Physical cash is one of the most tried and true forms of payment. Whether it’s accepting it for sales or covering some expenses, it’s handy and efficient, as the transaction is completed right then and there.
But cash also comes with some drawbacks. As a physical currency, it’s vulnerable to risks of fraud, theft, and misplacement.
Businesses combat these risks by implementing cash controls, and by using them in your operations, you’ll ensure that not a single penny will go unaccounted for.
What is cash control in business?
Cash control is the practice of putting checks and safeguards in place to protect your business’s cash. It includes everything from tracking cash payments and deposits to keeping accurate records and preventing fraud or mistakes.
The handling of cash is vulnerable to fraud, theft, and accident as it can easily be misplaced or lost. But with cash controls in place, cash activity is tracked, recorded, and audited from payment to deposit.
This ensures that all cash transactions are authorized and approved. If any amount goes missing, it’s flagged and cash activity is audited to identify what happened.
Cash control vs cash management
Cash control and cash management are complementary practices used in tandem to protect and optimize a business’s cash assets.
Cash controls cover the regulatory aspects of cash usage. This includes who has access to cash, what they can do with it, and how they must record all cash activity with supporting documents.
Cash management is focused on optimizing cash flow within business operations. This involves cash flow forecasting, budgeting, managing investments, and ensuring the efficient usage of every dollar.
Simply put, cash management is how money is used while cash controls are all of the security and accounting practices associated with cash transactions and handling.
To illustrate this in practice, let’s look at an example of a business trying to keep its costs in check.
It starts with cash management: forecasting its revenues and hashing out a budget for the next month of activity. With a plan in place, they manage their investments by ensuring there’s sufficient cash in their checking account to cover all expenses.
Over the next month, the business uses cash controls to monitor and manage spending. They enforce an approval process and separate responsibilities across employees so all cash activity is verified and approved by different individuals, minimizing the chance of misuse.
By using the two practices together, the business creates a plan for all cash activity (cash management) and enforces it (cash controls).
Why cash control is important?
Cash is the most liquid and vulnerable asset within a business. This makes it one of the easiest targets for internal and external fraud and theft, but also for innocent errors.
Cash controls are also an essential part of recordkeeping that keeps businesses tax compliant. Underreporting income because of mismanaging cash revenue could leave the business vulnerable to an audit. Plus, any cash expenses that weren’t recorded are tax deductions left on the table.
However, if you implement robust cash controls, you ensure every dollar is accounted for, every sale reported, and every tax-deductible expense is on the books.
Elements of cash control
Cash controls cover a wide range of practices involving monitoring, processing, and auditing cash activity. These are the core components of cash controls.
Monitoring cash transactions
Effective cash control begins with regular monitoring of cash transactions. This includes tracking every cash sale, deposit, and expense regularly and verifying the petty cash balance.
Every transaction should be verified with a supporting document (like an invoice or receipt) if possible.
Controlling receipts and disbursements
The procedure of accepting and making cash payments ensures that every transaction is authorized and for legitimate business purposes. This involves establishing approval hierarchies, supporting document requirements, and verification processes such that every transaction is a valid business transaction before cash changes hands.
Preventing fraud and errors
Think of cash controls as checkpoints that every transaction must go through to verify its authenticity and accuracy.
Cash fraud can result from employee theft, vendor schemes, or external attacks, while errors can occur due to simple human error.
Regardless of what occurs, cash controls are in place to catch this activity before it becomes a problem with downstream effects.
Secure storage
Secure storage refers to both the storage of cash and the records or supporting documents. There should be physical security like locked cash drawers and safes for the storage of cash, just as there should be a secure place to store cash receipts, invoices, and transaction logs so they cannot be altered or lost.
Documenting and reconciling cash transactions
Reconciling refers to verifying all cash transactions are recorded against a petty cash balance. Cash activity encompasses:
- Cash sales
- Cash expenses
- Cash deposits
- Cash withdrawals
Once all activity is verified in the log, the cash on hand balance must be confirmed against the actual cash balance to guarantee nothing has been missed.
Every business should have a set cadence, workflow, and format for recording cash transactions. It could be a physical logbook, spreadsheet, expense management platform, or anything that is used consistently and reliably.
Limited access
Access to cash and cash-related systems should be restricted to authorized personnel only. Be mindful of who is given access and just how much access they’re being granted.
This access should also be reviewed on a regular basis, removing access for anyone who no longer works at the company or no longer requires access.
Background checks
Any employee who is given access to cash and cash-related systems must pass a background check, clearing them of any history of financial crimes or dishonesty. This is an essential part of the hiring process, especially for those in financial roles.
Common cash control methods
The overview of cash controls may seem intimidating, but its implementation can be simplified into these five common cash control methods.
Segregation of duties
No single employee should be solely responsible for the approval, handling, and recording of cash transactions. This increases the chances of human error or misuse of cash.
This is increasingly important as a business grows and, in turn, so does its cash complexity.
By segregating duties across multiple employees, you prevent any one employee from having absolute control over cash. This means multiple eyes on your cash activity, minimizing the chances of error, theft, or misuse.
An example of this is having separate employees handle the cash transaction approval process and the transaction recording process. This way, the recordkeeping acts as a verification for the legitimacy of the approved transaction.
Daily bank deposits
Frequent bank deposits reduce the amount of cash held at any one time, minimizing the risk of theft or loss. Doing it as an end-of-day task ensures all cash activity that happened that day is verified before any information can be lost or forgotten.
The longer a cash balance goes without being verified, the harder it is to troubleshoot the difference or find the cause of the discrepancy.
Bank reconciliation
Regular bank reconciliation should be used in tandem with daily bank deposits to catch any discrepancies between internal records and bank statements.
The general ledger should have a petty cash or cash on hand account that holds all cash transactions, including deposits and withdrawals. Every deposit and withdrawal in the account should be verified against the amounts on a bank statement.
Once this is done, confirm that the ending account balance is the same as the cash the business holds.
Using cash registers and receipts
Point-of-sale systems and cash registers are used as both activity logs and secure storage. Having both working cooperatively maintains a running document of all cash activity, providing an audit trail.
Copies of any cash sales should be held onto in addition to the digital transaction log. They should be used at the end of the day to verify that all transactions are accounted for.
Petty cash fund audits
A petty cash fund audit involves reviewing all cash transactions for legitimacy and accuracy. This includes verifying the cash balance with the one reported in the general ledger.
The audit schedule depends on the size of the business and the complexity of its cash transactions. While a balance check should be done on a daily or weekly basis, a full cash fund audit could be done once a month if activity is low.
Cash fund audits are also an opportunity to review your current cash controls and their effectiveness. The more work required on an audit, the less effective your current cash controls are and you should consider a change.
Benefits of using cash controls
Wondering if cash controls are worth the extra work? These benefits make cash controls an essential practice for any business handling physical cash.
Reduced risk
Cash controls help combat some of the top financial risks businesses face, including fraud, theft, and compliance violations. By taking extra steps and implementing cash controls, you’re protecting every dollar that runs through your business.
Enhanced compliance with cash policies
Your internal cash policies are only effective so long as they’re being followed. Cash controls act as checkpoints to ensure everything is abiding by your rules and regulations.
Stronger audit function
One aspect of cash controls is maintaining a paper trail of all cash activity. This documentation plays an essential role for both internal and external auditing processes.
Improved financial stability
Businesses create forecasts and budgets based off of assumed cash levels, inflows, and outflows. If any cash is going unaccounted for, the validity of this work is at risk.
When you account for every dollar, ensure the business stays on track for its financial goals and projections.
The challenges of cash controls
cash controls provide benefits, but not without their own challenges with implementation and maintenance. Be mindful of these difficulties and follow our tips to address them.
Identifying potential risks and vulnerabilities
Effective cash controls address all potential risks and vulnerabilities within a business’s operations. This is easier said than done, as you may have blind spots, increasingly so when the business has gone through a phase of growth.
This is why setting cash controls is not a set-it-and-forget-it activity. You need to re-evaluate your cash controls on a regular basis to ensure you’re covering all possible risks.
Strategies for training staff on cash handling procedures
All employees need to be trained up on cash controls, with additional training any time the cash controls are adjusted. Employees with greater permissions and responsibilities may require specialized training, as well.
The training process becomes difficult when there’s limited time and resources with high employee turnover. Use centralized documentation to allow for self-guided training when possible.
Importance of adapting cash control measures to business size and type
As businesses grow, their cash activity complexity increases. Cash controls need to adapt to this growing complexity as what works for a small business may not work for a medium or large corporation.
Small businesses can get creative with their resources and limited staff but should consider adding headcount and technological systems to adapt.
Best practices for implementing cash controls
Take note of these best practices before you start implementing cash controls in your business.
Know the COSO framework
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) have provided a comprehensive framework for internal control and enterprise risk management (ERM).
COSO is an organization backed by major accounting organizations and associations like the American Institute of Certified Public Accountants (AICPA), the American Accounting Association, and the Institute of Internal Auditors.
The five components of internal controls are:
- Control environment: Establish a foundation of integrity, ethics, and trust from the top down, being mindful of the employees you bring into the organization
- Risk assessment: Identify and analyze risks within the organization based on likelihood and impact
- Control activities: Use policies and procedures such as approvals, authorizations, and verifications to keep all cash activity in line with expectations
- Information and communication: Maintain open communication with clear documentation so everyone can understand all activity
- Monitoring activity: Maintain regular evaluations to ensure the internal controls are working as expected
Clearly document procedures
Comprehensive documentation is essential for consistency and training purposes. It should be easily accessible so anyone doubt can get the answers they need.
These guides should be broken up into each aspect of cash control, with detailed step-by-step procedures and accountable individuals who can be reached for questions.
Just as your cash controls should be reviewed regularly, so should your documentation to ensure that it’s up-to-date.
Regularly audit cash activity
Auditing cash activity reviews the efficacy of your cash controls, identifying potential areas for improvement. The audit should be conducted by someone involved in the establishment of the cash controls and who has the authority to adjust them.
A regular audit should involve:
- Verifying transactions
- Confirming the cash account balance
- Reviewing documentation
- Testing cash control procedures
The frequency and scope of the audit should reflect the complexity of the business and its cash risk potential. For example, a business that occasionally accepts cash and uses it for expenses won’t need to audit its cash activity as frequently as a business that regularly uses a cash till.
Utilize tech where possible
Technology helps streamline cash control processes to reduce costs and improve efficiency. Modern accounting, point-of-sale, and payment processing systems keep human inputs to a minimum while maintaining the same level of documentation.
However, technology is not a replacement for cash controls. Rather, it should be used in conjunction with all of the principles covered here, like the segregation of duties and regular audits.
Stay on top of your spend management
Integrating cash controls is an important step to protect your dollars, but what about the money that flows through your business in other forms?
That’s where BILL Spend & Expense comes in. By leveraging automation and real-time reporting, your expense reporting stays up-to-date with transactions that are easy to review, approve, and sync. Not only does it save you time, but it also helps you better understand where your money is going.
Reach out for a demo and see how it can improve your cash controls.
