This article is part of a larger series on Bookkeeping.
Internal controls, in general, are procedures used to safeguard assets and implement financial and operational objectives. Creating internal cash controls for small businesses involves setting policies for handling physical cash and checking accounts and delegating responsibilities in keeping it. Cash controls are a crucial component of cash management best practices because cash, being the most liquid of all assets, is highly susceptible to theft and misappropriation.
To help you, we cover 19 best practices, categorized into cash controls for receipts, cash controls for payments, and general cash controls for a small business.
6 Best Cash Controls for Receipts
1. Ask Customers To Pay with Checks, Credit Cards, or via Electronic Funds Transfer (EFT)
Keeping too much cash on hand increases the risk of theft. You can reduce this risk by asking customers to pay with something other than cash. Although there are usually some fees associated with accepting credit cards, it may be worth paying to avoid the risk of dealing in cash.
2. Use Registers, Lock Boxes & Vaults
When you do accept cash, it’s best to use cash registers, lock boxes, and vaults as these can help protect what is physically received from customers. Point-of-sale (POS) systems often include built-in cash registers that only open when a sale is made and have override functions that are given only to the owner or manager. Meanwhile, lock boxes and vaults act as temporary storage for cash so that they’re not easily accessible by employees. You can keep cash inside these until you deposit them to the bank, which should be done at least daily or weekly for added security.
3. Issue an Official Receipt When Receiving Cash From Customers
An official receipt (OR) shows that a customer has paid the amount due. The amount on the OR should agree with the invoice amount. If the customer is paying in installments, then the OR should state clearly “in partial payment.”
Another important control feature to consider is the prenumbering of ORs. If you’re using an accounting program like QuickBooks Online, it will generate a numbered receipt automatically when entering payments.
4. Match the Invoice and Proof of Remittance To Verify Customer Payments
When we ask customers to pay electronically, such as via EFTs or PayPal, you should ask them to enter the account or invoice number in the reference number or message to the receiver field. In doing so, when reconciling payments and invoices, you can match paid invoices easily without asking the customer to send proof of remittances to you manually.
5. Send Customer Billing Statements Monthly
A customer billing statement or statement of account (SOA) informs your customer of their unpaid balances. Monthly SOAs can help detect unrecorded receipts since customers could dispute the SOA if they’ve already paid their balance.
6. Deposit Cash Received Before Spending
Keeping cash collections intact means that cash collections should equal cash deposits. For example, if the business collected $3,215 from customers today, then the same amount must be deposited in the bank, which also means that you cannot take money from collections for other purposes, such as paying suppliers or petty expenses.
It’s important to keep these intact so that cash receipts in the book and bank agree while also ensuring that you have a paper trail for any money spent. For added security and tracking, prepare a daily cash summary that shows all cash receipts and ensure that the total amount matches the daily deposits.
7 Best Cash Controls for Disbursements
1. Avoid Issuing Checks as ‘Pay to Cash’
When a check is “payable to cash,” it means that any person holding the check can encash it in the bank. While this is convenient, the risk of the check being stolen and used by an unauthorized person increases dramatically. To avoid such an instance, specify the payee’s name in the check, like “Pay to the Order of Vendor Company,” so that only authorized personnel of the vendor company can encash or deposit it.
2. Let the Owner Review Supporting Documents Before Signing Checks
In a small business setup, the owner should always review and sign checks. You can assign an employee to assemble all the supporting documents, such as purchase order (PO), vendor invoice, or receiving report, and prepare the check. After that, the owner will look at the supporting documents, match the amounts, and complete the check by signing it.
3. Keep Voided Checks & Mutilate Them To Prevent Reuse
Let’s say that you’ve already written a check and then noticed that you made an error, or the vendor says that they prefer online payments. Before putting the check aside, write the word VOID on the face of the check so that it cannot be reused. Alternatively, you can mutilate the check by tearing it partially. If you generally keep paper copies of the checks issued, place the voided check with the other checks so that you can see that all checks are accounted for easily.
4. Match Vendor Invoices With POs and Receiving Reports
The invoice, PO, and receiving report must agree before it’s processed for payment. This process is called three-way matching. First, the quantity and price of goods in the PO should match with quantity and price in the invoice. Second, the quantity in the receiving report should match with the quantity in the PO. Third, the goods listed in the receiving report should match the goods stated in the invoice. Checks should only be issued after you are confident you received what you ordered.
5. Stamp Vendor Invoices as ‘Approved’ and ‘Paid’ After Approval & Payment
Stamping vendor invoices is an important control to prevent double paying vendors. If you’re using accounting software like QuickBooks Online, be sure to enter the invoice number of all vendor invoices received. The platform will warn you if you try to enter the same invoice twice.
6. Establish a Petty Cash Fund for Small & Incidental Expenses
A petty cash fund can cover expenses that are too small to write a check for. Having a petty cash fund in place also speeds up the reimbursement process in case employees pay work-related expenses out of pocket.
7. Review Expense Reimbursement Requests Before Payment
When employees or managers go on an official business trip, they must submit a report detailing the expenses related to the travel along with the receipts. The owner should review the report and check if the expenses are within allowed limits. For example, let’s assume that company policy on travel and representation expenses states that hotel accommodation should be a maximum of $150 per night. If the actual hotel expense is $170, you should only reimburse $150.
6 General Cash Controls for Small Businesses
1. Have the Owner Review the Monthly Bank Statement & Canceled Checks Before Reconciliation
When the bank delivers your monthly bank statement, it will also give your canceled checks. Before forwarding these to the bookkeeper, who will process the bank reconciliation, the owner should review them to ensure everything is correct.
2. Perform a Monthly Bank Reconciliation
A bank reconciliation balances the cash balance in the books and the bank statement. Due to timing differences, the book and bank balances seldom agree, and reconciling items must be identified to know that the balances are correct. The process involves making sure every transaction in the books is on the bank statement, and every transaction on the bank statement is in the books.
This is often the best time to identify theft, but only if the reconciliation is done by someone with access to cash or the checking account. It’s extremely important that the person reconciling the checking account is not otherwise involved in recording and depositing receipts or issuing checks.
This can be very difficult for small businesses with one bookkeeper. You should consider having an external bookkeeping company perform the reconciliation or perhaps train a nonaccountant manager from another area of your business to perform the reconciliation.
3. Segregate Incompatible Duties
Custody of cash, authorization of cash disbursements, and recording of cash transactions should not belong to one person. These three functions are called incompatible duties. But since small businesses often don’t hire many employees to process transactions, the owner’s participation can compensate for the presence of incompatible duties.
Below are sample workflows that illustrate the proper segregation of duties in cash transactions:
a) Receiving Customer Cash
Cash received for in-store purchases should be run through a POS system or cash register. At the end of the day or shift, the owner or other designated person should close out the system and confirm that the cash in the register matches the daily summary of transactions. The cash should then be deposited in the bank by the assigned person and the daily summary report forwarded to the bookkeeper for recording. It’s a critical separation of duties that neither the bookkeeper nor the cashier counts the cash from the register.
b) Receiving Customer Checks from the Mail
The owner or other authorized person should open the mail and log all customer checks received. The designated individual should then deposit the checks in the bank account and forward the check log to the bookkeeper for recording. It’s a critical separation of duty that the bookkeeper does not have access to customer checks prior to them being deposited in the bank.
c) Signing Checks
The owner plus one other designated person should be the only people authorized to sign checks. As your business grows, you may need to designate additional people to sign checks, but the bookkeeper should never be allowed to sign checks.
d) Reconciling the Checking Account
The checking account and accounting records should be reconciled at least monthly. It’s a critical separation of duties that the person reconciling the account doesn’t have access to cash or checks received or authorization to sign checks. If the controls above are followed, then your bookkeeper can do the reconciliation. However, if your bookkeeper makes your bank deposits or signs checks, then you need to train someone else to do the bank reconciliation.
4. Make Timely Deposits
Ideally, daily cash collections must be deposited in the bank at the end of the business day. However, you can use a night depository if your business closes beyond banking hours but do this as practicable as possible. You may defer deposits by a day or two, but don’t keep large sums of cash in your business. Remember to use vaults and lock boxes to safeguard the cash.
5. Never Sign Blank Checks
Signed blank checks give fraudsters the opportunity to steal money from your business. That’s why the owner should never sign blank checks. If the owner won’t be around for a couple of days to sign checks, then they should assign the authority to another person who doesn’t record cash transactions or, if possible, delay the check signing until the owner returns.
6. Restrict Access to Blank Checks
Don’t keep blank checks lying around because fraudsters can forge signatures of authorized check signers easily. In some cases, the check signer should only use one kind of pen or ink when writing checks. Bank forensics can detect if two different pens were used to write and sign checks.
Setting up cash controls for small businesses is a cooperative effort between the owner and employees. In a very small business, the participation of the owner is crucial for cash controls. As the business grows, having structured internal controls become more important as the owner can no longer personally oversee all cash transactions. By setting good cash controls, you can prevent the misuse and misappropriation of cash and ensure proper cash accounting even as your business grows.