I'm Larry Walther, and this is principlesofaccounting.com, Chapter 6.
In this module, we'll look at cash management and
controls for receipts and disbursements.
Thinking first about cash management, recognize that organizations must ensure
that sufficient cash is always available to meet obligations as they come due.
And second of all that any available or excess or idle cash is appropriately
invested to generate the best possible returns to the organization.
Now, this will often require the preparation of a cash budget.
Indeed, in a later chapter considerable attention is given to the preparation of
a cash budget.
But for now just recognize that it is an overall plan
that depicts the cash inflows and outflows for a stated period of time.
This enables in advance identifying periods of time when there may be a cash
shortage which could otherwise be seen as a signal of weakness and
even do a considerable damage to the organization, for example,
payroll must be met or employees will not continue to work for an organization, so
proper cash management is very important.
Now, you may think of a cash shortage as a sign of a weak organization,
that's not always true.
A very successful company maybe having significant growth,
which means that additional cash is needed to acquire inventories or
build up in receivables in advance of actually collecting cash, or
even indeed building new locations, new facilities, acquiring new equipment.
All of those things take considerable amounts of cash, so
rapid growth can often times create a cash shortage.
So careful planning is needed to sustain a proper growth rate.
Now, strategies to enhance cash flows can be divided into, first,
external strategies such as issuing additional shares of stock.
The advantage is that those are funds that are not required to be repaid.
However, it definitely dilutes the existing ownership structure.
And in many cases, that's something the owners desire to avoid.
And so that gives rise to consideration of borrowing funds that do not entail
shareholder dilution.
But those funds must be repaid along with interest charges on the funds.
Some businesses will maintain a standing line of credit.
A standing line of a credit is an agreement with a bank or
other capable lender that says we have available to us upon our call or demand.
Access to borrow funds, now there's usually a significant fees for
setting up a stand by borrowing agreement or a letter of credit,
but it's certainly less than the interest cost that would be incurred
on actually borrowing the funds than simply holding those funds, so
that's a very viable external strategy for having access to cash as needed.
Internal strategies, include accelerating cash collections.
We saw in an earlier chapter the idea of offering a cash discount to our customers
to entice them to pay on a timely basis.
And we might also accept credit cards that involve immediate receipt or
immediate funding of our sales from a credit card company.
Or accepting electronic payments for
customers that give us same day access to funds that they.
Transfer to us.
In the alternative, on the flip side,
we might try to delay cash outflows such as paying by check through the mail.
That may buy us a few days utilization of funds,
however recognizing that using the float in that way
is not acceptable if you're using that to cover a cash shortage.
In other words, you're not permitted to write out checks.
Many people have found themselves in trouble for trying that idea for
cash management.
Now along with internal strategies to accelerate cash receipts or
defer cash payments, we also need to consider our cash controls,
which simply means limiting access to our cash, providing appropriate
segregation of duties so that the person disbursing the cash is not the one,
perhaps authorizing the disbursement, and other such accountability features.
When we think about cash collections,
if we have a business where we provide goods and service to customers.
They pay cash in hand.
We need to think about auditing those cash, tying up the cash to our cash
drawers and our receipts as well as making daily bank deposits of those cash amounts.
The same is true on receipts
of checks that is sales on credits where we later collect a check from a customer.
Those checks should be timely recorded in the accounting records.
Periodically, the actual deposits should be compared to the bank deposit slip.
So we need an enhanced control structure over those types of items.
That's often evidence through a bank reconciliation that we look at in
the next module.
Finally, we want to consider controls over disbursements,
proper authorization of payments,
proper separation of duties, Preparation of bank reconciliations, perhaps
utilization of a petty cash system that is in another module we will discuss, as well
as use of checks from most significant payments that occur by the organization.
So, there are a number of strategies that we can entertain to control cash,
manage cash, plan our cash activities.
Make sure that that asset remains
a solid vibrant part of our organization.