Planning And Control Of Cash And Shortterm Investments

Objectives Of Cash Planning And Control Cash is a particularly vulnerable asset because, without proper controls, it is easily concealed and readily negotiable. But it is something every business needs. From an overall viewpoint, cash management would have these six objectives :
1.	Provision of adequate cash for operations both short and long term
2.	Effective utilization of company funds at all times
3.	Establishment of accountability for cash receipts and provision of adequate safeguards until the funds are placed in the company depository
4.	Establishment of controls to ensure that disbursements are made only for approved and legitimate purposes
5.	Maintenance of adequate bank balances, where appropriate, to support proper commercial bank relations
6.	Maintenance of adequate cash records

 

Duties Of The Controller Versus The Treasurer   With respect to cash management, a cooperative relationship should exist between the controller and treasurer. Duties and responsibilities will vary, depending on the type and size of the business firm. Under ordinary circumstances, the treasury staff has custody of cash funds and administers the bank accounts. Usually, it is the treasurer who is responsible for maintaining good relations with banks and other investors, providing the timely interest and principal payments on borrowed debt, and investing the excess cash. The treasurer usually would have primary responsibility for cash receipts and disbursement procedures.   The controller may have these responsibilities in companies large enough for separate treasury and controllership functions :
-	Development of some, or all, of the cash forecasts
-	Review of the internal control system with respect to both receipts and disbursements to assure its adequacy and effectiveness
-	Reconciliation of bank accounts as part of a sound internal control system (and not to be done by members of the treasurer’s department who have access to funds or by accounting personnel who record the transactions)
-	As may be deemed appropriate, preparation of selected cash reports

The Cash Forecast Purposes of Cash Forecasting   A cash forecast, or cash plan, or cash budget, is a projection of the anticipated cash receipts and disbursements and the resulting cash balance within a specified period. This is a necessary function in any well-managed plan of cash administration.   The operation of any business must be planned within the limits of available funds, and, conversely, the necessary funds must be provided to carry out the planned business operations. In these days of increasing sales and earnings, and taxes, business management is rediscovering that profits are not the same as cash in the bank. The company may show a small profit, or even a loss, and have a very sizable cash balance. Particularly in those industries requiring heavy capital investment, the cash generation by the operations, the “cash flow,” may be very heavy and yet result in mediocre profits. For reasons such as these, cash forecasting is being recognized as a vital management function.   The basic purpose behind the preparation of the cash budget is to plan so that the business will have the necessary cash whether from the short-term or long-term viewpoint. Further, when excess cash is to be available, budget preparation offers a means of anticipating an opportunity for effective utilization. Aside from these general purposes, some specific uses to which a cash budget may be put are :
-	To point out peaks or seasonal fluctuations in business activity that necessitate larger investments in inventories and receivables
-	To indicate the time and extent of funds needed to meet maturing obligations, tax payments, and dividend or interest payments
-	To assist in planning for growth, including the required funds for plant expansion and working capital
-	To indicate well in advance of needs the extent and duration of funds required from outside sources and thus permit the securing of more advantageous loans
-	To assist in securing credit from banks and improve the general credit position of the business
-	To determine the extent and probable duration of funds available for investment
-	To plan the reduction of bonded indebtedness or other loans
-	To coordinate the financial needs of the subsidiaries and divisions of the company
-	To permit the company to take advantage of cash discounts and forward purchasing, thereby increasing its earnings

Cash Forecasting Methods   At least two methods are in widespread use for developing a cash forecast. Although the end product is the estimated cash balance, the methods differ chiefly in terms of the starting point of the forecast and the detail made available. These two techniques are described as :
1.	Direct estimate of cash receipts and disbursements. This is a detailed forecast of each cost element or function involving cash. It is essentially a projection of the cash records. Such a method is the one most commonly used in business and is quite essential to giving a complete picture of the swings or gyrations in both receipts and disbursements. It is particularly applicable to those concerns subject to wide variations in activity. Moreover, it is very useful for controlling cash flow by comparing actual and forecasted performance.
2.	Adjusted net income (or indirect or reconciliation) method. As the name implies, the starting point for this procedure is the estimated income and expense statement. This projected net income is adjusted for all noncash transactions to arrive at the cash income or loss and is further adjusted for cash transactions that arise because of nonoperating balance sheet changes

Estimating Cash Receipts

The sources of cash receipts for the typical industrial or commercial firm are well known collections on account, cash sales, royalties, rent, dividends, sale of capital items, sale of investments, and new financing. These items can be predicted with reasonable accuracy. Usually, the most important recurring sources are collections on account and cash sales. Experience and a knowledge of trends will indicate what share of total sales probably will be for cash. From the sales forecast, then, the total cash sales value can be determined. In a some what similar fashion, information can be gleaned from the records to enable the controller to make a careful estimate of collections.

Once the experience has been analyzed, the results can be adjusted for trends and applied to the credit sales portrayed in the sales forecast.

An example illustrates the technique. Assume that an analysis of collection experience for June sales revealed the following collection data :

Description	% of Total Credit Sales
Collected in June	2.1
July	85.3
August	8.9
September	2.8
October	. 3
Cash discounts	. 5
Bad debt losses	. 1

If next year’s sales in June could be expected to fall into the same pattern, then application of the percentages to estimated June credit sales would determine the probable monthly distribution of collections. The same analysis applied to each month of the year would result in a reasonably reliable basis for collection forecasting. The worksheet (June column) for cash collections might look some what as :

Description
Month of Sale	% Total	Net Sales		June Collections
February	- 4	$	149,500	$	598
March	1.9	$	160,300	$	3,045
April	7.7	$	290,100	$	22,338
May	88.3	$	305,400	$	269,668
June	2.1	$	320,000	$	6,720
Total collections		$		$	302,369
Cash discounts (May)	- 5	$	305,400	$	(1,527)
Losses	- 1			$	( 320)
Total				$	300,522

The Cash Forecast

These experience factors must be modified, not only by trends developed over a period of time but also by the estimate of general business conditions as reflected in collections, as well as contemplated changes in terms of sale or other credit policies. Refinements in the approach can be made if experience varies widely between geographical territories, types of customers, or channels of distribution. The analysis of collections need not be made every month it is sufficient if the distribution is checked occasionally.

Estimating Cash Disbursements

If a complete operating budget is available, the controller should have little difficulty assembling the data into an estimate of cash disbursements. The usual cash disbursements in the typical industrial or commercial firm consist of salaried and hourly payrolls, materials, taxes, dividends, traveling expense, other operating expenses, interest, purchase of equipment and retirement of stock.

From the labor budget, the manufacturing expense budget, and the commercial expense budget, the total anticipated expense for salaries and wages can be secured. Once this figure is available, the period of cash disbursement can be determined easily, for payrolls must be met on certain dates, closely following the time when earned. Reference to a calendar will establish the pay dates. Separate consideration should be given to the tax deductions from the gross pay, since these are not payable at the same time the net payroll is disbursed unless special bank accounts are established for the tax deductions.

The material budget will set out the material requirements each month. The more important elements probably should be treated individually (e.g., power units or engines). Other items will be grouped together. Only in a few instances is material purchased for cash. However, reference to required inventories and to delivery dates as well as assistance from the purchasing department will establish the time allowed for payments. If 30 days are required, then usage of one month can be moved forward for the purpose of estimating cash payments. The effect of cash discounts should be considered in arriving at the estimated disbursements.

The various manufacturing and operating expenses should be considered individually because they are by no means all the same. Some are prepayments or accruals, paid annually, such as property taxes and insurance. Some are noncash items, such as depreciation expense or bad debts. For a large number of individually small items, such as supplies, telephone and telegraph, and traveling expense, an average time lag may be used.

Cash requirements for capital additions should be determined from the plant budget or other known plans. No particular difficulty presents itself because the needs are relatively fixed and are established by the board of directors or other authority.

Usual practice requires the determination of cash receipts and disbursements exclusive of transactions involving voluntary debt retirements, purchase of treasury stock, or funds from bank loans. Decisions relative to these means of securing or disbursing cash are reached when the cash position is known and policy formulated accordingly. When branch plants are involved, all such outlying activities must be consolidated to get the overall picture.

FASB Statement of Financial Accounting Standards  : Statement of Cash Flows

Having discussed the two methods in general use for estimating cash flows, it may be appropriate to review the standard issued by the FASB relating to statements of cash flow. It could be relevant to the cash forecasting process if management desires that the internal estimating procedure closely parallel the format to be used in reporting cash flow to the investor or security analysts and others.

The cash reporting procedure prior to this standard in many instances suffered from these weaknesses : 

-	No common definition of cash. Should it include cash equivalents, compensating balances, postdated checks, and so forth?
-	No common format. The format for the issuance of a cash flow statement was not distinguished from the statement of changes in financial condition.
-	In many instances, it was difficult to identify the cash flows from normal operating activity. (They were combined with other cash producing/generating activities.) Thus, the potential investor was at a disadvantage in gauging the cash generating potential of the normal everyday activities.

The complete FASB Statement of Financial Accounting Standards , Statement of Cash Flows should be reviewed in its entirety by the controller. Though lengthy, the standard should be useful for many reasons, including :

-	It provides examples of the cash flow formats that meet the standard for general purpose external financial accounting and reporting.
-	It includes the many helpful definitions regarding cash flows from the three basic sources : operating, investing, and financing activities.
-	It contains useful background data on cash flow statements and the basis of the FASB for reaching the conclusions it did.
-	In addition to examples of statements of cash flow for a domestic manufacturing company, it provides an example of a statement of cash flows under the direct method for a domestic manufacturing company with foreign operations.

Relation of Cash Budget to Other Budgets 

From the preceding discussion, it is readily apparent that preparation of the cash budget is generally dependent on other budgets the sales forecast, the statement of estimated income and expense, the various operating budgets, the capital budget, and the long-range strategic plan. It is in reality part of a coordinated program of sales and costs correlated with business sheet changes and expected revenues and expenditures.

It can be appreciated, also, that the cash budget is a check on the entire budgetary program. If the operating budget goals are achieved, the results will be reflected in the cash position. Failure to achieve budgeted performance may result in the treasurer seeking additional sources of cash.

Depending on the financial position of the company, the cash forecast may have a high priority. Many executives prefer to review the cash forecast ahead of other projected statements, and it may, therefore, take the number one spot in the complete report on expected operations.

Length of Cash Budget Period

The length of the budget period depends on several factors, including the purpose the budget is to serve, the financial condition of the company, and the opinion of the executives about the practicality and accuracy of estimating. For illustration, a short-term forecast would be used in determining cash requirements, perhaps for one to three months in advance. But if the cash margin is low, an estimate of cash receipts and disbursements may be necessary on a weekly basis or even daily. On the other hand, a firm with ample cash may develop a cash forecast, by months, for six months, or a year in advance. For the determination of general financial policy a longer-term budget is necessary. Some companies feel that estimating beyond three months is inaccurate and restrict the cash budget to this period. Other companies maintain a running budget for three or more months in advance, always adding one month and dropping off the present month. A controller will have to adapt forecasting to the existing conditions. It may be necessary to prepare a short-term cash budget for cash requirements purposes and also a long-term forecast for use in financial policy decisions.

Putting the Cash Budget to Work   The controller can prepare the cash budget in the usual manner, indicating the extent of additional cash funds needed, if any, and the probable duration of such need. However, the responsibility for securing these funds on the most advantageous basis rests with the treasurer or chief financial officer. The treasurer, and not the chief accounting officer, would usually negotiate with banks for loans, or would invest surplus funds. Yet the part played by the controller is not always as routine as might appear. In times of adversity, the controller must be prepared to furnish extra information. Thus the treasurer may need to know the exact cash needs of the following week. This can be furnished by manually adding the bills payable at that time, as well as the payrolls. If the accounts payable are in the computer file, the requirements can be readily determined by tabulating the applicable due date file. The same procedure can be used in determining the funds, if any, to be transferred to each branch for the weekly period. Cash requirements must be planned just as other operations are planned. It simply is not satisfactory to assume that a high volume of sales will automatically result in a sound financial position or that with a satisfactory budgeted profit and loss statement finances will take care of themselves. The controller can be an effective voice in establishing the necessity for a well developed financial program.

Cash Collections

Administration of Cash Receipts

One of the primary objectives of financial management is the conservation and effective utilization of cash. From the cash collection viewpoint, there are two phases of control : (1) the acceleration of collections, and (2) proper internal control of collections.

Acceleration of Cash Receipts

Two methods are commonly used to speed up the collection of receivables : the lockbox system and area concentration banking. The lockbox system involves the establishment of depository accounts in the various geographical areas of significant cash collections so that remittances from customers will take less time in transit, preferably not more than one day.

Customers mail remittances to the company at a locked post office box in the region served by the bank. The bank collects the remittances and deposits the proceeds to the account of the company. Funds in excess of those required to cover costs are periodically transferred to company headquarters. Supporting documents accompanying remittances are mailed by the bank to the company. Collections are thus accelerated through reduction in transit time with resultant lower credit exposure. Arrangements must be made, however, for proper control of credit information.

Under the system of area concentration banking, local company units collect remittances and deposit them in the local bank. From the local bank, usually by wire transfers, expeditious movement of funds is made to a few area or regional concentration banks. Funds in excess of compensating balances are automatically transferred by wire to the company’s banking headquarters. By this technique in transit time is reduced.

The controller is expected to be aware of these and other devices for accelerating collections, and to assist the treasurer, should that be necessary.

While checks are the predominant means of collecting accounts receivable, an increasing amount of business is handled through electronic fund transfer (EFT). Moreover, there are various combinations of methods and instruments that speed collections :

-	Lockbox
-	Depository transfer check (DTC)
-	Preauthorized draft (PAD)
-	Automated clearinghouse (ACH) transfer (from one bank to another through the ACH system)
-	Wire transfer

Internal Control of Cash Receipts

In most business organizations, the usual routine cash transactions are numerous. The following sources are typical: mail receipts, over-the-counter cash sales, sales or collections made by salesmen, solicitors, and so on, and over-the-counter collections on account. Naturally, all businesses have other cash transactions of a less routine nature, such as receipts from the sale of fixed assets, that may be handled by the officers or require special procedures. Most of the cash problems will be found to center on the transactions just listed, because the more unusual or less voluminous cash receipts are readily susceptible to a simple check.

Regardless of the source of cash, the very basis for the prevention of errors or fraud is the principle of internal check. Such a system involves the separation of the actual handling of cash from the records relating to cash. It requires that the work of one employee be supplemented by the work of another. Certain results must always agree. For example, the daily cash deposit must be the same as the charge to the cash control account. This automatic checking of the work of one employee by another clearly discourages fraud and locates errors. Under such conditions, any peculations are generally restricted to cases of carelessness or collusion.

The system of internal control must be designed on the groundwork of the individual organization. However, there are some general suggestions that will be helpful to the controller in reviewing the situation :

-	All receipts of cash through the mail should be recorded in advance of transfer to the cashier. Periodically, these records should be traced to the deposit slip.
-	All receipts should be deposited intact daily. This procedure might also require a duplicate deposit slip to be sent by the bank or person making the deposit (other than the cashier) to an independent department—for use in subsequent check or audit.
-	Responsibility for handling of cash should be clearly defined and definitely fixed.
-	Usually, the functions of receiving cash and disbursing cash should be kept entirely separate (except in financial institutions).
-	The actual handling of cash should be entirely separate from the maintenance of records, and the cashiers should not have access to these records.
-	Tellers, agents, and field representatives should be required to give receipts, retaining a duplicate, of course.
-	Bank reconciliations should be made by those not handling cash or keeping the records. Similarly, the mailing of statements to customers, including the check off against the ledger accounts, should be done by a third party. The summarizing of cash records also may be handled by a third party.
-	All employees handling cash or cash records should be required to take a periodic vacation, and someone else should handle the job during such absence. Also, at unannounced times, employees should be shifted in jobs to detect or prevent collusion.
-	All employees handling cash or cash records should be adequately bonded.
-	Mechanical and other protective devices should be used where applicable to give added means of check—cash registers, the tape being read by a third party; duplicate sales slips ; daily cash blotters
-	Where practical, cash sales should be verified by means of inventory records and periodic physical inventories.

Illustrative Cash Receipts Procedure

A simple and effective cash receipts procedure can be executed that embodies some of the controls mentioned in the preceding section and that is adaptable by most industrial firms receiving cash by mail. All incoming mail not addressed to a specific individual is opened in the mailroom. Any mail containing remittances is listed on a daily remittance sheet prepared in triplicate. The name, check number, date, and amount.

Common Methods of Misappropriating Cash

An enumeration of some of the more common methods of misappropriating company fundsmay be a guide to the controller in recognizing points to guard against :

1.	Mail receipts
	a.	Lapping diverting cash and reporting it some time after it has been collected ; usually, funds received from one account are credited against another account from which cash has been diverted earlier
	b.	Borrowing funds temporarily, without falsifying any records, or simply not recording all cash received
	c.	Falsifying totals in the cashbook
	d.	Overstating discounts and allowances
	e.	Charging off a customer’s account as a bad debt and pocketing the cash
	f.	Withholding of miscellaneous income, such as insurance refunds
2.	Over the counter sales
	a.	Failing to report all sales and pocketing the cash
	b.	Underadding the sales slip and pocketing the difference
	c.	Falsely representing refunds or expenditures
	d.	Registering a smaller amount than the true amount of sale
	e.	Pocketing cash overages
3.	Collections by sales people
	a.	Conversion of checks made payable to “cash”
	b.	Failure to report sales
	c.	Overstating amount of trade ins

Where adequate internal control is used, most of these practices cannot be carried on without

collusion.

 

Other Means of Detecting Fraud

In addition to the segregation of duties that has been described, certain other practices may be adopted to further deter any would-be peculator or embezzler. One of these tools is surprise audits by the internal auditor as well as by the public accountants. Another is the prompt follow up of past due accounts. Proper instructions to customers about where checks should be mailed, and a specific request that they be made payable to the company, and not to any individual, also will help. Bonding of all employees, with a detailed check of references, is a measure of protection. Special checking of unusual receipts of a miscellaneous nature will tend to discourage irregularities.

 

Cash Disbursements

Control of Cash Disbursements

Experience indicates the value of maintaining careful controls over the timing of disbursements to ensure that bills are paid only as they are due and not before. In such a manner, cash can be conserved for temporary investment

Another consideration in payment scheduling is the conscious use of cash “float.” By recognizing in transit items and the fact that ordinarily bank balances are greater than book balances because of checks not cleared, book balances of cash may be planned at lower levels. The incoming float may be balanced against the outgoing payments.

The relationship between the time a check is released to the payee and the time it clears the bank, the disbursement float, is made up of three elements :

1.	The time needed for the check to travel by mail or other delivery from the issuer to the payee
2.	The time required by the payee to process the check
3.	The period required by the banking system to clear the check, that is, the time from deposit by the payee to the time the item is charged to the issuer’s account

In controlling this “float,” it often is helpful to trace the time interval of large checks to estimate the proper allowance for the period required for checks to clear. The controller should take measures to assure there is no abuse of float (e.g., writing of checks on banks in some remote location far from the recipient’s address, so as to secure an additional three or four days of float).

Administrative Bank Accounts

In the control of disbursements, particularly where subsidiary or field office divisional transactions are involved, several special purpose bank accounts may be used (e.g., imprest accounts, zero balance accounts, and automatic balance accounts).

Under an imprest system, the unit operates with a fixed maximum balance. Periodically, such as weekly, or when the fund is below a minimum level, receipted bills are submitted for reimbursement.

With a zero balance account system, the clearing account for the organizational segment is kept at a zero balance. When checks are presented for payment, arrangements are such that the bank is authorized to transfer funds from the corporate general account to cover the items. Payment may be made by draft. Comparable arrangements can be made for the treasurer to make wire transfers to the zero bank account on notification of the items being presented for payment. Zero bank balance arrangements can facilitate control of payments through one or a limited number of accounts. The system may facilitate a quick check of the corporate cash position

Automatic balance accounts use the same account for receipts and disbursements. When the account is above a specified maximum level, the excess funds are transferred to the central bank account; conversely, when the balance drops below a minimum level, the bank may call for replenishment.

Internal Contro 

Importance of Internal Control

Once the cash has been deposited in the bank, it would seem that the major problem of safeguarding the cash has been solved. Control of cash disbursements is a relatively simple matter if a few rules are followed. After the vendor’s invoice has been approved for payment,

the next step usually is the preparation of the check for executive signature. If all disbursements are subject to this top review, how can any problem exist? Yet it is at precisely

this point that the greatest danger is met. Any controller who has had to sign numerous checks knows that it is indeed an irksome task the review to ascertain that receiving reports are attached, the checking of payee against the invoice, and the comparison of amounts. Because it is such a monotonous chore, it is often done in a most perfunctory manner. Yet this operation, carefully done, is essential to the control of disbursements. Where two signatures are required, both signatures need not make the detailed review, but certainly one should. The other can review on a spot-check basis only. There are too many instances where false documents and vouchers used a second time have been the means of securing executive signatures. Prevention of this practice demands careful review before signing checks, as well as other safeguards. It cannot be taken for granted that everything is all right. Those who sign the checks must adopt a questioning attitude on every transaction that appears doubtful or is not fully understood. Indeed, the review of documents attached to checks will often bring to light foolish expenditures and weaknesses in other procedures.

Some Principles of Internal Control 

The opportunities for improper or incorrect use of funds are so great that a controller cannot unduly emphasize the need for proper safeguards in the cash disbursement function. Vigilance and sound audit procedures are necessary. Although the system of internal control must be tailored to fit the needs of the organization, some general suggestions may be  helpful :

-	Except for petty cash transactions, all disbursements should be made by check.
-	All checks should be prenumbered, and all numbers accounted for as either used or voided
-	All general disbursement checks for amounts in excess of $x (e.g., $5000) should require two signatures.
-	Responsibility for cash receipts should be divorced from responsibility for cash disbursements.
-	All persons signing checks or approving disbursements should be adequately bonded.
-	Bank reconciliations should be made by those who do not sign checks or approve payments.
-	The keeping of cash records should be entirely separate from the handling of cash disbursements
-	Properly approved invoices and other required supporting documents should be a prerequisite to making every disbursement
-	Checks for reimbursement of imprest funds and payrolls should be made payable to the individual and not to the company or bearer.
-	After payment has been made, all supporting documents should be perforated or otherwise mutilated or marked “paid” to prevent reuse.
-	Mechanical devices should be used to the extent practical (check writers, safety paper, etc.)
-	Annual vacations or shifts in jobs should be enforced for those handling disbursements.
-	Approval of vouchers for payment usually should be done by those not responsible for disbursing
-	Special authorizations for interbank transfers should be required, and a clearing account, perhaps called Bank Transfers, should be maintained.
-	All petty cash vouchers should be written in ink or typewritten.
-	It may be desirable to periodically and independently verify the bona fide existence of the regularly used suppliers of recurring services (e.g., consultants, lawyers).

Methods of Misappropriating Funds

The safeguards just listed are some of those developed on the basis of experience by many firms. Some common means of perpetrating fraud are :

-	Preparing false vouchers or presenting vouchers twice for payment
-	“Kiting,” or unauthorized borrowing by not recording the disbursement, but recording the deposit, in the case of bank transfers
-	Falsifying footing in cash records
-	Raising the amount on checks after they have been signed
-	Understating cash discounts
-	Cashing unclaimed payroll or divided checks
-	Altering petty cash vouchers
-	Forging checks and destroying them when received from the bank, substituting other canceled checks or charge slips

Forging checks and destroying them when received from the bank, substituting other canceled checks or charge slips

Bank Reconciliations

An important phase of internal control is the reconciling of the balance per bank statement with the balance per books. This is particularly true with respect to general bank accounts as distinguished from accounts solely for disbursing paychecks. If properly done, the task is much more than a listing of outstanding checks, deposits in transit, and unrecorded bank charges. For example, the deposits and disbursements as shown on the bank statement should be reconciled with those on the books.

Petty Cash Funds

Most businesses must make some small disbursements. To meet these needs, petty cash funds are established that operate on an imprest fund basis, that is, the balances are fixed. At any time the cash, plus the unreimbursed vouchers, should equal the amount of the fund. Numerous funds of this type may be necessary in the branch offices or at each plant. A uniform receipt and uniform procedure should be provided, including limits on individual disbursements through this channel, proper approvals, and so forth. If it is practicable, the person handling cash receipts or disbursements should not handle petty cash. Other safeguards would include surprise cash counts, immediate cancellation of all petty cash slips after payment, and careful scrutiny of reimbursements. Although the fund may be small, very considerable sums can be expended. The controller should not neglect checking this activity.

Payrolls

In most concerns, payroll disbursements represent a very sizable proportion of all cash payments. Proper safeguards for this disbursement are particularly desirable. The use of a special payroll account is a very common procedure. A check in the exact amount of the total net payroll is deposited in the payroll account against which the individual checks are drawn. This has advantages from an internal control standpoint, and it may facilitate the reconciling of bank accounts.

The preparation of the payroll, of course, should be separate from the actual handling of cash. Special payroll audits are advisable by the internal audit staff to review procedures, verify rates, check clerical accuracy, and witness the payoff.

 

Reports On Cash

Cash Reports for Internal Use

The cash reports used in most businesses are rather simple in nature but still provide important information.

For information purposes, a simple daily cash report is prepared in some companies for the chief executive and treasurer. It merely summarizes the cash receipts and cash disbursements, as well as balances of major banks.

 

Cash Flow Analysis for Investment Purposes

Cash flow is a broad measure of company performance. “Free cash flow,” a further refinement of cash flow in that from “cash flow” is subtracted a provision for required capital expenditures and, in some calculations, the dividend payments. In this latter case, the subtrahend is the equivalent of “discretionary funds,” and it represents sums that can be spent on acquisitions, stock buybacks, inventory, and many other items.

Where reported earnings are heavily reduced by depreciation, cash flow in some industries is an analytical yardstick of choice. It is useful to investors in spotting companies with ample resources to make them rewarding acquisitions. Additionally, corporate raiders are attracted to high cash flow situations because the cash stream may be used to pay down heavy debt incurred in a takeover. Periodically, listings appear comparing stock prices in terms of cash flow.

The controller should be aware that cash flow may rank high in judging the investment worth of a company. It is a feature that usually deserves comment in any analytical effort.

Cash Flow Ratio Analysi 

The requirement by the FASB for companies to provide shareholders (with access to the public and to potential investors) with a statement of cash flows, which identifies cash flows from operating activities, as well as that from investing activities and financing activities, has facilitated and encouraged the use of certain cash flow ratios. These ratios are useful in the planning and control of cash in that they may provide benchmarks or standards to measure the cash performance of a given company against other entities. Such comparisons may be helpful in evaluating financial performance of an acquisition target or other investments. Equally valuable, the ratios may be used to judge trends in the controller’s own company and as compared with competitors or other selected best in their class entities.

The cash flow ratios are of two types. The sufficiency ratios directly measure the ability of a company to generate enough cash flow to meet the needs of the entity, such as the ability to pay long term debt, provide for needed plant and equipment, and pay dividends to the owners. The efficiency ratios indicate how well a company generates cash from selected measures, such as sales, income from continuing operations, and from total assets (or total assets employed).

The cash efficiency ratios reflect the effectiveness or efficiency by which cash is generated from either operations or assets. Specifically :

-	The cash flow-to-sales ratio reflects the percentage of each sales dollar realized as cash.
-	The operations index reflects the ratio of cash generated to the income from continuing operations.
-	The cash flow from assets reflects the relative amount of cash which the assets (or assets employed) are able to generate.

These ratios will assist in the analysis of financial statements. However, there is still a need for a consensus as to what are useful cash flow ratios, and the development of norms or standards for companies and industries.

Impact Of New Information Technology And Organizational Structures

The vast majority of the basic cash management functions described earlier in this chapter have been performed for years and will continue to be accomplished. But how they will be done, and what organization structure will do them (who) is subject to change. The pressures or influences that are causing or accelerating adjustments are many and include :

-	The substantial improvements in information technology, or computer technology
-	Growth in the global nature of business
-	Economic pressures that are causing entities to integrate horizontally, to reduce staff size (such as treasury or controllership functions), to focus on the principal business, and to do more subcontracting or outsourcing
-	Closer electronic integration with supplier, customer, or other third parties (such as banks)

The personal computer and the related software greatly aid in the analysis of data required for a cash forecast, as well as the actual preparation of the cash plan. As corporations and banks electronically integrate, there are many possibilities that should be of interest to the controller (for internal control and other purposes) including :

-	Using an electronic data interchange (EDI) file, a customer can supply selling company’s bank directly with invoice data and arrange payment. The bank will then update the payee’s account
-	Where banks handle the lockbox operations, they can book images of remittance documents in a computer file and avoid enormous sorting and reassociation of check copies and the like. Less paperwork means less cost.
-	Arrangements can be made with a company’s bank for automatic payment of taxes and or other designated items. This reduces float and provides greater control over the payment.
-	Companies can arrange a system for electronic payment of selected supplier invoices thus reducing paperwork
-	For faster information, arrangements can be made for electronic account analysis.
-	Banks can provide an automated check reconcilement through data transmission.
-	Other systems have been developed by banks, using modern technology at the time of check presentments to reduce fraud.

Aside from the technology involved, companies can select banks to perform duties regularly handled by their own internal departments, such as portfolio management; cash collections, cash disbursements; payroll check preparation, retirement funds custody, accounting, and disbursements. Outsourcing of some financial activities is no longer a dirty word. Hopefully, the treasurer will have close contact with the company’s banks in order to keep abreast of what services can be proved (more cheaply) on an outsourcing basis.