Friday, December 2, 2016

Small Business Internal Controls Over Cash

Cash is a small business owner’s most valuable asset, but small businesses are more likely to suffer embezzlement and/or misappropriation of cash assets for the following reasons:
  • Limited number of employees, prohibiting effective segregation of duties.
  • Owners tend to trust employees more – especially long-term employees – and become slack about monitoring or reviewing their work.
Well-designed, effective internal controls will safeguard cash assets by limiting the opportunity for theft or the likelihood of error.

When designing internal controls over cash, think, “Could someone…” instead of, “Would someone….” This removes any question of trust.

Start the process of designing effective internal controls over cash by answering the following questions:
  • Who has access to cash and why?
  • Where is cash held at all times?
  • What is the process flow from beginning to end for cash receipts and disbursements?
  • Where do opportunities exist for theft or error?
The most important internal control over cash is the segregation of cash-handling duties among employees.

With proper segregation of duties, no single person will have control over a cash transaction from beginning to end. Segregating duties provides for checks and balances and limits the opportunity for theft and the likelihood of error. Even the smallest business (two to three people) can achieve adequate segregation of duties by ensuring that different people:
  • Receive and deposit cash.
  • Write and sign checks.
  • Reconcile bank statements and review bank reconciliations.
  • Bill for goods and services and maintain the approved customer list.
  • Process payroll, distribute payroll checks, and review payroll reports.
  • Authorize invoices for payment and process vendor payments.
Other internal controls over cash include the following:       
  • Mandatory vacations, especially bookkeepers and all cash handlers.
  • When cash is held onsite, secure it in a locked location such as a safe. Limit access to authorized personnel. Change combinations or other access codes periodically or when someone leaves.
  • Limit bank account signature authority and online access to authorized personnel. Update signature cards and immediately block access when an authorized person leaves the business.
  • Make frequent bank deposits to minimize the amount of cash held at the business location overnight.
  • Use a buddy system when moving cash from one location to another.
  • Count cash in the presence of two people and in a non-public area not easily visible to others.
  • Require two-person reviews and approvals for all disbursements – payroll, operating expenses and reimbursements.
  • Prohibit cash withdrawals or personal charges of any kind on the company credit cards. Require original receipts and reasons for business-related credit card purchases and set appropriate per transaction dollar limits.
  • Perform timely reconciliations of bank and credit card statements to subsidiary and general ledgers and require they be independently reviewed.
  • Pay particular attention to all unusual purchases, review supporting documentation and ask a lot of questions.
No system of internal control is 100 percent foolproof but when thoughtfully designed and periodically reviewed for effectiveness, internal controls over cash will safeguard a small business’ most valuable asset.