Any activity involving money is referred to, among accountants, as a transaction. Any transaction which involves an immediate receipt or payment of cash is known as a cash transaction. Let us start by assuming that cash means notes and coins.
There are numerous businesses (such as those of window cleaners, hairdressers, taxi services) which are carried on strictly on a cash basis.
Cash is the lifeblood of any business. It is arguably the most important of all the resources used within a business, and the owners and managers need to be aware at all times of their cash position. There are two reasons for this – a commercial one and a security one.
Commercial Reason
Just as we need to know in our personal life that we have sufficient cash to pay the rent and feed ourselves, so in our business life, we need to know that there is sufficient cash to pay suppliers and staff on time – if not supplies may be cut off and staff leave.
Security Reason
Cash is vulnerable and the secret is to avoid putting temptation in anyone’s way. There is the risk that it could be stolen or used to pay for non-business items, for example, a garage employee may use business cash to buy new tires for his own car. Stealing cash from a business or applying it other than for a legitimate business purpose is referred to as misappropriation.
Misappropriation is often carried out by the staff. It frequently involves small amounts, sometimes over long periods, but it can also involve quite large amounts. It is particularly difficult to control if it is carried out by a senior figure, as in the case of Christopher Woodhead. Woodhead had set up a number of companies providing external textured coatings for houses and withdrew large cash sums from these businesses on the pretext that he was paying suppliers in cash or was making cash refunds to clients: in reality, he was using the money to meet his personal needs.
Following a prosecution by the Serious Fraud Office (www.sfo.gov.uk), he was convicted on 27 July 2004 and ordered to pay back £428,000. Misappropriation of funds can affect businesses of all sizes, from major companies such as Enron down to the local restaurant.
How Serious is the Risk?
A survey conducted for Bank of Scotland Business Banking in 2006 found that the cash flow of nearly a quarter of UK small businesses (900,000 businesses) was under threat from losses due to staff theft or fraud. The moral of this is that it is the responsibility of every business to take active steps to control its cash – it is negligent not to do so.
How is Cash Controlled?
There is no single solution. There are the steps taken by management, for example noticing if a member of staff has a change in lifestyle (holidays, new car, expensive clothing) or in the day-to-day operation of the business comparing cash takings on the days they work with takings on their day off.
In this article, however, we are concentrating on the procedures within the financial accounting system and explain the steps taken within that system to control cash. These include:
Daily Routines
■ There needs to be written and reliable evidence to support every amount received and paid. Such evidence is known as a voucher:
(i) The voucher evidencing cash sales is often the till roll from a cash register.
(ii) The voucher evidencing a payment is usually a receipt issued by the person to whom the payment has been made. It should be possible to see from the receipt the reason for the payment and, if it is a substantial payment, it would be normal for it to be authorized by a responsible employee.
■ Every amount received and paid is recorded in a Cash account, with a cross-reference to the corresponding voucher that provides evidence of and an explanation for the transaction.
■ To avoid holding excessive amounts of cash, amounts surplus to the immediate requirements of the business are placed in a bank and movements in and out of the bank are recorded in a Bank account.
■ The Cash account and the Bank account are written up in a Cash Book.
Random Routines
■ Physical checks are made from time to time to confirm that the difference between the total received and the total paid is actually held.