Tips on Internal Control over Cash for SMEs

From one of the world’s most successful businesspeople – Bill Gates said “Treatment without prevention is simply unsustainable.” Despite this statement made in context of health care, it perfectly fits in the business world. In today’s highly competitive business environment, a company’s edge cannot be sustained only by way of promotion of business through an aggressive business strategy that largely focuses on growing sales volumes and gross profit. Of equal importance to a business is a relationship of trust with its staff, suppliers, clients and other business partners. To build up and maintain such a relationship, the organization has to uphold an ethical culture and put in place a system of effective internal control, to be fostered through good governance.

Very often, business analysts say that poor cash management is the main reason for business failure. It is widely believed that poor cash management is probably one of the biggest challenges that hinder entrepreneurs from progressing.

Understanding the basic concepts of cash management and the key internal control measures will help you plan for the unforeseen eventualities that nearly every business faces.

Internal controls are systematic measures instituted by an organization to conduct its business in an orderly and efficient manner, safeguard its assets and resources, deter and detect errors, fraud, and theft, ensure accuracy and completeness of its accounting data, produce reliable and timely financial and management information, and ensure adherence to its policies and plans. Such measures may include techniques such as such as reviews, checks and balances, methods and procedures.
All businesses including SMEs have internal controls, be it structured or not. The non-existence of documented controls does not mean they do not exist. Whether it is a small market stall in the Nakasero market, a grocery in Kalerwe or even a “Jua Kali” business in Katwe, these businesses have some means of obtaining security over the cash and inventory left at the end of the day. There are other examples of internal controls in every aspect of our daily lives. Some of the basic ones include assigning specific staff for handling cash, having a lockable drawer for cash at the business premises and cross-checking our bank statements at the end of the month.

Whereas many if not most SMEs do not have documented internal controls, it is very important to note that undocumented controls are usually not very effective due to several reasons. The absence of documented controls does not guide management and employees to consistently handle a specific situation. So, here today, we highlight a few strong tips that will guide SMEs on how to formalize internal controls over cash.

The framework for internal control process aims at creating the necessary preconditions for the whole organisation to contribute to the effectiveness and the high quality of internal control. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines internal control as having five components:

  1. Control Environment: Sets the tone for the organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control.
  2. Risk Assessment: The identification and analysis of relevant risks to the achievement of objectives, forming a basis for how the risks should be managed
  3. Information and Communication: Systems or processes that support the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities
  4. Control Activities: The policies and procedures that help ensure management directives are carried out.
  5. Monitoring: Processes used to assess the quality of internal control performance over time.

Being more specific with cash, there are four major controls;

  1. Establishment of responsibility: This is an essential characteristic of internal control where the assignment of responsibility to specific individuals. Take an example of a cashier who is solely responsible for receiving cash. In this case, the control is most effective when only one person is responsible for a given task. Establishing responsibility includes the authorization and approval of transactions.
  1. Physical, mechanical and electronic controls: Physical controls relate primarily to the safeguarding of assets. Mechanical and electronic controls safeguard assets and enhance the accuracy and reliability of the accounting records. Use of physical, mechanical, and electronic controls is essential. Examples of these controls include:
  • Safes, vaults, and safety deposit boxes for cash and business papers.
  • Locked warehouses and storage cabinets for inventory and records.
  • Computer facilities with pass key access or fingerprint or eyeball scans.
  • Alarms to prevent break-ins.
  • Television monitors and garment sensors to deter theft.
  • Time clocks for recording time worked.
  1. Segregation of duties: This involves breaking down tasks that might reasonably be completed by a single individual into multiple tasks so that no one person is solely in control. Payroll management, for example, is an administrative area in which both fraud and error are risks. A common segregation of duties for payroll is to have one employee responsible for the accounting portion of the job and someone else responsible for signing the checks. Although it improves security, breaking tasks down into separate components can negatively impact business efficiency and increase costs, complexity and staffing requirements. For that reason, most organizations apply this technique to only the most vulnerable and the most mission critical elements of the business.
  1. Independent internal verification: These works to make sure your employees are following the rules and not short-cutting internal controls. Unlike an external audit, which focuses on financial statement analysis, internal verification analyzes internal accounting controls. In a small business, “independent” means people not associated with the accounting department — such as you and a manager from another department — supervise the audit.

In conclusion, despite numerous challenges to implement effective and sufficient internal control measures in SMEs, it is very important for these SMEs to consciously develop the appropriate measures given that they play a vital role and surely have influence on SMEs performance. Managers of SMEs should note that they are much more vulnerable to fraud by those who work in the organization (staff) than those outside because of these weak controls.

By Brian Ahabwe Kakuru
Brian Ahabwe KakuruBrian is the Managing Director at BLEGSCOPE®, and has 10+ years of management consultancy experience notably in the finance & banking industry, MSMEs, FMCG companies and in the service industry. You can follow him on        twitter >> @BrianAhabweK


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