So, you want to learn
Bookkeeping!
Cash
by Bean Counter's Dave Marshall

Lesson 4
Cash Controls


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
Bean Counter
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 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. 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 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.

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

Cash Receipts

  • 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.
  • Duties:
  • 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 receipts.
  • 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 needed.
  • 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 Drawers/Registers
    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 Returned Checks
    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 needed.
  • 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.

Cash Disbursements

  • Establish procedures for recording, preparing, reviewing, and signing and mailing checks.
  • 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 unnoticed.
  • 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 Statement.
  • 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 check file.
  • Duties:
  • 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 reconciliations.
  • Void checks should be filed and accounted for.
  • 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.
  • A Copy Of the check along with the attached documentation should be promptly filed in the Vendor's File.
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 controlled.

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.

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