Count Your Money
Cash is defined as "money and other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit". Cash is the medium of exchange for any monetary transaction, and any other item that is readily convertible to legal tender is considered "as good as cash". It consists of bills and coins in circulation, and any other negotiable instrument immediately convertible to these by financial institutions. For cash to be actually used as an instrument of trade, it should both be available and acceptable.
What is available cash? Cash is considered available when it is unrestricted in use regardless of its location as long as it can be drawn immediately anytime when the need arises. A savings account opened in another country is still considered available cash when it can be drawn anytime at its counterpart institution here in the Philippines. Cash must be readily available to settle currently maturing obligations and other capital requirements and are not subject to any restrictions whatsoever. Restricted cash is any amount that has an existing limitation as to use imposed by a party other than the owner, and to which limitation the owner must submit. Maintaining balances of cash accounts, funds in escrow, special savings, and time deposits not maturing within three months fall under this category.
Cash is a very, if not the most, valuable asset of any business. A company's internal control status and operational effectiveness is mostly measured by how much cash its policies were able to save in relation to certain financial ratios, followed by level of employee morale and so on (see how the human factor is only second to money). A capital-intensive firm can establish its own treasury function to account for its cash movements at any interval as it sees fit, but SMEs and growing companies need to count every penny in their pockets to fund its capital requirements.
But how?
Some companies are puzzled where the money went after it is long gone. This is way past the time the expenses have been incurred and financing should have long been availed, thus making accountability for lost cash quite difficult to establish. As a rule of thumb, control is most effective when only one person is responsible for a given task. This, however, is only applicable to small-scale businesses; corporations especially publicly-listed firms are subject to the dreadful Sarbanes-Oxley law or equivalent. This rule is without its flaws -- it is hard to discover fraud when the person controlling cash inflows and outflows is also responsible for its recording for then it could be very easy to manipulate supporting documents such as collection receipts, bank deposit slips and withdrawals, and payment vouchers. Thus, a character check is crucial before selecting a trustworthy candidate for the job. Accountability should be established well within those involved in a cash cycle to easily pinpoint holes in the controlling aspect.
If the company can afford to, monetary or effort-wise, the record-keeping function should be separate from physical custody. This is where value-added services from the depository bank comes in. A passbook savings account can be very helpful in monitoring cash movement: the cashier prepares a daily/weekly/monthly cash report based on issued receipts and invoices paid, to be compared by a separate person (the business owner or representative) to the passbook. Daily cash collections should be deposited that same day to the bank. Cash payments well over Php1,000 should be paid using the company check independent from the cash custodian. Expenses below this amount may be settled through the office fund which may be set up and replenished using a company check as well. These controls are to prevent window dressing, lapping and kiting - deliberate errors to cover over/under recording of cash.
A surprise cash count handled by the cash custodian should be exercised regulary and on a non-routinary basis to check whether the job of accounting for them is done well. Aside from bills and coins, the transactions stated in the cash report should have evidence of transactions - official receipts for collections accompanied by a bank deposit slip dated the same day, invoices/billings/statements of accounts for payments as well as receipts issued by the payee, shipping/delivery documents, and so on. This is proof that a cash transaction indeed incurred and was not just made up to conceal an unofficial use of company funds. It is also crucial that company documents such as official receipts are pre-numbered and accounted for regularly, for it is possible that a receipt has been issued by a customer but such payment was not turned over to the coffers. A missing or doubly-used receipt signals abnormality in cash inflow handling.
Cash disbursements are ideally made through checks wherein at least two signatories independent of the cash custodian are authorized by the bank to sign checks. This is to ensure that no connivance exists between these parties and establish the integrity of expense reporting. A ghost disbursement can only be possible if a signatory signs the check and the custodian reports it as legit - one thing management may find difficult to prove.
A monthly reconciliation of cas per records versus all bank accounts should be prepared by the custodian for review supported by the passbooks to substantiate the cash balance per bank. If not a passbook account, it is a depositor's right to demand a Statement of Account from its depository bank on a timely basis.
These are merely controls for cash actually existing for company use. To increase its cash level, collection of outstanding receivables should be increased so as not to let revenues stay idle in collectible accounts. Impose interest and/or late payments to customers as necessary to insist prompt payment. Trim down on unnecessary expenses especially those incurred for personal purposes - remember that it is company money they are using for their lunch or car registration renewal. For trading companies, keep inventory levels low either by ordering only what has been committed to customers with minimal allowance for unexpected orders - do this only if lead time for ordering and delivery from the supplier of goods is relatively short. A good inventory management is crucial in cash maintenance and reduce the possibility of wastage/spoilage, obsolescence, or shortage. During expansion or upgrading, plan the timing of major expenditures such as equipment purchase and office rennovation. Calculate carefully when the funds will be available to finance these expenses and if the benefits that will be received during the useful life of these investments will greatly outweigh the cost of its procurement. And if the company really does well, it should invest its excess or idle cash in special savings account, or to other revenue-generating instruments if someone can. Ask your bank how they can help you increase your net worth.
What is available cash? Cash is considered available when it is unrestricted in use regardless of its location as long as it can be drawn immediately anytime when the need arises. A savings account opened in another country is still considered available cash when it can be drawn anytime at its counterpart institution here in the Philippines. Cash must be readily available to settle currently maturing obligations and other capital requirements and are not subject to any restrictions whatsoever. Restricted cash is any amount that has an existing limitation as to use imposed by a party other than the owner, and to which limitation the owner must submit. Maintaining balances of cash accounts, funds in escrow, special savings, and time deposits not maturing within three months fall under this category.
Cash is a very, if not the most, valuable asset of any business. A company's internal control status and operational effectiveness is mostly measured by how much cash its policies were able to save in relation to certain financial ratios, followed by level of employee morale and so on (see how the human factor is only second to money). A capital-intensive firm can establish its own treasury function to account for its cash movements at any interval as it sees fit, but SMEs and growing companies need to count every penny in their pockets to fund its capital requirements.
But how?
Some companies are puzzled where the money went after it is long gone. This is way past the time the expenses have been incurred and financing should have long been availed, thus making accountability for lost cash quite difficult to establish. As a rule of thumb, control is most effective when only one person is responsible for a given task. This, however, is only applicable to small-scale businesses; corporations especially publicly-listed firms are subject to the dreadful Sarbanes-Oxley law or equivalent. This rule is without its flaws -- it is hard to discover fraud when the person controlling cash inflows and outflows is also responsible for its recording for then it could be very easy to manipulate supporting documents such as collection receipts, bank deposit slips and withdrawals, and payment vouchers. Thus, a character check is crucial before selecting a trustworthy candidate for the job. Accountability should be established well within those involved in a cash cycle to easily pinpoint holes in the controlling aspect.
If the company can afford to, monetary or effort-wise, the record-keeping function should be separate from physical custody. This is where value-added services from the depository bank comes in. A passbook savings account can be very helpful in monitoring cash movement: the cashier prepares a daily/weekly/monthly cash report based on issued receipts and invoices paid, to be compared by a separate person (the business owner or representative) to the passbook. Daily cash collections should be deposited that same day to the bank. Cash payments well over Php1,000 should be paid using the company check independent from the cash custodian. Expenses below this amount may be settled through the office fund which may be set up and replenished using a company check as well. These controls are to prevent window dressing, lapping and kiting - deliberate errors to cover over/under recording of cash.
A surprise cash count handled by the cash custodian should be exercised regulary and on a non-routinary basis to check whether the job of accounting for them is done well. Aside from bills and coins, the transactions stated in the cash report should have evidence of transactions - official receipts for collections accompanied by a bank deposit slip dated the same day, invoices/billings/statements of accounts for payments as well as receipts issued by the payee, shipping/delivery documents, and so on. This is proof that a cash transaction indeed incurred and was not just made up to conceal an unofficial use of company funds. It is also crucial that company documents such as official receipts are pre-numbered and accounted for regularly, for it is possible that a receipt has been issued by a customer but such payment was not turned over to the coffers. A missing or doubly-used receipt signals abnormality in cash inflow handling.
Cash disbursements are ideally made through checks wherein at least two signatories independent of the cash custodian are authorized by the bank to sign checks. This is to ensure that no connivance exists between these parties and establish the integrity of expense reporting. A ghost disbursement can only be possible if a signatory signs the check and the custodian reports it as legit - one thing management may find difficult to prove.
A monthly reconciliation of cas per records versus all bank accounts should be prepared by the custodian for review supported by the passbooks to substantiate the cash balance per bank. If not a passbook account, it is a depositor's right to demand a Statement of Account from its depository bank on a timely basis.
These are merely controls for cash actually existing for company use. To increase its cash level, collection of outstanding receivables should be increased so as not to let revenues stay idle in collectible accounts. Impose interest and/or late payments to customers as necessary to insist prompt payment. Trim down on unnecessary expenses especially those incurred for personal purposes - remember that it is company money they are using for their lunch or car registration renewal. For trading companies, keep inventory levels low either by ordering only what has been committed to customers with minimal allowance for unexpected orders - do this only if lead time for ordering and delivery from the supplier of goods is relatively short. A good inventory management is crucial in cash maintenance and reduce the possibility of wastage/spoilage, obsolescence, or shortage. During expansion or upgrading, plan the timing of major expenditures such as equipment purchase and office rennovation. Calculate carefully when the funds will be available to finance these expenses and if the benefits that will be received during the useful life of these investments will greatly outweigh the cost of its procurement. And if the company really does well, it should invest its excess or idle cash in special savings account, or to other revenue-generating instruments if someone can. Ask your bank how they can help you increase your net worth.
Labels: random ramblings
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