
recording and tracking these "special" receipts.
- Balance Your Cash
Believe it or not I've done work for some small businesses that did
not want to fool with the "hassle" of balancing their cash
drawers/registers. Oh gosh how tempting. Employees are not dumb and
are fairly observant. As I've already stated, most people are
basically honest but why put them in a tempting position. We also
tend to rationalize-I need a little gas money so I'll borrow it
from the register and put it back later. Most of us don't mind
helping out but I want to be asked. Count your registers/drawers
and balance them daily. If you don't want to do it yourself assign
a trustworthy person the task and periodically check them. If you
need to close up put the cash and checks in a money bag and do your
count the first thing the next morning.
It's a lot easier to find and fix
a mistake today than it is at the end of the month. It's also a lot
easier to balance.
- Set Up Procedures For Handling
Many banks will run a customer's check twice in order to try
collect the funds and credit them to your account. In the event
that they are unsuccessful your customer's check is returned to
you. You need to have a procedure in place and an individual
designated to promptly follow up on these returned checks. If the
check is local and the endorsement has not been canceled by the
bank one good method is to call the bank that the check is drawn on
and see if the check is good. Good days to make a call are Friday
and Monday since many companies pay their employees on Friday. If
the account has a balance large enough to cover your check high
tail it over to the bank and get it cashed. If the endorsement has
been canceled or the check is non-local, you need to immediately
call the customer and make arrangements for them to make the check
"good" and pay any additional check processing fees that are stated
in your policies. Writing a bad check in today's society is a
serious offense and if prosecuted may result in fines and jail
time. Don't leave your bad checks just laying around collecting
dust. Take immediate action and get your money. You should also
review the current status of this customer's account such as open
orders and current balance and late amounts to see if additional
actions such as halting shipments, a credit hold, or COD terms are
- Spot checks should be made to see
that the amount deposited in the bank agrees with the deposit
slips, the amounts recorded in the cash receipts journal, and the
amounts initially recorded in the Daily Receipts Log.
- Establish procedures for
recording, preparing, reviewing, and signing and mailing
- Set up and notify bank of
authorized check signers. Set up limits-some checks might require
two signatures. Check signers should not be individuals that record
or prepare the checks.
- Only prepare checks for
expenditures that have been properly approved and have supporting
documents such as invoices, purchase orders, receiving reports,
expense reports, etc.
- All checks should be pre numbered
and accounted for.
- Checks, Check Book, and Signature
Stamp should be locked up.
Let's not provide a temptation by having our checks or checkbook
easily accessible. Unfortunately it has happened where blank checks
have been taken from the end of a checkbook or stack of computer
checks and forged. If a proper bank reconciliation and review of
the cashed checks is not performed this theft could go
- A three part check is recommended
in order to have the original check and two additional copies for
the following accounting records.
- Original - sent to supplier and
included and returned by the bank with the Bank
- Copy to attach to the supporting
documentation (invoice, purchase order, receiving reports, etc. and
filed in the supplier's file.
- Copy to maintain in a numerical
- Individuals responsible for
recording the checks should not prepare, and/or sign, and/or mail
checks, and/or prepare the bank reconciliation.
- Individuals responsible for
preparing the checks should not record, and/or sign, and/or mail
checks, and/or prepare the bank reconciliation.
- Individuals who sign checks
should not prepare and/or record, and/or prepare bank
- Void checks should be filed and
- Supporting documents along with
the prepared check should be provided to the check signer. Prior to
signing the check, the approved check signer(s) should review the
attached documentation to ensure that all the necessary approvals
have been obtained and that the attached documentation supports the
amount of the check and who the check is made out to (payee). The
invoice along with any other supporting documentation should be
Marked As Paid (Canceled) so that it can not be used again as
support for another check.
- Refrain from using monthly
Supplier Statements as documentation for checks.
- Signed checks should be mailed
immediately by an individual not involved with recording or
preparing the check.
- Checks should not be prepared if
they are not going to be mailed immediately.
In this lesson we learned that
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
- A Copy Of the check along with
the attached documentation should be promptly filed in the Vendor's
We discussed General Cash Controls
as well as some specific controls and procedures related to Cash
Receipts and Cash Payments (Disbursements).
||I know you don't want to have to
be a cop, but unfortunately if you don't watch your business and
Cash who's going to ?
You may want to take another pause
before we dive into our next Lesson - Cash Forecasting. You'll need
to put on your thinking cap, pay attention, and do some work of
your own in order to complete it.