Managing cash flow means managing working capital funds in and out of your business. This includes the aspects related to accounts receivable, accounts payable, office expenses, and so on. Tracking cash flow should be done periodically based on the size of the organization. It is advised that small businesses should track the cash flows on monthly basis due to the small number of ins and outs of funds.
Profit and cash flow are different things. Hence, businesses should prepare cash flows periodically to track the movement of cash. If you do not have positive cash flows or say cash in hand, it would become difficult to run the business on daily basis without any cash. Hence, invoicing lays a fundamental basis for smooth business functioning.
Effective cash management is necessary to attribute of a successful business but what if the majority of transactions of the business are done by the way of cash. There comes the problem in this digital world where almost all of the business transactions are either settled in real-time with the help of the internet. The nature of the business which basically deals in cash would certainly put the business at high risk for the following reasons:
Cash is the most liquid asset appearing in the balance sheet of the company. All the liquid assets are more susceptible to fraud and mismanagements as compared to other assets in the business. Management inexperience and incompetence play a big part in the inherently risky nature of cash.
2) Debt Covenant
The lenders place various debt covenants on cash to protect their money. This ensures that they have a higher chance of receiving cash from the business. The debt covenants may require that company maintain a certain level of cash compared to the total assets or to maintain minimum levels of working capital etc.
This may result in management to manipulate cash levels to maintain certain cash levels in order to meet debt covenants. This is difficult manipulation and requires the top-level management acceptance to do such manipulation in the cash.
3) Susceptibility to Theft
Cash is always considered to be inherently risky because it’s prone to theft and misappropriation. Cash can be manipulated if the employee sells the item and does not record the sale diverting the proceeds for personal use. Further, the non-employee may rob the business in case of high cash in the box which would be written as a business loss rather than misappropriation.
The high risk of cash here is that it may be manipulated and stolen by the staff with high authority. Hence, proper control shall be kept in place. Generally, the staff going through personal financial problems have a high temptation to steal the cash of the business. a dishonest employee records fraudulent sales returns or writes off the customer’s balance as uncollectible.
4) High Volume of activity
For some companies, the cash transactions during the accounting period are very high in comparison to other accounts in the books. When the business is set up in a way to deal with cash transactions, cash will be huge. The various cash transactions would include cash received from sales, cash received from receivables settlement, cash payment for expenses, cash payment for inventory, cash paid for debt settlement and interest, etc.
When the volume of cash transactions is high, it becomes more susceptible to error than other accounts in financial statements. Hence, this is the reason why cash is considered high risk as compared to other accounts.
Cash can be easily transferred between branches or countries. Such ease and convenience put cash more prone to fraud or illegal activity such as money laundering. Hence, the business places various authorization checks at the gate for cash transactions. Improper authorization can lead to misstatement in cash, imbalances, or any other form of error in balances or procedures related to cash transactions.
Money laundering is easily done through transferring cash from one bank to another in front and creating a separate backdrop transaction in behind. Auditors would find it very difficult to deal in such kind of transactions where layering has been done meticulously to evade the system.