Cash Management Part II – Building an Efficient and Powerful Cash Management System

By Garrett Fisher
October 9, 2011

In our last article, we analyzed negative effects of relying primarily on online banking daily balances as a means to manage cash. An organization needs to effectively keep a check book via its accounting system and manage cash beginning from the present and not with a view to the past (online banking presents a view to the past, ironically). This article will explain building blocks necessary to maintain consistent present cash values. When a few basic rules about structure are followed, the process is surprisingly accurate and powerful.

The linchpin to keeping ongoing cash accurate is to develop a schedule for getting cash reporting from accounting to management. First, a schedule allows for accounting to follow in-depth processes to ensure that pertinent entries are in and verified (i.e., that management is getting an accurate report). Second, the schedule also allows accountants to be able to gather accurate information vs. random, on-demand calls for immediate cash reporting that are not accurate. Depending on the organization, it also prevents management from bulldozing into a process that may not be properly understood, pulling inaccurate reports and causing a sequence of disasters. Accountants need a basic amount of advance notice to ensure that cash is accurate for decision makers. The schedule may be daily or weekly. Generally larger organizations push for daily whereas small businesses can get by with weekly.

Now that there are some basic ground rules, the rest is basic accounting. All types of cash transactions need a process in place, followed and verified at cash reporting time. Some examples:

  • Deposits: Deposits, unless minor, should be taken to the bank every business day and entered into the system by a certain time of day on the same day. If the threshold cannot be met that day, collections staff need to be notified. Keeping a consistent cash entry procedure makes collections more efficient.
  • Checks: Accounting systems will automatically record checks printed. However, a few pitfalls. First, businesses that print check runs that they do not intend to mail. This is referred to as “holding checks” and is one of the most inefficient cash management practices on the planet. If management is releasing checks (vs. accounts payable), then accounts payable has no clue what has really been mailed and what has not. Further, ledger cash balances go negative necessitating keeping a list of outstanding checks to arrive at a “true” cash balance. Even worse, invoices that are on a held check come off the accounts payable and the power of the accounting system is lost. The final straw (kind of a humorous one) is when end of period reporting becomes due and management realizes that they will be reporting negative cash to banks and investors. The amelioration is either a flurry of cash transfers to create positive cash or a time-wasting reversal and reprinting of all held checks. The second pitfall to check payments is manual checks. When manual checks are written (by whomever), a process must be in place to notify accounting immediately and enter into the system.
  • Electronic Transactions: Electronic transactions that are known about should of course be entered when made. The other option is to leverage online banking and validate daily or weekly that no unknown electronic transactions have been posted. Those that have been posted should be entered into the system.
  • Payroll: Payroll should be entered once submitted with all cash entries affecting the ledger on time. In some cases, payroll is highly complex and cannot be entered quickly (due to a variety of reasons possibly including separation of duties). At the very least, accountants should be given gross cash amounts and enter placeholder entries to keep cash accurate until full entries can be made.
  • Credit Card Receipts: If a business receives most of their revenue via retail sales made by credit card, then “Due from Credit Card” accounts should be established and maintained in the accounting system. Validating actual deposits by using online banking and posting as received is better than guessing – especially as MasterCard & Visa have a shorter float than American Express payments and holidays and weekends can create vagaries in float schedules.

At cash reporting time, accounting should validate with all applicable parties that deposits are entered, the bank has been checked, no manual checks have been written and that the final cash balances “makes sense”. Generally a verbal from everyone that items are in is sufficient. Some organizations with brittle cash flow may choose to do an interim bank reconciliation for the week/day before reporting cash amounts. A simple report to management can easily show Cash in Blank, Float and Register Balance (Float equals Register Balance minus Cash in Bank) and be fully accurate.

Organizations with significant accounting department issues very well may have eyes glazed over at a long list of changes to make. A key tool is to approach each process, one by one and progressively roll out changes. Significant problems are solved in a day.

In our next article, we will answer the classic question “WHERE DID ALL THE CASH GO!?!?!” and delve into making sense of the very powerful and oft-overlooked Statement of Cash Flows.