Some Basic Tips of Cash Management in Your Business
Cash is probably the most vulnerable asset in any organization. Cash is easily stolen,
lost, misused, uncollected, improperly mismanaged, and often lacks adequate written policies
and procedures (control activities).
Cash is often improperly monitored by management or ignored all together. Effective cash
management is imperative in every business organization, whether for-profit or not-for-profit.
Cash consists of unrestricted and restricted cash accounts, checking and savings accounts,
certificates of deposit. Certain highly liquid investments held for a short time period or
readily convertible are considered to be cash equivalents, which are reported as cash in
financial statements.
A cash equivalent is an investment with an original maturity date of no more than three
months, as defined per GAAP (generally accepted accounting principles).
Treasury bills, money market funds, commercial funds, and
federal government funds sold are all cash equivalents. All cash and cash equivalents must be
disclosed as current assets in financial statements in accordance with GAAP (Generally
Accepted Accounting Principles). The GAAP required financial statement, Statement of Cash
Flows, reports how an entity's activities provided or used cash for operating, investing and
financing activities for the reporting time period.
Effective cash management must incorporate accuracy, completeness, authorization,
existence, disclosure and reporting over all cash activities and the cash cycle within the
organization. Management requires these controls over cash so that future business planning,
forecasts, and projects can be made, as well as for the production and issuance of the entity's
financial statements to stockholders, investors, and financiers.
Cash is the backbone of business transactions, despite the plastic nature of our business
and personal society. Eventually, the organization must pay up and the mighty dollar is what is
required. The cash cycle consists of several key components, regardless of the industry type,
profit motivation, and the form of organization of the business. Cash is generated by the
revenue and financing functions of the business and cash is expended by the operating and
acquisition activities.
Therefore, every organization must effectively and efficiently manage its cash flow –
acquire cash, spend cash, anticipate cash needs, and report on sources and uses of cash.
Proper cash management with the Financial Information System (FIS)
The following lists serves to highlight the major points that are necessary in a FIS cash
management policy.
(1) Establish organization goals for cash management that will support the overall
organization's goals and mission statements.
Implement them into the FIS, communicating them to appropriate members of the
organization. Revise these as needed.
(2) Use a "good" cash tracking system within the FIS that meets the organization's needs.
The accounting software chosen should easily meet the established cash management goals.
Consider using additional applications for cash tracking – for example, electronic
worksheets with detail that supports the cash detail in the general ledger.
(3) Institute and execute a cash budgeting process:
- research and evaluate the organization's cash needs – avoid over extension;
- be realistic -- forecast needs & update as new information comes;
- keep the cash management goals front and center;
- compare actual to budgeted figures on a periodic basis (i.e.monthly);
- use zero based budgeting and avoid using last year's "adjusted" for inflation just
to get the job done;
- for accounting packages that lack budgeting capabilities use an electronic
spreadsheet for tracking and comparison.
(4) Thoroughly document all cash transactions:
- use sequential numbering, batch or hash totals;
- reconciliations are to be programmed into the application – all can be
mandatory, automated, preventative, nondiscretionary controls built into the
accounting software;
- use a template and detailed, step by step procedures for each cash transaction
type for accuracy, consistency and completeness of all information in the following
cash areas: cash deposits, cash withdrawals, checks written, cash invested,
cash sales, cash payments;
- for the accounts receivable (A/R) cycle offer cash discounts, collect timely,
state and enforce collection process, institute chargebacks for insufficient funds (NSF)
checks, reconcile large customer accounts frequently/weekly, charge interest
& late fees for late payments, and reconcile weekly sales to A/R and cash;
- for the accounts payable (A/P) cycle take all discounts offered, pay bills timely,
reconcile large vendor accounts frequently/weekly, reconcile A/P monthly (or weekly
for larger organizations) to cash outs, and implement proper procedures to prevent
and detect duplicate payment (only pay on original invoice, not a copy).
(5) Enter all cash transactions accurately, completely, timely and consistently; identify,
mandate, and document with detailed procedures what must be entered so every transaction
is complete, valid, and accurate.
Where possible have software programmed for these entries and do not allow transaction
to be processed or batched until all is completely entered --
use nondiscretionary, preventive, automated, mandatory control activities such as
sequential numbering, computer assigned numbering for purchase orders, invoices,
check numbers, journal entries, etc.
(6) Thoroughly train and education those with cash management responsibilities.
Prepare, communicate and update frequently the policies and procedures manual for
cash management.
Consider issuing the policies manuals on the organizational network or Intranet
(or distribute on floppy diskettes) so that they are more readily available on a central
computer for larger offices and individually available (this also saves a lot of paper
and money).
(7) Keep the manual, discretionary and voluntary controls in the cash management system
to a minimum – work with the programming and development staff for changes to your
current accounting system or for a upcoming new one.
Develop and institute adequate segregation of duties in cash management –
use separate people for the following duties:
- opening the mail/logging checks,
- depositing checks and other forms of cash,
- input into the financial information system,
- owner/managerial review and monitoring,
- independent review.
(8) Establish reconciliations of cash to A/R and sales, reconciliations of cash to A/P and
purchases, reconciliation of the general ledger (books) versus the bank statement
(each to be performed by a separate employee where possible and by one that does not
perform any functions in (7) above).
(9) Implement a system of daily cash management – use a template to track cash flows and
determine needs (some smaller organizations may only need to do this weekly).
Invest all idles funds immediately in both short-term and long-term investments whenever
possible.
(10) Establish, document and communicate authorization levels for spending, investing, etc.,
and have these approved by a high level of management in the organization.
Implement a system of preventive and monitoring controls to limit abuse.
Do not use blanket purchase order or invoice forms, and avoid the use of manual
checks for the FIS that has an automated check system.
Once the cash management policy is created, implemented, and communicated, the
organization will be reaping the rewards of improved cash flow!
Top of Page
|
TuffBaggs' Articles & News -- Cash Management