Safeguarding Cash Fund

How do you manage cash? Are you confident that your cash is in good hands? Are you handling your cash the right way? These are some of the common queries of every business organization when discussing about the most liquid asset – Cash. Since “Cash” is a very delicate asset of a company wherein improper handling may lead to fraud and other notorious scheme to corrupt the said resource. Companies tend to look for solutions on how to control and mitigate malpractices of cash handling.

Businesses implement policies and procedures in their operation in order to increase efficiency, avoid mistakes and stop fraudulent activities. These processes are called internal control. Cash is more susceptible to theft and fraud. If the opportunity arises, a dishonest person can pocket the company’s money and conceal it. In order to safeguard cash, the following internal control should be observed:

• Separation of Duties and Delegation of Authority

Different persons should be assigned in different functions such as but not limited to collection, recording, disbursing, and reconciling. As one of the vital foundations for an internal control process, properly delegation for specific duties is highly recommended to avoid manipulation of cash records along with its collections made. Below are some examples of separation of duty:

1. A person authorized in signing of checks must not be allowed to hold the unsigned checks or to deposit them
2. One person may receive cash and checks from collection sales and receivables, but another person should record he related transactions in the respective accounting books.
3. An employee assigned to hold petty cash fund should not be in charged in replenishment and counter checking of the related petty cash expenses.

Separation of tasks helps in mitigating the risk of misappropriation of cash. This is to avoid the consequences of overlooking possible errors and concealment of fraud that may result to inaccuracy of accounts and amounts.

Rotation of Duties – It also advised that rotation of duties should be practiced regularly. By doing so, a person will not have complete control of the transactions and use it to commit fraud. Knowing that someone else will be doing their job after a period of time, they will be more responsible and be hesitant in committing fraud.

Dual Signatory – For more security, most companies adopt a two-person signatory method. By establishing this, checks will require 2 signatures to be used to payments and encashments.

• Documentation Procedure

Proper documentation will ensure that cash transactions are genuinely authorized. It is useful in counter checking the accuracy of transactions. Whenever cash is needed for any legitimate transaction, it must be properly documented for tracing and easy monitoring of cash flows. Whenever there is collection from sale it must be supported by official receipt and other transmittal documents if necessary. For deposit, it must be supported by deposit slips with signature from bank indicating receipt thereof.

For disbursing purposes, most companies use a voucher system. It is a method of internal control for cash disbursement wherein the company uses voucher in documenting transactions. A voucher is an internal document associated with accounts payable account. It is usually prepared with attached invoices or supporting documents before making payments to ensure correctness of the amounts to be paid. All payments are made by checks except for small expenses where payment is made out of the petty cash fund which is supported by petty cash voucher. A voucher system is a useful mechanism in summarizing cash expenditures in a company.

Purchase of company equipment and other fixed assets, payroll and other transactions which require cash payments are recorded in a “Voucher register” while checks issued for payments are recorded in a “Check Register”.

• Proper Cash Handling

Cash on hand is prone to theft. Best way to avoid this is to deposit the cash as soon as possible, most preferably within 24 hours from receipt. Undeposited cash or checks must temporarily be stored in a secured location where unauthorized employees have no access to. Holding too much of cash is not advisable if not used on a regular basis.

Where payment through check is impractical for some small purchases, company may apply a petty cash system. A petty cash fund is a small amount of cash set aside to pay for small expenses. The amount of fund shall be determined by the management depending on the company’s needs. For big companies, they assign petty cash fund for different departments. A petty cash custodian shall be tasks in safekeeping the fund, release payments and replenishment.

Purchases made under petty cash fund must be supported by petty cash voucher and receipt. Once the fund is exhausted or is below the threshold, it will then be subject to replenishment. All petty cash expenses made for the particular period will be consolidated, summarized and be presented for replenishment.

• Monitoring and Reconciliation

Monitoring – Cash inflows and outflows must be monitored on a regular basis, this way, any unauthorized transactions can be easily traced.

Reconciliation – Reconciling cash as recorded in the company’s books against the actual cash helps you to identify any error or fraud at an early stage. And thus, will help you settle these issues before it is too late. Cash must be duly accounted for. Since cash is usually the subject for audit, it must be recorded properly to its related accounts in order to minimize any material errors.  (For further details please see blog for “Cash Management – Bank Statement and Reconciliation”)

• Physical Security

This includes security cameras, access restriction and a secured storage such as a safe or lockbox for checks and cash. Opportunity and temptation may push someone to do fraudulent act, these two may be removed by creating a secured environment. Installation of CCTV Cameras to areas where the cash is safely stored is a good action in case any unauthorized person may attempt to open it or any authorized person that may possibly commit theft or fraud. For safe combinations, it is recommended that the access is limited for two persons, preferably managerial or supervisory position. It is also advised that the lock combination must be changed at least once a year or as the case arises. Any movement of cash from the safe or lockbox must be properly documented and duly accounted for. It is important for companies to implement policies and guidelines for cash management not only to eradicate malpractices of cash, but also establishing audit trail in case of errors or act of fraud. With strong internal control, company’s cash is properly safeguarded.