Why managing cash is important
Cash is the lifeblood of any business – without receiving cash from sales, a business would not be able to pay their suppliers or employees. Therefore, one area where businesses should have strong internal controls is around the handling of cash – both coming into the business and going out.
How businesses manage cash
There are many types of internal controls that a business may implement to protect cash including:
- Payments for goods and services can only be made electronically – this stops employees from stealing physical cash – it can be much harder to steal cash electronically from a bank account.
- Cash registers – that record all transactions, Electronic Funds Transfer (EFT) payments by debit or credit card, and physical cash transactions.
- Security cameras – that are placed over areas where cash is handled in a business – such as the register and in a back office.
- Regular checks of the bank statements by owners of the business to identify any transactions that look unusual or potentially fraudulent.
In almost all accounting textbooks, you’ll find two other internal controls around cash – the use of a petty cash fund and the creation of a bank reconciliation. Both of these controls are falling out of use as businesses move away from physical cash and electronic funds transfers are becoming instantaneous with improvements in the banking system. You may have seen OSKO as a payment option within your online banking – it is an instant funds transfer – no need to wait 2-3 days for the funds to transfer between institutions. There are also improvements such as PayID which allows you to use a mobile phone number, email address or ABN to transfer funds instead of the BSB and Account number.
The original form of electronic transfer to businesses was via BPay – a method that took days and transactions had to be submitted by certain processing cut-off times. OSKO is being increasingly used because transfers occur within minutes at any time of the day or night.
Applying internal controls to the handling of cash in a business – both receipts from customers and payments
Cash can be a major part of many business operations. When it comes to large organisations like supermarket chains such as Woolworths, Coles and Aldi, or fast food outlets like McDonalds and KFC, millions of dollars in cash can change hands within a matter of minutes, and it can pass through the hands of thousands of employees spread across many stores. Internal controls ensure that all of this cash reaches the bank account of the business entity. What are some of these controls?
The first control is monitoring. Not only are cameras strategically placed throughout the store to prevent shoplifting and crime by customers, but cameras are also located over all areas where cash changes hands, such as over every cash register. These cameras may be monitored and footage is recorded. This close monitoring makes it more difficult for misuse of cash to occur.
The second control is around the access to cash – cash is the area in any business where there are likely to be more controls because it is easy to steal physical cash. Within a supermarket, each employee has his, her or their own cash drawer with a set amount of cash. At any time, any employee can reconcile the sales recorded within the system to the cash balance that should be in the drawer. This reconciliation or “closing out” process is often done at the end of every shift. If access to the drawer is restricted to one employee, that employee is responsible when cash is missing. If one specific employee is consistently short on cash, the company can investigate and monitor the employee closely to determine if the shortages are due to theft or if they are accidental, such as if they resulted from errors in counting change.
A third control implemented in many businesses is the use of electronic payments through debit cards, credit cards and Apple and Android pay. Using electronic payment methods, no physical cash is ever handled by the employee and this significantly reduces the risk of employee theft of cash. It also reduces the risk of accidentally giving customers the wrong change, because the electronic payment is always for the correct amount.
Technology plays a major role in the maintenance of internal controls, but other principles are also important. If an employee makes a mistake involving cash, such as making an error in a transaction on a cash register, the employee who made the mistake typically cannot correct the mistake. In most cases, a manager must review the mistake and clear it before any adjustments are made. These changes are logged to ensure that managers are not clearing mistakes for specific employees in a pattern that could signify collusion, which is considered to be a private cooperation or agreement primarily for a deceitful, illegal, or immoral cause or purpose. Duties are also separated to count cash on hand and ensure records are accurate. Often, at the end of the shift, a manager or employee other than the person responsible for the cash is responsible for counting cash on hand within the cash drawer. For example, at a supermarket, it is common for an employee who has been checking out customers for a shift to then count the money in the register and prepare a document providing the counts for the shift. This is compared to the point of sale system that records exactly how much cash should be in each register. Store managers will compare counts of cash registers to sale systems and investigate any discrepancies.
The ultimate goal is to determine if the cash and credit/debit card transactions equal the amount of sales for the shift. For example, if the shift’s register had sales of $800, then the documentation of counted physical cash plus electronic credit/debit card payments should also add up to $800.
Will we ever go entirely cash-less?
In countries like the USA, cash and cheques (which they call “checks” in the US spelling) are still widely used. Here in Australia, it is virtually impossible to find a bank or financial institution that offers accounts with a traditional chequebook. COVID-19 has seen an immense speed up in the adoption of electronic payment methods in Australia – there was the fear COVID-19 could be spread in our plastic notes and coins. Chau (2021) reports that ATM usage has been declining since 2008, and coupled with more competition in the electronic payments sector – the fees merchants pay for electronic transactions has lowered and become more transparent. In the past, high fees for credit/debit card transactions meant that many businesses didn’t offer credit cards for transactions under $20. Now these fees are a common cost of doing business and consumers have shown a preference for businesses that accept electronic payments for even the smallest of items.
It is forecasted that 98% of Australia’s transactions will be cash-less by 2024.
Also leading the way on a cash-less society is China. In my own travels there in 2019 (on a trip with UTS) – I was wandering the streets looking for breakfast. I found a stall that had a long line and I ordered by just pointing. When I tried to hand over money to pay – the old lady who ran the stall kept pointing to a QR code for WeChat pay – in the end – someone in the line who understood English took my money and paid for my breakfast and theirs using their WeChat wallet payment app.
I had taken out plenty of cash to spend in China, not realising that most payments were electronic. In many places, credit cards like my American Express and Mastercard were not accepted, only WeChat Pay and Alipay. Thank goodness our UTS Beijing office staff were travelling with us to take care of paying for lunches, snacks and drinks! Banks in China are also starting to go fully electronic, with news that some smaller banks will no longer deal in bank notes and coins.
With the move to a more cash-less society – the questions around controls shift towards who has access to the bank account? How many people are required to authorise bank transactions? What about cards attached to that bank account? I regularly give my eldest son who is 9 years old, my credit card to order our hot dogs and fries at Costco while I’m waiting in line to pay – so imagine if a business had a debit or credit card that staff could access! How does a business ensure that the card is used for only valid and appropriate business-related transactions?
Regardless of whether our transactions are using physical cash or electronic cash – internal controls over cash still need to be strong.
Other methods to control cash
Prior to electronic funds transfers, to try and minimise employees stealing cash, businesses often had an internal control that required all payments to be made by cheque. If you’ve never heard of a cheque, that’s quite alright. Australian financial institutions have been phasing out cheques for the last decade.
A cheque is essentially a pre-numbered slip of paper that allows the owner of the account to authorise transfer of funds to the recipient of said physical paper slip. It would take banks anywhere from 3 to 10 days to process the funds transfer from a cheque.
But if you’re a cafe and you run out of avocados – you don’t want to have to write a cheque to give to the local fruit and vegetable store for avocados (even more critical – Australian businesses don’t accept payment by cheque because it is very easy to create fraudulent cheques!). So instead, you have a small amount of cash (typically in a small metal box called a petty cash tin) that you give to a staff member to buy these items. They bring back the receipt and any change. At the end of the week – you check how much physical cash is left in the petty cash tin, add in the value of the receipts – and it should match the cash you put in there originally.
I conducted a survey of small businesses around my area – cafes, a dance school, local restaurants – not one business used petty cash tins any more! They are being phased out of existence as our cash becomes more of an electronic item instead of a physical item.
What are businesses doing instead?
Businesses are likely to give staff cash out of the cash register, and then use the cash register system (which is often linked to the point of sale system and accounting system) to record that supplies were purchased with cash and attach a digital photo of the receipt.
Another alternative is a business debit or credit card that has a maximum spend limit that the employee can use at a local supplier – tap and go – and return the receipt to the business owner or manager. The receipt is then input into the accounting system as an expense.
It is important to evolve our business processes and internal controls as the environment around the business changes.
The bank is a very important partner to all businesses. The bank provides somewhere for businesses to store their cash, and it processes electronic transactions – whether that be payments by customers (recorded as revenue) using debit or credit cards, or the business paying its suppliers. A business may also take out a loan from its bank and make regular repayments on that loan.
Bank accounts for businesses can involve thousands of transactions per month. Most transactions in Australia now happen within minutes, with some taking one or two days.
A bank reconciliation (or ‘bank rec’ as the accountants say) is an internal control that has the business compare the transactions it has recorded for their cash account in their accounting records, with the transactions the bank has recorded. There may be some discrepancies. For example, your bank may charge a regular account keeping fee that you haven’t recorded as an outflow of cash. Or you receive interest on a savings account that has not been recorded as an inflow of cash. In some circumstances, an electronic funds transfer may be delayed – you record the outflow of cash in your records, but it takes some days for the bank to withdraw the funds and transfer them to the intended recipient.
Bank reconciliations are a more critical control in countries that still have a high usage of physical cheques like in North America. They are still an important control here in Australia, but there are less discrepancies between the accounting records and the bank’s records of transactions because we have a more highly developed electronic funds transfer system.
The bank reconciliation is prepared by the business’s accountant (not the bank) on a regular basis – usually monthly for large businesses with high transaction volumes, sometimes quarterly for smaller businesses. For those businesses using a cloud-based software such as Xero, a bank reconciliation can be conducted by the business owner – no accountant needed! (If you’re curious – you can see how easy it is to conduct the bank reconciliation in Xero) Once a business has identified transactions that are recorded in the bank’s list of transactions, but not their accounting records – they are then recorded.
In Accounting and Accountability we will not be going through the detailed process to conduct a bank reconciliation, as we don’t believe it is necessary at this introductory level of accounting. However, if you’re going for a job as an accountant in a business – this is the first thing you should brush up on!
Chau, D. (2021) COVID-19 is speeding up Australia’s shift towards a cashless future, ABC News, website accessed 7 March 2022.