Whether you have a side hustle or full-time business, it is important to have internal controls for cash. You work hard for your money, so obviously, you want to be sure it is as secure as possible.
Note that there is not anything 100% absolutely secure, but internal controls can help give some reasonable assurance. When we talk about cash controls, we are talking about internal controls over cash receipts and cash disbursement.
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While every business is going to be different, we will discuss important things to consider. A risk assessment should be done to identify areas in your organization.
Make more informed business decision. Be prepared for taxes and audits.
It is important to understand the difference between errors and fraud. Some errors are going to happen as humans make mistakes from time to time. Fraud is defined by The Institute of Internal Auditors North America in the glossary as “Any illegal act characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the threat of violence or physical force. Frauds are perpetrated by parties and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage.”
Fraud involves pressure or need, opportunity, and rationalization. Internal control focuses on looking at the opportunity piece.
Methods of Internal Controls of Cash
1. Segregation of duties
Basically, there are three areas that should be performed by different people in different parts of the organization.
This is easier in larger businesses to separate and more difficult in smaller businesses. But it is important to know and understand this limitation in a smaller business and separate duties as much as possible.
Segregation of duties with cash receipts
You want to avoid the same person collecting the payment, making the deposits, recording the payments and reconciling the bank statement.
Segregation of duties with cash disbursements
You want to avoid the same person ordering items, receiving items, keying in invoices, approving, and issuing payments to vendors.
Can fraud still occur with segregation of duties? Yes, but it is more difficult when multiple people are involved as it takes collusion between the co-workers.
If you are not able to have the best segregation of duties, consider having checks and balances in place to help monitor cash as much as possible.
2. Access to Cash
Once payments are made, you want to limit the access to it. We want it to be secured as much as possible until it is in the bank.
This can be done multiple ways. I have listed below a few that we have used before.
I have used these drop boxes for cash collections where it takes two keys to open it to get them out. Once they are dropped in these drop locked boxes, the money cannot be accessed by one person.
We have also used these types of bags to transport payments between places, whether within the business or when it goes to the bank.
3. Reconciliation of Bank Accounts
It is important for all balance sheet accounts to be reconciled monthly, but especially for cash. The bank statement should be reconciled with the general ledger.
Even if your accounting is outsourced, this is something that you should request monthly.
When others know that you are looking at certain things, that helps reduce the risk of fraud.
Consider the process when any refunds or voids need to be made in your business. Do you or a designee want to sign showing approval for any refund or voids? Do you want to have them document why it needs to be refunded or voided? If something is being returned often, it might be helpful to know the specific reason.
If you do not have anyone else sign or initial the approval of refunds and voids, you may want to be alert if there is a trend of one employee having many more of these compared to others.
Do you want payments over a certain dollar amount to be approved by someone else than the person paying the bills?
Receipts are a good way to be sure that the payment (cash, credit card, checks, etc.) are received.
It is best practice to use numbered receipts too. Why? It is possible someone could give a customer a receipt and then just keep the money and throw away the receipt. Unless it is numbered, you will not realize that something is missing.
Even if a numbered receipt is messed up when they are writing on it, it should still be kept and just write void on it.
These receipts should be secured as if a customer has one, it shows payment was made. Click here to see an example of the numbered receipts.
6. Secure Blank Checks
Best practice has blank checks secure where it takes more than one person to get to them when needed.
7. Mail Received Process
For checks coming in the mail, they should be endorsed immediately with a “For deposit only” stamp.
Running a tape of money received in the mail is a good practice.
Another best practice is to make a copy of any checks. This allows for referring back to them when needed.
8. Tools and Process for Payments Being Valid
If money is accepted, there are counterfeit detection blacklights and pens.
Do you have a process for NSF (not sufficient funds) checks?
Do you have a process for credit card payments that do not go through?
When you work hard to get the money to come into the business, it is important to make sure the payments are good and that you get paid for the products or service you provide.
9. Cash Back
Consider if you want your business to accept payment for more than the purchase price and give cash back to the customer. If this is allowed, do you want to limit the dollar amount?
Until the monies are all deposited in the bank, there is a risk that the payment is not good. Another thing to consider is the additional amount of cash needed to be able to provide cash back if you choose too and still have enough change for other customers.
10. Cash Drawers
It is best practice to have each employee have their own cash drawer so that they are the only ones responsible for the money.
In reality, it might not be able to work that way, but it makes it more difficult if there are different hands in the cash. If there is a handoff during periods of the day, it is best practice to have the drawer counted at the beginning and end of this time. It protects not only your cash but the employees involved as it is documented how much they started and ended within the drawer.
Keep the cash drawers locked. These types of bracelets work great in keeping up with the key.
Cash can be stored when not in use in locked cash registers. Safes are another way to secure cash.
11. Surprise Cash Audits
These should be done unannounced. This should include the cash drawer in use or any petty cash funds.
The element of surprise and monitoring is important.
Documenting cash processes in written policies and procedures is good. It not only keeps things consistent, but it shows the expectations.
These are just some internal controls for cash in your business. Segregation of duties, access to cash, bank reconciliation, approvals, receipts, secure blank checks, and the mail process is part of the cash controls process. Other internal controls include tools and processes for payments received, cash back, cash drawers, and surprise cash audits. Do what you can to put in internal controls to protect your cash.
Disclaimer: A Couple of Stellys shares financial opinions but it should not be interpreted as legal or financial advice. Prior to making any business decisions, you should consult with your Certified Public Accountant (CPA) and/or attorney for your respective business or personal use.