The term cash control has many facets. By definition, cash control is a way to monitor a company's credit, collections, cash allocation, and disbursem*nt policies, as well as its invoicing function. In simple terms, cash control is the internal regulation of cash and cash-related policies in a business. There are multiple components to cash. Cash includes currency notes, coins, and bills. Cash can be defined as any money that takes the form of currency. Cash equivalents can be defined as investment securities that mature within 90 days. Simply stated, cash equivalents are liquid assets that can be turned into cash within a short period of time and are not affected by changing interest rates. An example of a highly-liquid item would be a 90-day CD (Short-time Certificate of Deposit). Cash equivalents also include bank certificates of deposit, money orders, banker's acceptances, treasury bills, and commercial paper.
The relationship between value and its applicability lies in the concept of liquidity. Liquidity can be defined as how quickly something can be turned into cash. This is important because a business with few liquid assets can quickly encounter trouble that could derail business activities. To understand liquidity, consider that a business might have $10,000 in the bank, $25,000 in 90-day CDs, $15,000 in 1-year bonds, $5,000 in money orders, and $30,000 in real estate. To understand how much cash and cash equivalents a business possesses, remember that CDs and money orders are cash equivalents. Adding those $25,000 + 5,000 with the $10,000 in the bank equals $40,000 cash and cash equivalents.
Cash Control in Business
Cash is an extremely important part of a company's business for several reasons. Cash can provide businesses with:
- independent control over activities
- effective coverage of expenses
- investor satisfaction
First, cash allows a business to have more control over its activities. Having cash on hand is important because it relieves a business of the pressures of being in debt. When a business takes on a debt, specifically a sizable one, and is unable to repay in the short term, the debtors tend to stake a claim as to how the business ought to be run. Debtors want their debt repaid, so they may issue guidelines on how the business can recoup cash, or may even offer ultimatums. This can derail the business, as what is necessary to do to cover a debt may actually be unhealthy for the business in the long term. Having cash, then, allows a business to run on its own terms and have a much wider scope of activities.
Second, cash allows a business to cover expenses effectively. The availability of cash makes it possible for a business to pay employees, pay for utilities such as rent, power, and taxes, and allows them to do so in a timely manner. Paying for expenses when they are due is important because it avoids conflict with external parties and allows the business to focus on itself, instead of worrying about factors such as reputation or litigation. One of the signs that a business is not healthy is unpaid utilities, which rob the business of its reputation in the eyes of the public and its investors. Having cash negates these possibilities.
Finally, cash allows businesses to pay investors and provide them with dividends. Cash in a business can be used to acquire share buybacks within the context of investors, which is beneficial to both the business and the investors. Paying out dividends keeps investors happy and ensures that there is less internal friction to worry about. When investors are happy, more investment is likely to be poured into the business, which allows it to grow and thrive. Having cash provides the possibility for growth in this manner and negates internal conflict.
Cash Management Control System
A cash management control system can be defined as a system, usually online in contemporary economies, that is created or implemented to enter and preserve daily transactions that affect the finances and budgets of a business, and allow for investing operations and other core financial activities in a business. An effective cash management control system is important for the long-term success of a business.
- It reduces the amount of idle cash in a business and ensures that the cash is being put to productive use.
- It ensures that transactions are recorded and balanced out to reduce the probability of or to eliminate fraud in the business.
- It keeps track of assets in such a way that going bankrupt or landing in debt becomes very difficult. It is easy for a business to disintegrate without a cash management control system.
Internal controls in cash management refer to the guidelines for managing a cash account. Two necessary important components of an effective internal control system for cash management are first, the separation of duties and second, a written protocol for cash handling and disbursem*nts. Internal controls can also include employee background checks, training of staff, use of lockboxes for customer cash, reconciliation of statements, and securing assets and cash in secure locations. They can be explained as follows:
| Internal Control Measure | Explanation |
|---|---|
| Separation of duties | This ensures that no individual can exploit or operate the whole system on their own. When duties are divided, it becomes harder for fraud to occur. |
| Written protocol for cash handling and disbursem*nts | A written protocol provides a foundation for integrity, allows for later access to transactions, and serves as a deterrent for deliberate illegal transactions. |
| Employee background checks | These are important in verifying that an individual can be trusted to partake in cash transactions. |
| Training of staff | For a cash management control system to be effective, personnel must be trained on the time value of money, how to detect transactions' inconsistencies, how to ensure integrity during transactions, and the overall importance of cash. |
| Use of lockboxes | Lockboxes are a common internal control for cash because they provide a safe and reliable mechanism for the short-term storage of customer cash. They also provide the security feature of authentication. |
| Reconciliation of statements | An effective cash management control system must be bolstered by double entries and periodic reconciliation to ensure that records are consistent. In this manner, it is relatively difficult for fraud to occur. |
| Securing assets in safe locations | Placing assets in well-defended locations prevents physical theft of cash and serves as a proper foundation for financial activities such as disbursem*nt. |
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