Cash Internal Controls Overview

In this presentation, we’re going to introduce the internal controls related specifically to cash, cash internal control goals, these are going to be the objectives of the internal control system over cash, we want to have the cash handling separate from the record keeping. So whoever is handling the cash, we would like to have them not be the same person doing the record keeping. And therefore we have that separation of duties. We have the person that is entering the data, not having as much of an incentive to steal the cash because they’re not the ones handling the cash, the people handling the cash, know that if they do steal it, the record keeping should pick that up, and they are a separate person. cash receipts are deposited to the bank. We want to make sure that the cash receipts are going to the bank as soon as possible, hopefully on a daily basis, so that we’re not actually emulating cash. We don’t want a cash to be piling up, because if it is then we have a greater risk of theft to happen and greater loss if that does happen.


And we want to put it into the bank as soon as possible. That’ll help us basically to safeguard the cash. It’ll also help us to record the cash more accurately the bank, being someone who is going to have a separate record of the cash recordings as we go for us cash payments made by cheque or electronic funds transfer. And there’s gonna be we don’t really want to the point here is that we don’t really want to make our payments purchasing for business with cash. And the reason is that when there’s no cash audit trail for it, I mean, if we use cash, we don’t have a good audit trail. Now, some people think of cash and they think, well, if I if I have cash payments, no one could track that and possibly might think of that as a good thing that you know, people can’t see what you’re doing or their you know, some, the government can’t see what you’re doing or something like that. But note that we want good record keeping, of course when it’s our records, because we want to be able to go back and say Hey, what did I spend the money on? We want to have an audit trail so that when we look at our purchases, we can see what happened.


If we Purchase everything with cash. We don’t have a good audit trail, we can’t go back to our bank statement and say, Hmm, what did I write a check for it? Well, who did who did we write the check for, we can easily find that when we write the checks, we also have control over someone who is going to sign the checks, as opposed to possibly someone requesting that the cash payments be made. So if a cash payment has been requested by one department, and or for a small business, and one of our employees has a cash payment request or dealing with the payables, we could still take control over the cheque signing activity. And that can be an effective internal controls so that checks aren’t written, of course, for illegitimate reasons. Electronic fund transfers can have similar types of internal controls and be quicker as well. So we could do that electronically as well and have a similar trail of tracking to see what is going on. And, and so the point here is to limit the cash dispersements so that we have that tracking cash cash equivalents.


Now cash is going to be anything that’s going to be really liquid, something that we’re going to be able to pay off our short term obligations with, we typically think of cash as being physical cash or something that’s going to be in our bank account, or our checking account. Now for talking about something that’s going to be fairly equivalent to cash, cash and cash equivalents, we’re talking about something that’s going to be due really soon something that we could we can also basically have access to and pay off our account with very quickly. If we have a long term constraint on the type of investment that we have, then of course, we wouldn’t be calling an a cash or cash equivalent managing cash. We’re talking about managing cash, we’re talking about the plan receipt to be able to cover payments. And this seems kind of obvious, but it when we talk about accrual accounting note that we’re not accounting for our for our income statement, our revenue and expenses with cash flows. So we want to make sure that as well We do accrual accounting.


And when we look to optimize our net income, that we also go back and manage our cash flows, because it is important for us to make sure that we are managing cash in such a way that we have enough cash to be able to cover our payments. However, we want to have a minimum steady cash level at the same time. In other words, it’s not efficient, of course, to have a lot of cash for a business, the objective of the business is to earn revenue, not to have a lot of cash at any given time. If we have a lot of cash at any given time, that means that we have purchasing power that we’re not putting and using effectively, we’re just we’re just holding on to it. So what we want to do is have that minimum level of cash that we need in order to go after opportunities that will happen. But at the same time, we want to have enough cash to be able to make payments. So if we have too much cash, then we’re not being optimal with our purchasing power.


And if we don’t have enough cash, of course, then we’re not gonna be able to pay our bills. If we don’t have a minimum amount of cash a level that is relevant, then we’re not going to be able to really go after those opportunities that may arise and need a little bit more cash at any given time managing cash. So how are we going to achieve these goals of the cash management? Well, one, we want to have collection of receivables, meaning we want to do what we can in order for the cash to be collected sooner, we would like to have the cash sooner rather than later. This I mean, it can seem like not a big deal when you’re talking about, you know, a few days or a month but businesses will spend a lot of time to try to get that money a little bit earlier. If you can get the money a little bit earlier. It could be worth a lot one because the time value of money and two just to make sure that you are keeping up with your cash flows having the cash on hand ready for opportunities. You want to be able to delay payments of liabilities. Again, it seems it could get the point of seeming trivial on on how you delay the payments for a couple of days or something like that.


But any kind of delay of payment that you can have is going to be beneficial to the business, you want to be able to delay the payments, and that will increase the amount of cash on hand at any given time. Assets are steady state assets at a steady necessary level. Once again, you don’t really our goal isn’t to compile assets, if we if we make a lot of money if the business is doing really well. And we don’t want to put the money back into the business, there’s no growth opportunity that we see at any given time, then we probably would give that money to the owners of the business, whether they be stockholders or individuals. If it’s a sole proprietor or a company in order for the owners to then take that money and they don’t want to hold on to it either. They want to invest it you want to be making money on the money if the if there’s no business opportunity within the business, to be making money to grow the business, then we should distribute that money to the owners so that they can make their own investments and make money with it. plan and budget expenditures.


So we want to make sure that we have the plan. We have a budget in place in order to know what those expenditures will be, that’ll help us to know what what cash level we need to have at any given time, and have helped us to have that steady level of assets that we will want to have, over time if we know what those expenditures are, have an idea of what they are in advance, invest when there is excess cash. Now, when we have, again, when we have excess cash, we don’t want to just hold on to the cash because we’re not making any interest on it. We want to invest it and we could, you know, invest it back into the company, if there’s growth opportunities, or we want to invest in something that we’re making money on like a CD or something that we make financial investment and get a return on, meaning we’re trading the purchasing power at any given time. We can’t use it in order for a greater return, or we want to give it to the owner so that they can make their own personal investments whether they be the stockholders or they be the owner of the company.


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