Internal Cash Controls for Small Businesses: 20 Best Practices

hi this is tim yoder with fit small business today i want to share with you my 19 best practices for controlling cash in small businesses so first let's look at some cash controls we have over the receipt of cash and when i'm talking about cashier i'm not only talking about physical cash but also checks and really anything to do with your checking accounts and so how can we control in our cash for our cash receipts well the first thing we can do is try to avoid physical cash as much as possible so ask our customers to pay with checks credit cards or via eft um so businesses where you don't have a lot of walk-in customers this usually isn't a problem a lot of people don't want to mail cash thankfully so they'll mail you checks even if you can avoid checks that would be great i highly recommend considering accepting credit cards i know there's some fees involved but it does eliminate a lot of the problems we have um dealing with cash and checks my second suggestion is if you do have a lot of walk-in customers that are going to be paying with cash use registers along with a point-of-sale system lock boxes vault somehow you need to lock up the cash obviously um the the desk the the drawer of a desk is not sufficient so make sure you protect that cash as it comes in registers are very important because they record the amount of cash that comes in which can then be actually tied to the physical amount at the end of the day my third suggestion is to always make sure the customer gets a receipt so again this goes back to using a cash register so make sure your employees when they accept cash from a customer they're ringing it through the point-of-sale system or cash register and giving that receipt to the customer that is a couple of things first the customer can prove they paid if there's a problem in the future and the second thing is is it make sure it records the receipt of cash so that when cash is tied out later everything balances if your employee does not ring up the customer they could very easily slip that cash into their pocket and you would have no way of finding that so if you've been places sometimes they offer you a free gift or fifty percent offer the service is free if they if you're not giving a receipt this is why they want to make sure that you're holding their employees responsible for giving you a receipt that ensures the transactions recorded in the cash register that's so that the employee cannot just stick it in their pocket number four match the invoice and the proof of remittance to verify customer payments so this isn't so much about theft as just being able to properly monitor and control your cash receipts so anytime you receive a cash via a check or eft or whatever other payment you want to make sure that the customer includes their their invoice number that they're paying so that you can properly match the cash payment with the invoice and so this is actually fairly important um especially if you have invoices with the same amounts over varying time periods if an employee were to steal let's say you have somebody pays 100 every month if an employee were to steal a hundred dollars they could just keep applying next month's payment to the prior months invoice and be one month off and you'd never really know how to catch it however if the customer puts on their check or as a note to their eft which invoice they're paying then you have the opportunity to catch that somewhere a payment has gone missing number five send the customer billing statements monthly uh this is one of the best ways to catch um theft of cash or of checks um really this is using the customer to verify the amount that they owe us so if they've made a payment that has somehow gone missing the customer is going to let us know right if we say you owe a thousand dollars and they've already paid it you're certainly going to hear from the customer so this is just a great way to double check that no payments have gone missing number six deposit your cash before spending it so this is something that's pretty unique to small businesses to sole proprietorships or even corporations if they're owned by one person that person might like to stick their hand in the till right in the register and just get some cash out to go for lunch or something that is you know their right as the owner it is their cash but best practices are absolutely to let that cash be deposited into the bank account and then withdrawn with a check to the owner somehow like that so that there's a paper trail of that cash because if you just stick your hand in the cash register and take money out well then you have no control over cash whatsoever the cash deposited is not going to match the amount of cash received for the day you have no idea what happened okay so really really bad idea be disciplined deposit the money into the checking account and then write the owner a check for whatever they want okay let's talk about disbursements and so a lot of this has to do with issuing checks so what are some controls small businesses need around issuing checks well first off make the check payable to the person it should go to don't make it payable to cash seems like a a common sense thing but sometimes for sake of ease people write checks to pay to cash well write it just to the vendor that you intend to pay the owner should be involved with cash disbursements in very small businesses they should review the supporting documents before signing the checks there should be a purchase order a vendor invoice or receiving a port um all of these things to verify that this is a valid bill and then the owner should sign it the owner should not just take the word of the bookkeeper keep voided checks and mutilate them so do not just shred voided checks you need to keep track of all of your checks so you want to know exactly what happened to each check number if one gets you know messed up as you're writing it you avoid it you put that somewhere where you can find it so if anybody ever questions they look at a bank statements like well what happened to check 112 here's 111 and 113 what happened to 112 and go to your file avoid a check sale right there it is it was avoided check okay so you need to keep control of your checks i know they still need to be signed but forged signatures are not that difficult and so you really want to keep track of your blank checks just like you would cash you need to match your in your vendor invoices with purchase orders and receiving reports so again this isn't so much about cash being misappropriated this is about making sure the amount you're paying is the correct amount so is the vendor billing you for the same amount that you ordered and received once you pay a vendor invoice make sure you physically stamp if it's a paper invoice stamp that invoice as being approved or paid so that you don't accidentally pay it again i would add to this point if you're using accounting software you should make sure that you enter the correct invoice number whenever you enter a bill there is a place to enter the bill number make sure you enter that number and then good software if you try to pay that bill twice it will give you a warning so quickbooks online is the most popular software i'll throw a link in the description below if you want to check that out 30 day free trial but as you enter bills enter that invoice number and then quickbooks will warn you if you're trying to pay a bill twice that's a very nice feature establish a petty cash fund so you don't want to have to be writing checks for every little expense if somebody orders a pizza for lunch for the office you don't want to have to write a check for that that can come out of petty cash and we do have a a good petty cash article at fit small business i will throw a link to that into the description as well so you can learn about how to use a petty cash fund number seven review your expense reimbursement request before payments so you should have a reimbursement policy saying this is what you need to do if you want to be reimbursed form you fill out here you attach your receipts total the amount all of this stuff make sure that you're having good documentation before reimbursing expenses okay so those are our best practices for disbursements now we have some more overall best practices that look at kind of the the accounting system around cash as a whole my first suggestion here is in very small businesses the owner should look at that bank statement and cancel checks every month personally they should be the person that opens it so they see everything that's with that bank statement all of the checks they review if it's a very small business they're going to have a very good idea if everything looks correct or if there's a transaction that doesn't quite look right now obviously as the company grows it may outgrow the the status where the owner is really going to know everything that's going on uh at this point um perhaps it would be the the cfo that would open the checks or the controller it should not be the bookkeeper that's actually reconciling the bank account but somebody should look over the bank statement separate from the bookkeeper to see if everything looks correct there needs to be a monthly bank reconciliation performed this is actually absolutely the best time to identify theft as well as errors you know usually it's not a theft we always want to be vigilant about looking for thefts but your bank reconciliation will oftentimes find errors either things that you've recorded in your books that were incorrect or things that cleared the bank that somehow never got recorded in your books we need to segregate incompatible duties and so we'll talk about this a little bit in length here um but essentially there are three different positions that you need to establish even in small businesses there needs to be the custodian of the cash sometimes this might be called the treasurer uh small businesses this might be the owner okay so somebody has to have custody of cat of the of the cash they're the ones that empty out the cash register drawer and deposit it they're the ones that collect the check for checks from the mail and deposit them they are the custodian of the cash a separate person needs to be authorized for cash disbursements meaning they're the ones that can sign checks in a small business this might be the owner as well now segregating incompatible duties if it's the owner they can do all of these things right we're not going to if it's a sole owner we're not going to be worried about about segregating duties from them this is really to prevent fraud and theft from employees and so if it's the owner we don't need to segregate the duties but if this is all done by employees we need a separate custodian of the cash check signer and then the third person is the person actually recording the transactions and that's generally the bookkeeper so what does this mean the bookkeeper should not have custody of the cash and the bookkeeper should not be signing checks those are incompatible duties so let's look at the first scenario here so if we're receiving customer cash this usually means we actually have a storefront of some sort where people are actually coming in we're receiving cash in person if that's a major portion of your business you should have a cash register or point of sale system where all cash received gets ring through the system so that you can then match uh what was recorded as sales the actual cash on hand so at the end of the day the custodian of the cash should count the amount in the register compare it to what the register shows a sales and then deposit that into the bank account the point-of-sale system will generate a summary report that can be forwarded to the bookkeeper and then the bookkeeper will use that to record the transaction the bookkeeper does not need access to the cash to record the transaction they do that from the summary report so it's a critical separation of duties that the bookkeeper does not have access to the cash from the cash register so receiving customer checks from the mail so the custodian of your cash is the one that should open the checks in the mail so this could be the owner or somebody else that they designate so i know some small companies there aren't you know so we need a custodian of cash we need a bookkeeper and we need a check signer i know sometimes there's not three people in your accounting department the owner can take over perhaps hopefully two of those duties but maybe only one so you'll have to designate somebody else perhaps the custodian of the cash is a manager that's not necessarily otherwise involved in the bookkeeping so maybe your most trusted manager in addition to doing whatever their normal job is they are also your custodian of cash okay so that custodian of cash opens up the mail and they log all the customer checks received perhaps they just make photocopies of the checks that would serve the purpose of a log as well they then deposit those checks in the bank and they forward that log of checks onto the bookkeeper so that they can record the transaction so again it's a critical separation of duty that the bookkeeper not have access to the customer checks prior to them being deposited in the bank and finally signing checks so the owner plus one other designated person needs to be authorized to sign checks at least one other person so it has to be more than just the owner and we'll talk about some scenarios here in a second but the owner is not always there right so it has to be somebody other than the owner but we know from our previous discussion already that the signer of checks should not be the bookkeeper right bookkeeper records transactions signer of check needs to be somebody separate because that is a a incompatible task so again it can't be this custodian of the cash but perhaps you have another manager that could be in charge of signing checks and finally reconciling the checking account who should reconcile it the checking account is generally going to get reconciled reconciled by the bookkeeper and that is fine as long as the bookkeeper is not a check signer nor is the bookkeeper the custodian of cash um great so that's our segregation of duties incredibly important difficult for small businesses most larger corporations have these built into their whole uh structure small businesses it's more difficult but hopefully if you just keep your keep in mind those three things right you have the custodian of cash you have the check signer and you have the bookkeeper and those three have to be different people okay our fourth best practice for general cash controls is to make deposits timely so hopefully you can do it daily especially with cash don't allow it sitting around your office and obviously if it does sit around your office make sure that it gets locked up never sign blank checks well this seems like a no-brainer the problem is we get ourselves backed into a corner where we feel like we have no choice so if the owner is the only person that can sign checks the owner's not always there so if they're going to go on vacation and where we see it often is payroll if the owner's on vacation you still have to have payroll right you can't not pay your employees because the owner's gone and so the owner will sign blank checks leave it for the bookkeeper to print print out after the fact so avoid that and the way we avoid that is not to back ourselves into that corner right you need to designate a second person to sign checks and this should not be the bookkeeper we've already talked about that in length bookkeeper cannot sign checks so this needs to be another manager that's not the manager that's the custodian of your cash restrict your access to blank checks so lock your blank checks away blank checks far too easy to forge a signature it may get caught after the fact but we'd like to prevent it from ever happening in the first place so let's lock those blank checks away and great that is our 19 best practices for controlling cash in a small business again my name was tim yoder with fit small business and i look forward to seeing you next time

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