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APPENDIX A11.2
CASH MANAGEMENT CYCLE
The broad objective of cash management is to facilitate
the inflows and outflows of the cash needed to maintain
a going concern. The top financial manager (often called
the chief financial officer or CFO) has the overall responsibility for cash management. In most sizable firms,
a treasurer who reports directly to the CFO has specific
responsibilities in this area.
The management of cash entails more than receiving
cash from customers and disbursing cash to suppliers.
Together with the CFO, the treasurer is involved in such
decisions as:
From which sources should needed cash be acquired,
and when?
What dividends should be paid?
How should excess cash be used?
In this section, we briefly discuss the sources of cash,
uses of cash, techniques for effective cash management,
and controls over cash. Although our discussion does
not include the management of working capital, investments, and other broad measures of “funds,” their management is closely tied to cash management.
Sources of Cash In addition to receipts from customers, a firm’s sources of cash include loans from
banks, issues of bonds, sales of stock, sales of fixed assets, dividends and interest from investments, sales of
investments, factoring of accounts receivable, and delays in paying amounts due on accounts. When acquiring cash from any of these sources, a firm should follow
established policies and procedures. Short-term and
long-term planning should be performed, employing
tools and techniques to be discussed later. All of the
possible alternative sources should be investigated. For
instance, if short-term borrowing is necessary, various
banks should be compared with respect to borrowing
rates and terms, reputation, service, and so on. In addition, decisions involving cash should be made by managers who are clearly authorized, such as the treasurer.
When large amounts are involved, more than one manager should sign off on the decision.
Uses of Cash
Cash may be used to purchase goods
and services (as discussed in Chapter 13), build plant assets, acquire investments, retire bonds, pay off bank
loans, pay dividends on stock and interest on bonds and
notes, reacquire the firm’s own stock, and redeem stock
rights or options.
Policies and procedures, fostered by careful planning, are as important to the sound uses of cash as are
the sources from which cash is acquired. Consider this
scenario, for example. A firm could set a planned level
for its cash balance. When the actual cash balance exceeds the planned level, the excess could be automatically invested in money market funds or some other
short-term instrument. When the actual balance drops
below the planned level, the deficiency will be covered
by selling an adequate amount of the short-term instrument. Furthermore, when the firm’s stock price drops below the book value of the firm, excess funds in the
short-term instrument could be employed to repurchase
shares at the advantageous price.
Techniques of Cash Management A variety of techniques may be applied to aid in making effective decisions
related to cash management. The scenario described in
the previous paragraph incorporates two techniques: setting planned cash levels and monitoring key information.
The monitoring devices may include executive information
systems and outside information retrieval services. Other
important techniques include scheduled reports, budgeting, modeling, and expert systems.
One of the most useful scheduled reports for cash
management is the statement of cash flows, one of the
three basic financial statements. It shows the inflows
and outflows of cash over the past accounting period,
usually a year. Other helpful scheduled reports include
an analysis of changes in the cash balance, and registers
of cash receipts and cash disbursements.
Since the above-mentioned scheduled reports look
backward at past changes to cash, they are more useful
for monitoring cash than for cash planning. Perhaps the
most important vehicle for cash planning is the cash
budget, a projected cash-flow statement. Because it
looks to the future, often the coming year or quarter, the
cash budget helps a firm to anticipate its cash needs.
Since it is broken down by days or weeks or months, the
cash budget can project the timing of (1) expected borrowings, when outflows exceed inflows, or (2) likely investment opportunities, when inflows exceed outflows.
Furthermore, by matching inflows against outflows, the
extent of the borrowings or investment opportunities
can be estimated. With an effective cash budgeting system, the financial managers can ensure that the cash
balance remains adequate to meet all expected needs,
including taking all cash discounts allowed on purchases. If the budget forecasts a cash shortfall, however,
the manager should have sufficient warning to arrange
short-term financing (e.g., a bank loan) at the lowest feasible rates. On the other hand, if a cash excess is forecasted, the manager can look for the most lucrative
short-term investments.
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APPENDIX A12.1
Financial modeling and expert systems can be used
for cash planning over longer time horizons or in special
situations. For instance, financial models can be incorporated into a decision support system (DSS) that simulates the firm’s operations over the next couple of
years. “What if ” conditions can be tried within the DSS
concerning changes in sales prices, economic factors
such as interest rates, and so on. After a series of manipulations, the DSS would likely indicate when and how
much long-term financing could be needed over the
time horizon. An expert system could be developed and
used to help decide which types of long-term financing
(e.g., stocks, bonds, bank line of credit) might be most
suitable.
2. Appropriate policies and procedures for obtaining needed funds and for investing excess funds.
Internal Controls over Cash The needed internal
8. Reconciliation of each bank account monthly by a
person not otherwise involved in cash procedures.
controls should ensure that all cash transactions are
properly authorized, recorded, and processed; that cash
is properly safeguarded and effectively used; and that
the cash balance in the balance sheet is reliable. Among
the specific needed controls (in addition to those listed
in Chapters 12 and 13) are the following:
1. Proper use of budgets and forecasts for planning
and controlling cash flows.
3. Appropriate separation of custodial, recording,
and authorization functions with respect to cash.
4. Prompt endorsement and recording of all cash
receipts, with the deposit of all cash received
daily by an authorized person.
5. Issuance of prenumbered checks for all expenditures (except petty-cash items).
6. Proper use of petty-cash funds under imprest
procedures.
7. Use of separate imprest bank accounts for payroll expenditures.
9. Adequate physical security over cash (and blank
checks), including the use of locked cash registers, lockboxes, and safes.
10. Close supervision over and restricted access to
cash and cash-related activities, including access
to electronic transfers of cash.
11. Surprise audits of cash.
APPENDIX 12.1
MANUAL PROCESSING WITHIN THE REVENUE CYCLE
This appendix provides a survey of manual processing
procedures relating to credit sales and cash receipts.
Narrative descriptions of the procedures are accompanied by document system flowcharts, which are keyed to
the narrative by circled numbers. These numbers designate key control points within the sales and cash receipts procedures. The application controls described in
the chapter are particularly needed at these points. The
accounting entries pertaining to the revenue cycle are
included at appropriate places in the narrative descriptions.
Credit Sales Procedure
Figure A12.1-1 depicts a document system flowchart of
the manual credit sales procedure.
1. Receipt of the sales order
The credit sales procedure usually begins when a customer’s purchase order is received by the sales order department. After verifying that the order is valid and
accurate, a sales order clerk prepares some type of sales
order. Three document preparation procedures are available: separate order and billing, prebilling, and incom-
plete prebilling. In the separate sales order and invoice
procedure, the invoice is prepared as a separate document only after the goods have been shipped. The sales
order in this case is used only as a shipping order. This
procedure is employed when the availability of inventory
cannot be determined or when ordered goods are often
out of stock and must be backordered. In the prebilling
procedure, the sales invoice (bill) is completely filled in,
including prices and extensions and total, as soon as the
order is approved. This procedure is feasible if all data
are known, including the availability of ordered quantities. In the incomplete billing procedure (which is depicted in the flowchart), a combined sales order-invoice
is prepared at the time the order is approved. This document shows quantities but not price extensions, freight
charges, and so on. After the order has been shipped,
the document is completed and used as the sales invoice.
2. Check of credit acceptability
A copy of the sales order is sent to the credit department
for a check of the customer’s credit. If credit is approved,
the sales transaction is authorized by the sales order department. The customer is then sent an acknowledg-