Internal Control and Cash Management : Business Administration Training : Lean Business Club, Inc.

FINANCIAL MANAGEMENT
CHECK POINT 51: INTERNAL CONTROL AND CASH MANAGEMENT

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1.	what is internal control?
2.	internal accounting control
3.	advantages of internal accounting control
4.	the purpose of internal administrative control
5.	basic principles of internal control
6.	cash management and control
7.	banking procedures
8.	cash deposits and withdrawals
9.	bank statements
10.	bank reconciliation
11.	small business example bank reconciliation statement
12.	for serious business owners only
13.	the latest information online

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Level 5: I/We Plan To Start A Small Business With Employees.	V
Level 6: I Am A One-Person Business Owner.	V
Level 7: I Am A Small Business Owner With Employees.	V
Level 8: We Are Small Business Owners Without Employees.	V
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FINANCIAL MANAGEMENT
CHECK POINT 51: INTERNAL CONTROL AND CASH MANAGEMENT

Please Select Any Topic In Check Point 51 Below And Click.

1.	what is internal control?
2.	internal accounting control
3.	advantages of internal accounting control
4.	the purpose of internal administrative control
5.	basic principles of internal control
6.	cash management and control
7.	banking procedures
8.	cash deposits and withdrawals
9.	bank statements
10.	bank reconciliation
11.	small business example bank reconciliation statement
12.	for serious business owners only
13.	the latest information online

DO I NEED TO KNOW THIS CHECK POINT?

Management Level	Yes	Optional
Level 1: I Am An MBA Student.	V
Level 2: I Am A Professional Manager In A Company.		V
Level 3: I Plan To Start A One-Person Business.	V
Level 4: We Plan To Start A Small Business Without Employees.	V
Level 5: I/We Plan To Start A Small Business With Employees.	V
Level 6: I Am A One-Person Business Owner.	V
Level 7: I Am A Small Business Owner With Employees.	V
Level 8: We Are Small Business Owners Without Employees.	V
Level 9: We Are Small Business Owners With Employees.	V
Level 10: I Am A Management Consultant Or A CPA.	V

WELCOME TO CHECK POINT 51

TUTORIAL 1 General Management				TUTORIAL 2 Human Resources Management				TUTORIAL 3 Financial Management				TUTORIAL 4 Operations Management				TUTORIAL 5 Marketing And Sales Management
1	6	11	16	21	26	31	36	41	46	51	56	61	66	71	76	81	86	91	96
2	7	12	17	22	27	32	37	42	47	52	57	62	67	72	77	82	87	92	97
3	8	13	18	23	28	33	38	43	48	53	58	63	68	73	78	83	88	93	98
4	9	14	19	24	29	34	39	44	49	54	59	64	69	74	79	84	89	94	99
5	10	15	20	25	30	35	40	45	50	55	60	65	70	75	80	85	90	95	100

HOW CAN YOU BENEFIT FROM CHECK POINT 51?

The main purpose of this check point is to provide you and your management team with detailed information about Internal Control And Cash Management and how to apply this information to maximize your company's performance.

In this check point you will learn:

• What is internal control?
• About two types of internal control.
• About the purpose and advantages of internal accounting control.
• About the purpose and advantages of internal administrative control.
• About the basic principles of internal control.
• About cash management and control guidelines.
• About banking procedures.
• About cash deposits, withdrawals, and bank statements.
• About bank reconciliation procedures.
• How to complete bank reconciliation... and much more.

LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 51

You and your management team should become familiar with the basic Lean Management principles, guidelines, and tools provided in this program and apply them appropriately to the content of this check point.

You and your team should adhere to basic lean management guidelines on a continuous basis:

•	Treat your customers as the most important part of your business.
•	Provide your customers with the best possible value of products and services.
•	Meet your customers' requirements with a positive energy on a timely basis.
•	Provide your customers with consistent and reliable after-sales service.
•	Treat your customers, employees, suppliers, and business associates with genuine respect.
•	Identify your company's operational weaknesses, non-value-added activities, and waste.
•	Implement the process of continuous improvements on organization-wide basis.
•	Eliminate or minimize your company's non-value-added activities and waste.
•	Streamline your company's operational processes and maximize overall flow efficiency.
•	Reduce your company's operational costs in all areas of business activities.
•	Maximize the quality at the source of all operational processes and activities.
•	Ensure regular evaluation of your employees' performance and required level of knowledge.
•	Implement fair compensation of your employees based on their overall performance.
•	Motivate your partners and employees to adhere to high ethical standards of behavior.
•	Maximize safety for your customers, employees, suppliers, and business associates.
•	Provide opportunities for a continuous professional growth of partners and employees.
•	Pay attention to "how" positive results are achieved and constantly try to improve them.
•	Cultivate long-term relationships with your customers, suppliers, employees, and business associates.

1. WHAT IS INTERNAL CONTROL?

INTERNAL CONTROL

Business owners and financial managers must be familiar with design, installation, and maintenance of stringent internal control systems within the financial department which represents one of the critical management functions in every business organization.

Internal Control is defined by the American Institute Of Certified Public Accountants (AICPA) as:

"The plan of organization and all of the coordinate methods and measures adopted within a business to safeguard its assets, check the accuracy, and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies".

This broad definition relates specifically to two types of internal control illustrated below. (6).

TWO TYPES OF INTERNAL CONTROL


Internal Accounting Control		Internal Administrative Control

ADDITIONAL INFORMATION ONLINE

•	What Is An Internal Control? By Blair Cook.
•	Internal Control Systems By Nasir Khan.
•	Fraud And Internal Control Part 1 By John Hall, CPA.
•	Fraud And Internal Control Part 2 By John Hall, CPA.
•	Internal Control And Internal Audit By Mindset Learn.

2. INTERNAL ACCOUNTING CONTROL

INTERNAL ACCOUNTING CONTROL

The main purpose of Internal Accounting Control is to ensure the completeness, accuracy, validity, and maintenance of accounting records and physical security of assets. All basic internal accounting control procedures must be performed in accordance with the Generally Accepted Accounting Principles (GAAP).

Some of the basic requirements of internal accounting control are outlined below. (7).

BASIC REQUIREMENTS OF INTERNAL ACCOUNTING CONTROL

1.	Transactions are executed in accordance with management's general or specific authorization.
2.	Access to assets is permitted only in accordance with management's authorization.
3.	Transactions are recorded as necessary to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) and to maintain accountability for assets.
4.	The recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

3. ADVANTAGES OF INTERNAL ACCOUNTING CONTROL

EMPLOYEE MOTIVATION METHODS

Effectively implemented Internal Accounting Control helps to achieve important objectives within the financial department and provides several benefits outlined below.

ADVANTAGES OF INTERNAL ACCOUNTING CONTROL

1.	It prevents losses of cash and inventory from theft and fraud.
2.	It facilitates preparation of accurate records related to company transactions with customers, suppliers, and creditors.
3.	It provides management with essential level of financial security within the organization.
4.	It provides management with important tools for control within the financial department and the entire organization.
5.	It enables management to properly plan and implement financial activities within the organization.

4. THE PURPOSE OF INTERNAL ADMINISTRATIVE CONTROL

INTERNAL ADMINISTRATIVE CONTROL

The main purpose of Internal Administrative Control is to ensure high operational efficiency within the financial department and adherence to managerial policies related to the accounting function. Main tasks of internal administrative control are outlined below.

INTERNAL ADMINISTRATIVE CONTROL TASKS

1.	Dealing with the company's customers, suppliers, and creditors.
2.	Authorizing business transactions pertaining to the purchase and sale of products or services.
3.	Maintaining a proper bookkeeping system.
4.	Maintaining steady control over company assets such as cash, inventory, and capital assets.
5.	Maintaining an updated payroll accounting system.
6.	Collecting cost accounting information.
7.	Preparing management accounting reports.
8.	Maintaining a computerized accounting system.

All administrative control tasks outlined above can be completed manually or by using a specific accounting software program.

POPULAR ACCOUNTING SOFTWARE PROGRAMS

There are several excellent Accounting Software Programs available to small business owners at present. Some of the most popular accounting software packages are presented below:

• Sage One

• QuickBooks Intuit

• FreshBooks

• Harvest Software Systems

• NetSuite

Various accounting software programs may include additional functions, depending on each specific package. This is discussed in detail in Integrated Financial Management in Tutorial 3.

5. BASIC PRINCIPLES OF INTERNAL CONTROL

INTERRELATION BETWEEN ACCOUNTING AND ADMINISTRATIVE CONTROLS

Internal Accounting and Administrative Controls are strongly interrelated. Both types of control, therefore, need to be developed at the same time and implemented in accordance with the company's specific requirements.

In order to maintain effective internal control within the financial department and the organization as a whole, management is advised to adhere to the following Basic Principles Of Internal Control outlined below.

BASIC PRINCIPLES OF INTERNAL CONTROL

• Separation Of Duties.

It is important to ensure that all critical areas of accounting control are handled by more than one person to minimize mistakes and chances of possible embezzlement of cash and other assets.

• Development Of A Sound Accounting System.

It is essential to develop, implement, and maintain simple but effective procedures for bookkeeping and control over assets, liabilities, revenues, and expenses. Such a system should also prescribe regular balancing of books of account and allow spontaneous audit.

• Implementation Of Effective Human Resources Management Policies.

This entails selection of qualified and reliable employees, continuous supervision and possible rotation of employees in key positions, and regular employee performance appraisal and training.

• Review Of Internal Control Policies.

It is necessary to conduct regular reviews of the company's internal control policies and to identify possible inefficiencies in the financial department.

6. CASH MANAGEMENT AND CONTROL

CASH MANAGEMENT AND CONTROL

One of the major elements of internal control relates to Cash Management And Control. Cash, the most liquid form of assets, must be administered with particular care. The control of cash represents a difficult task since it is utilized throughout the company's business activities which follow a typical operational cycle:

Cash

Purchases

Operations

Sales

Cash

Cash is usually defined as the sole medium of monetary exchange that is totally negotiable and free of restrictions. One of the weakest points related to the use of cash is its vulnerability to misappropriation. It is essential, therefore, to install and maintain a sound cash management and control system and to adhere to the following guidelines outlined below.

CASH MANAGEMENT AND CONTROL GUIDELINES

1.	The function of handling cash is separated from the bookkeeping function.
2.	The number of employees who have access to cash is limited.
3.	Employees who handle cash are specifically designated and their background is checked thoroughly.
4.	Cash received by mail is handled by at least two employees.
5.	Cash received over the counter is controlled through the use of cash registers and sometimes through the use of pre-numbered sales tickets.
6.	Cash receipts are recorded daily.
7.	Cash receipts are deposited daily.
8.	Cash is stored in a safe place.
9.	The amount of cash is verified against relevant documentation or bank statements.
10.	All payments are made by check except some small payments made out of a petty cash fund.
11.	Petty cash is controlled on a daily basis.
12.	Cash journal is reconciled periodically with appropriate bank statements.

ADDITIONAL INFORMATION ONLINE

Please watch these excellent videos professionally narrated and produced by Susan Crosson and SFCC:

•	Cash And Receivables 1 - Overview By Susan Crosson.
•	Cash And Receivables 2 - Bank Reconciliation By Susan Crosson.
•	Cash And Receivables 3 - Accounts Receivable By Susan Crosson.
•	Cash And Receivables 4 - Uncollectable Account By Susan Crosson.
•	Cash And Receivables 5 - Notes Receivables By Susan Crosson.
•	Cash And Receivables 6 - Journal Entry Recap By Susan Crosson.

7. BANKING PROCEDURES

BANKING FACILITIES

Because of its vulnerability, cash should not be kept on the company premises and, instead, should be deposited in an appropriate bank account. Banking Facilities play an important role in safeguarding cash and other valuable business documents, such as stocks, bonds, and various corporate documents. Moreover, the use of Checks for cash disbursements helps to minimize the amount of cash on hand and provides a permanent record of all payments.

Hence, it is apparent, that control of a company's bank accounts is an integral part of cash management and control. The financial manager needs to develop, implement, and maintain effective and safe Banking Procedures, which include several tasks outlined below.

BANKING PROCEDURES

1.	Daily deposit of cash from cash sales and other cash receipts.
2.	Weekly withdrawals of cash for wages and petty cash.
3.	Monthly reconciliation of bank statements with the cash journal.

All banking procedures and monthly reconciliation outlined above can be completed manually or by using a specific Accounting Software Program as discussed in detail in Tutorial 3.

ADDITIONAL INFORMATION ONLINE

•	Opening Your Business Bank By JerryTheFixer.
•	Informative Episode On Banking Procedures By ShameFOX.
•	Banking Procedures And Control Of Cash By Rachelle Agatha.
•	Online Banking For Small Business Accounts By WebsterFinancial.
•	Small Business Banking - Personal Vs. Business By Michelle, Small Biz Doer.

8. CASH DEPOSITS AND WITHDRAWALS

CASH DEPOSITS AND WITHDRAWALS

Daily Deposits of cash must be accompanied by a Deposit Ticket prepared in duplicate by the person responsible for handling cash. All deposit tickets must be kept in a special file and, if necessary, be used for reconciliation of bank statements.

Weekly Withdrawal of cash for wages is necessary when wages are paid in cash to the hourly paid employees. Salaried employees, on the other hand, are normally paid by check on a bi-weekly or monthly basis.

In addition, withdrawal of small amounts of cash may be required to maintain a steady level in the Petty Cash Fund. Cash withdrawals must be affected by cash withdrawal slips prepared in duplicate by the person responsible for handling cash.

9. BANK STATEMENTS

BANK STATEMENTS

Once a month, the company must receive a Bank Statement which, in turn, must be reconciled with the company's books of account. The bank statement summarizes all transactions on the company's bank account, i.e. deposits of cash and checks, withdrawal of cash and checks, regular monthly payments and deductions, accrual of interest, service, and interest charges.

All previously issued checks that have gone through the bank account are also returned to the company together with the bank statement. The cash balances on the bank statement and in the cash journal rarely coincide with one another. This happens for several reasons and, subsequently, necessitates a Bank Reconciliation of accounts.

REASONS FOR BANK RECONCILIATION OF ACCOUNTS

• Outstanding Checks.

These checks have been issued by the company, recorded in the cash journal, but not yet presented to the bank for payment.

• Deposits In Transit.

These deposits have been placed in the bank, recorded in the cash journal, but not processed in time to be reflected on the monthly bank statement.

• Service Charges.

These charges are reflected only on the bank statement for usual services provided by the bank to a particular company.

• Interest Charged Fee.

This fee is commonly charged by commercial banks on the credit line balance utilized by the company.

• Non-Sufficient Funds (NSF) Checks.

These checks are collected by the company from its customers and deposited in the bank account. However, these checks are not covered by sufficient funds in the customer's bank account and are subsequently returned to the company.

• Miscellaneous Charges And Credits.

These relate to special services provided by the bank to the company, e.g. printing of checks, collection and payment of promissory notes, and stopping payments on checks.

10. BANK RECONCILIATION

BANK RECONCILIATION

Bank Reconciliation is reconciliation between the bank statement and the cash journal.

The Bank Reconciliation Process must be carried out on a monthly basis and it entails several steps outlined below.

THE BANK RECONCILIATION PROCESS

Step 1: Enter The Cash Balance.

Enter the cash balance as reflected on the latest bank statement.

Step 2: Compare Deposits.

Compare deposits reflected on the bank statements with deposits recorded in the company's books. Any deposits in transit should be added to the balance. Any deposits from the previous month that are not yet listed on the bank statement should be checked immediately.

Step 3: Trace Returned Checks.

Trace returned company checks to the bank statement and verify that each check is correctly charged to the company's account and signed by authorized person. Arrange all paid checks in numerical order and compare them with the record of checks issued. List all issued checks that are not reflected on the bank statement as outstanding checks and deduct these checks from the bank balance. Any outstanding checks from the previous month should be included.

Step 4: Determine Cash Balance.

Determine the adjusted cash balance as per bank statement.

Step 5: Enter The Cash Balance.

Enter the cash balance as reflected in the company's books.

Step 6: Add Credits.

Add to the cash balance any credit items issued by the bank and not yet recorded in the company's books, e.g. notes receivable collected by the bank, interest earned.

Step 7: Deduct Debits.

Deduct from the cash balance any debit items issued by the bank and not yet recorded in the company's books, e.g. service charges, interest charges, collection fees, NSF (non-sufficient funds) checks and NSF penalties.

Step 8: Determine The Adjusted Cash Balance.

Determine the adjusted cash balance as per the company's books and compare this with the adjusted cash balance as per the bank statement. In case of a discrepancy, repeat the process until both cash balances are reconciled.

Step 9: Make Journal Entries.

Make journal entries for items on the bank statement not yet recorded in the company's books.

ADDITIONAL INFORMATION ONLINE

•	Bank Reconciliation Part 1 By Tony Bell.
•	Bank Reconciliation Part 2 Example By Tony Bell.
•	Bank Reconciliation Part 3 Example By Tony Bell.
•	How To Prepare A Bank Reconciliation? By Denise Dodson.
•	How To Perform A Bank Reconciliation? By AmandaLovesToAudit.

11. SMALL BUSINESS EXAMPLE
BANK RECONCILIATION STATEMENT

BANK RECONCILIATION STATEMENT

ABC Service Company Bank Reconciliation Date: July 31, 2013
Step 1	Balance Per Bank, July 31		$1,234.56
Step 2	Add Deposits In Transit On July 31		$200.00
Step 2	Sub-Total Balance Plus Deposits In Transit		$1,434.56
Step 3	Deduct Outstanding Checks: No.200 No.205	$120.10 $314.46
Step 3	Total Outstanding Checks		$434.56
Step 4	Adjusted Cash Balance Per Bank		$1,000.00

Step 5	Balance Per Books, July 31		$2,345.67
Step 6	Add Credit Items: Note Receivable Collected By Bank Interest Earned	$200.00 $20.50
	Total Credit Items		$220.50
	Sub-Total Balance Plus Credit Items		$2,566.17
Step 7	Deduct Debit Items: Service And Interest Charges NSF Check From XYZ Company	$95.00 $1,471.17
Step 7	Total Debit Items		$1,566.17
Step 8	Adjusted Cash Balance Per Books		$1,000.00

12. FOR SERIOUS BUSINESS OWNERS ONLY

ARE YOU SERIOUS ABOUT YOUR BUSINESS TODAY?

Reprinted with permission.

13. THE LATEST INFORMATION ONLINE

LESSON FOR TODAY:
In God We Trust, All Others Pay Cash!

Jean Shepherd, Writer

Go To The Next Open Check Point In This Promotion Program Online.