Principles to Establish Strong Internal Controls Over Cash Receipts
It’s always important for business owners to set up a reliable and consistent process for tracking cash receipts, to ensure leadership has an accurate way to monitor results. Properly designed controls should include both preventive and detective controls. Preventive controls are put in place in order to prevent a loss, and include segregation of duties, automation, access restrictions and documentation requirements. Detective controls on the other hand, exist to detect errors or fraud. They can include reviews, reconciliations, and audits, and are critical to ensuring that the preventive controls are functioning properly. But in order for business owners to guard against a variety of problems, the best option is to establish both types of controls. To establish and communicate the foundations for a good control environment over cash receipts, business owners should consider the following principles.
Segregation and Automation
Start by looking at every aspect of a sale transaction and the corresponding cash receipt to ensure different individuals are involved regarding the creation of the receivable, the receipt of the payment, and the application of the cash receipt in the accounting system. A common misconception is to assume proper segregation when there is one individual handing the cash receipt, while a second individual accounts for the payment. Without a third individual to verify that the receipts match what is recorded, the risk of error or fraud will remain present.
While this does not mean you need any army of accountants, it does mean structuring the system to properly define and segregate responsibilities in the cash receipts process. The first step begins outside of accounting at the point of sale. The sales receipt is logged into a detailed “cash receipt log” describing the receipt date, amount, check date, and payee information. Cash receipts should immediately be securely stored, and checks should be stamped “for deposit only” with the company’s banking information and deposited in a timely fashion. When possible, cash receipts should also be directed to a centralized location.
Once the cash or checks are stored or deposited, the receipt log is then forwarded to a second individual in order to record the payments in the accounting system. This individual does not handle the cash receipts, but directly records the log activity as well as any additional information provided by the customer. Payments are then applied either directly to outstanding invoices or to the company’s revenue, based upon the information provided by the customer.
At this point, many companies stop the review process. However, for best practices, a third individual should now match all receipts from the receipt logs to the deposits recorded at the bank and applied by accounting. Maintaining documentation of this reconciliation process ensures that differences are reconciled routinely and timely. Businesses with larger volumes of cash receipts may consider automating the process through the use of a bank lockbox or other third party vendor, providing details of collections on your behalf. This comes at a fee, often based upon the cash receipt volume. However, it’s well worth the cost as it can further strengthen controls by removing one of the three individuals from the process that has access to cash receipts.
Finally, consider the types of receipts delivered back to the customer and be sure any receipt books or other acknowledgements are pre-numbered in order to account for the sequence of all receipts provided. A formal receipt tracking system is particularly important for unsolicited receipts such as a special event or a transaction with a not-for-profit.
Access Restrictions
As mentioned, a company may have up to three separate individuals involved with the receipt, processing and verification of cash receipts. But the process is only as secure as the access settings of the accounting system. For instance, the individual recording receipts should only have access to the cash module of the system, which means they can enter receipts but cannot modify customer account details such as returns, discounts, pricing, or quantities sold. Nearly every accounting software is sophisticated enough to limit the types of access based upon the user assigned credentials. Unfortunately, far too often these controls are underutilized, and individuals have full access to all accounting modules, regardless of their responsibilities. Full access should only exist for certain IT individuals and the system should have an audit trail that details all overrides to the traditional system.
Documentation
Finally, the starting point to analyze what can go wrong with any type of transaction is proper documentation. It ensures the process and procedures are clearly communicated with your team and can often uncover any weaknesses in the process before trouble arises. Communicating with individuals who have responsibilities in the process often results in the development of clearer policies with which are able to be consistently enforced, as well as uncover unique situations for which risk of error may remain. As an added benefit, these communications can also result in controls that accomplish the intended control without being overly burdensome to those completing the tasks. Concise and easy to follow controls always offer a better control environment that people feel compelled to support. Difficult or overly complex processes invite poor policy allegiance and overrides. Timely reviews and thorough documentation also promotes a strong control environment in order to detect errors.
These simple steps, combined with a strong tone at the top by management, promote a solid control environment over cash receipts throughout the organization and can help prevent problems when you least expect them.
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