Internal controls for cash: Basic procedures & guidelines

When retail, e-commerce and other companies take steps to safeguard their cash assets, what they’re really doing is executing internal controls for cash. These controls ensure well-intentioned employees won’t accidentally misrepresent cash flow and that bad actors can’t fly under the radar while committing cash fraud.

This risk is especially significant given that, in 2022, cash receipt fraud accounted for 23% of all workplace fraud. What’s more, it took companies an average of 15 months to uncover that fraud — every second of which can cause further damage to a company’s bottom line and reputation.

Getting internal controls for cash right isn’t just about the cash itself. It’s about protecting the organization from costly fraud and the reputational damage that can come with it.

To help you implement a robust internal controls system, this article will explain:

• What internal controls for cash are, and why they’re important
• The four basic internal controls procedures
• Internal control measures for different types of cash handling
• How to develop your own internal controls system for cash

What are internal controls for cash?

Internal controls for cash are procedures designed to safeguard cash. Controls are imperative for any financial activity, but cash is especially vulnerable to fraud because its security is directly tied to the person handling it. There are no digital breadcrumbs to follow.

That makes even the most basic internal controls for cash a critical financial security measure. Organizations may limit the amount of cash on hand, double-check cash counts, or even separate who collects and counts it, all of which are vital ways to make cash handling more secure.

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Why is an internal control system for cash important?

An internal control system for cash is important because it protects an organization’s best interests. It helps employees understand how to handle cash and empowers organizations to limit fraud and prove compliance with cash-handling regulations.

In turn, it contributes to a stronger culture of compliance, fosters a more robust audit function and encourages employees to see even the smallest transactions as either helpful or harmful to the organization.

The 4 internal control measures for cash

There are countless internal control measures for cash, but many are based on four basic measures. These are:

1. Background checks: This ensures that those handling cash are trustworthy and don’t have a track record of stealing or misrepresenting cash assets.
2. Limiting cash access: Many organizations only allow employees to withdraw specific amounts of cash at a time. This exposes less cash to the risk of miscounts or misappropriation.
3. Securely storing cash: Storing cash somewhere secure, like a safe, helps ward off theft, both by employees and by members of the public.
4. Separation of duties: All organizations should adopt this basic cash control, which requires that multiple people be involved in every transaction. For example, one person should collect the cash, another should count it, and yet another should deposit it.

Basic internal control procedures for cash

How you approach cash controls depends on your business. Employees in a retail setting may need to follow different protocols than those collecting cash donations for their nonprofit. But understanding the internal control procedures for different types of cash handling can help you create or strengthen systems that will suit your business.

Effective internal controls for cash include:

Cash disbursements (payments)

There are specific protocols organizations can implement to ensure that any cash they disperse (i.e., used to make payments) remains secure. Standard internal controls for cash disbursements are:

• Use a point-of-sale (POS) system
• Secure cash in a register connected to the POS
• Keep a comprehensive list of all vendors
• Verify the identity of all vendors to mitigate fraud
• Implement passwords and two-factor authentication on all financial systems
• Audit controls and systems at least annually to detect any weaknesses

Cash collected

Internal controls for cash collected, also called cash receipts, is an equally important way to enforce safer cash handling. These controls involve tracking and securing any cash that comes into the organization.

The most effective controls are:

• Limit cash access to only designated employees
• Document all transactions, including receipts and refunds
• Review and validate the documentation within 24 hours
• Have one employee collect and deposit cash and have a second employee reconcile accounts
• Maintain a thorough log of cash receipts
• Compare logs against the cash ready for deposit
• Keep all cash that’s not in the register in a lock box or safe

Petty cash

By definition, petty cash only represents small sums of money typically used for small transactions. While this means petty cash may be immaterial to a company’s bottom line, how you handle petty cash can still be a reflection of your overall system of internal controls for cash.

Common petty cash controls include:

• Keep the minimum necessary amount of petty cash on hand
• Designate a sole individual to be responsible for managing the petty cash
• Petty cash should be resupplied monthly or more frequently if necessary
• Only small transactions can be reimbursed using petty cash
• Reimbursable transactions must have pre-approval and a detailed receipt
• Implementing surprise cash audits to verify transactions and totals

Cash equivalents

Cash equivalents are assets that can be quickly liquidated into cash; securities, treasury bills or notes and other short-term investments are common cash equivalents you’ll see on the balance sheet.

Since this money is invested, it’s easy to overlook internal controls that can help manage them. However, it’s essential to track and report cash equivalents accurately using controls like:

• Document types of cash equivalents, banks and types of bank accounts, authorized signatories and more
• Designate one person to initiate the transfer from cash equivalent to cash and another to reconcile the transaction
• Choose only cash equivalents with a near-term maturity date so the investment won’t lose value
• Carefully define cash and cash equivalents on the balance sheet to accurately represent which assets are liquid and which aren’t

General guidelines for effective internal controls for cash

At their most basic level, internal controls for cash are intended to secure cash and cash equivalents. This may sound simple, but the more cash a business handles — and the more people involved — the more complex the internal controls system becomes.

As you’re implementing internal controls over cash, consider leveraging these guidelines:

1. Define “cash:” For most organizations, cash doesn’t just refer to dollar bills; it’s an umbrella term for currency, coins, checks, money orders and credit card receipts. Be clear about how your organization defines cash so employees know which controls to follow.
2. Require accountability: Designate an employee responsible for cash at any given time. Document when the responsibility changes hands, including the amount of cash, the date and signatures from both parties.
3. Keep thorough records: Your controls are only as strong as your documentation. Make note any time cash is dispersed or received so you can reconcile every transaction.
4. Regularly self-assess: Don’t wait for an audit to test whether or not your controls are effective. Routinely assess your internal control system and even test at random to ensure that your controls are successful and that employees are taking them seriously.
5. Centralize control monitoring and workflows: Cash assets may seem difficult to track, but automating and centralizing internal controls management can help drive the accountability that secures cash handling requires.

Take an always-on approach to cash controls

Effective cash controls have multiple components. It requires:

1. Understanding what your cash assets are
2. Identifying organizational processes that involve cash
3. Assessing which controls can make those processes more secure

While it’s possible to do it all manually, internal controls management technology can turn controls into a more strategic function — one that protects your organization’s profitability for the long haul.

Learn about the different features to look for in internal controls for cash management solutions, from always-on risk detection to advanced reporting capabilities.