Cash is arguably the most important asset of a business. Without cash, a business cannot survive in the long run no matter how solid the business model. Cash is the most liquid asset of a business and often the most vulnerable to theft. For this reason, it is important to have strict controls around cash inflows and outflows as well as cash on hand.
In a previous blog, I discussed controls around cash on hand or petty cash. The focus of this blog is establishing controls around cash inflows. The most important cash inflow to control is customer receipts. It’s important to have processes in place to track checks from the time they are received to when they are ultimately deposited in the bank. Whenever possible, the same person should not be receiving checks, depositing checks, and recording payments in the accounting system. This provides too many opportunities for mistakes and theft. Segregating the roles introduces a good system of internal controls – “checks and balances” – to catch most mistakes or, at worst, prevent misappropriation.
An easy way to track customer receipts through the entire process is to create a check receipts log. It starts with the person that opens the mail or collects the payments. Every check that comes in the door should be entered on the log with a payee name, check number, amount, date received, and initials of the person receiving the payment or completing the log. The next person handling the checks is usually the person recording the payments in the accounting system. This person should sign the check receipts log to acknowledge that all checks on the log are received and recorded. This step helps ensure that every check received is entered in the accounting system. It not only protects the payments received, but also protects the integrity of the customer balances by increasing the likelihood that accounts receivable and outstanding invoices are reduced as a result of the payment.
The next step is to physically deposit the payments in the business’ bank account. All undeposited checks on the check receipts log should be deposited, and the log again signed by the person completing the deposit. The final step is just as important as the first three – daily or periodic review of the log by a person completely independent of the first three steps, ideally a supervisor/manager or business owner. The last step is critical in holding other personnel accountable and confirming all payments ultimately are deposited. While this process is not fool proof – it won’t prevent all errors or theft related to fraud or collusion – it does provide adequate segregation of duties to prevent most common errors and discourage intentional misappropriation of funds.Written by: Ashley Peth TGG Accounting