Why Are Internal Controls for Cash Important to a Company?

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Cash represents the most liquid asset a company owns. Liquidity refers to the company’s ability to use the cash for financial transactions. Companies use cash to conduct most business transactions, including customer payments, vendor payments, equipment purchases and employee payroll. Because of the role cash plays in financial transactions, internal control procedures for cash constitute a high priority for companies. Cash internal controls serve several important functions for businesses.

Accurate Reporting

One role internal controls play in relation to cash involves accurately reporting the level of cash held by the company. Businesses rely on accurate cash reporting to understand the amount of money available to make required payments. Businesses also want to know the correct amount of cash on hand. If the business holds excess cash, it may invest that cash in order to gain a return on the money. If the business lacks enough cash, it may need to acquire financing. An example of an internal control to ensure accurate reporting involves performing bank reconciliations.

Reduce Theft

Internal controls also reduce the possibility of someone stealing the cash. Both employees and non-employees may be tempted to steal cash from the company. Businesses who receive cash payments keep enough currency on hand to facilitate customer transactions. Businesses also use checks to make cash payments. Internal controls safeguard both paper checks and currency. Companies use separate internal controls for employees and non-employees. Internal controls aimed at reducing theft of cash include installing video cameras, or securely locking checks when not in use.

Minimize Errors

Internal controls regarding cash minimize the potential for errors in reporting and handling money. Errors impact the cash balance in either favorable or unfavorable ways. A favorable error occurs when the company holds more cash than it expects. An unfavorable error occurs when the company holds less cash than it expects. Both types of errors indicate that employees mishandle cash. Internal controls minimize the potential for errors when dealing with cash. Techniques can include training employees on cash handling or installing registers that automatically dispense change to customers.

Maintain Confidence

Investors, lenders and management want to believe the numbers reported on the financial statements, especially concerning cash. Internal controls place parameters around employee activities and cash management, providing assurance that the employees properly handle the cash and maintaining trust in the numbers.

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