Safeguarding cash allows your small business to maximize cash flow.
Cash, including checks, is an important aspect of many businesses. But controls such as monthly reporting must be put in place to safeguard it. If not, you may not have a grasp on what you need for future investments, which may impact further cash flow.
The FlowFirst® management model consists of four “flows”: sales flow, operational flow, financial flow and, most importantly, cash flow.
The accumulation of cash enables the proper level of investment that drives the other three flows, which ultimately leads to increased cash flow. Financial flow, in addition to processing accounting and financial information and providing financial results and management reports, must have the built in internal controls to safeguard cash.
Many processes exist to help safeguard cash. Some examples include properly handing checks and expense reports, monitoring and reconciling the monthly budget, and establishing controls for the monthly reporting process. All of these types of processes are vital to safeguarding cash and allow your business to maximize cash flow.
Many safeguards exist for protecting cash in the form of checks.
When issuing, receiving and recording checking transactions, there are a number of processes that every business should follow:
- The primary check signers should maintain a sequential log of checks and physically inspect voided or cancelled checks.
- Password-protected Excel files should be kept by the primary check signer. This helps ensure that all checks are sequentially accounted for.
- An alternate check signer should be designated in the event that the primary check signer isn’t available. This alternate signer should be given access to the Excel files.
- Images of the front and back of cancelled checks should be saved with each bank statement.
- The primary check signer should review and initial the monthly bank reconciliation. Following this, a designated member of management outside of the accounting department (who is familiar with the company’s vendors) should review the monthly activity, including wire transfers and cancelled check images.
- Make sure that all credit card usage and check request forms are signed by the requester and reviewed by the accounting department monthly.
- Checks over a certain dollar amount should require a second signature. Establish controls for larger checks, where the primary check signer reviews and sorts the larger checks, so the secondary signer is able to quickly review these checks before mailing.
- Include any supporting documentation with invoices and mailed checks. Do not mail separately.
The monthly reporting process can also play an integral role in safeguarding cash. Establishing key controls and keeping a close watch on daily, monthly and annual statements are good ways to begin to create a firm system of control.
Here are eight recommendations for safeguarding cash flow in the monthly reporting process:
1. Expenses should be reconciled to the budget and variances explained and accounted for.
2. All of the assets and liabilities of the company should be analyzed and compared to the prior month.
3. New vendor files should be reviewed for proper setup and authorization.
4. If applicable, payroll reports should be reviewed by department and compared to prior periods.
5. Monthly reports should reflect all daily, monthly and yearly non-cash adjustments and write-offs, by both the attorney and the client.
6. Management should manually review all reports for accuracy.
7. A monthly roll forward of accounts receivable must be maintained. Deposits must be reconciled to bank activity, additions must be reconciled to billing reports, and non-cash adjustments and write-offs must be reconciled to adjustment reports.
8. Each month, management should conduct a formal review of the budget and compare it to actual performance. This committee should review monthly profit-and-loss statements in order to carry out a detailed comparison of the expected budget to the actual budget.
- The accounting department should prepare a monthly narrative that explains any significant changes or discrepancies between the expected budget and the actual budget.
- Be sure to establish key controls such as supervisory review and bank statement and reconciliation approval for client funds, master funds and checking accounts.
- Be wary of having too many check signers, especially if monitoring controls aren’t firmly established. Consider requiring a second signature to help with control.
Cash flow is the most important “flow” in the FlowFirst® management model. It’s the initial cash investment, as well as the subsequent accumulation of cash, that helps fuel the other three flows. Safeguarding this vital asset goes hand in hand with safeguarding your business.
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