The new county director of finance finds that she has authority to ensure efficient, effective management of receivables and cash generated by the county departments. She decides to write to all department heads, describing specific practices they should implement to improve cash management in their departments. Discuss the major points she should make in her memo.

Please help me in answering this question and see below.

Cash

Cash management activities vary depending on the nature of the entity. They are much more

extensive at the office of a central director of finance, who may be responsible for paying all the

municipality's bills, than they are at one of the departments. We will cover both central office

and department-level controls, separating them into two categories - safeguarding controls and

operating controls.

Safeguarding Controls

Remember that the basic objective of safeguarding controls is to reduce the risk of theft. In

considering the controls that might be employed to prevent theft, first think about how a

dishonest employee might steal. The easiest way to steal cash is to take it at the point it enters

the government. The more complex way - unless the employee is simply dipping into the petty

cash fund - is to access cash that has already been deposited.

Here are some typical safeguarding controls. The techniques include separating employee

duties, making bank reconciliations, and using modern technology. Using modern technology

serves not only to reduce the potential for fraud, but also to ensure prompt deposit of cash.

The principle of separation of duties is that no one person should authorize a transaction,

record it in the accounting records, and have custody of the resulting asset. Stated another

way, a person in the position of doing something wrong should not be able also to cover

it up. A bookkeeper, for example, should not be able to write out a check to himself, cover

it up by not recording the check in the records, and then remove evidence of the crime by

destroying the check when he makes the bank reconciliation.

The bank reconciliation is a key element of control. The bank statement should go to a

person who has no role in handling cash, keeping accounting records, or preparing or

approving payment vouchers. Further, reconciling the statement with the books should

be done promptly. Keeping the bank reconciliation process separate from the other

bookkeeping functions is always important, but it is particularly so in a small office, where

separation of other duties may be difficult. Making the bank reconciliation ordinarily

includes comparing paid checks listed in the bank statement with the entries in the books,

examining checks for signatures and endorsements, and investigating the reconciling

items.

Whenever feasible, paying bills and receiving cash should be done using techniques that

incorporate electronic data interchange, such as electronic funds transfer (EFT). EFT

enables cash to be transferred directly from one bank to another. This not only speeds up

the movement of cash, but also saves money and improves controls by removing people

from the process. A pre-authorized payment system, for example, allows automatic

payment of recurring items without manual intervention.

Lock box arrangements with banks can speed up deposits and improve controls by using

third parties to handle cash receipts. In addition, using bar codes on the remittance part

of invoices can also speed up deposits and reduce costs. For example, bank staff at the lock

box can electronically scan amounts from the remittance part, producing a computer file

and a hard copy tape of the day's cash receipts. The tape can be reconciled with the cash

received, which will have been deposited promptly.

In the absence of electronic systems, the traditional controls accompanying cash

collections and paper checks include:

-cash registers with internal counting devices, so as to have an independent check on

the amount of cash deposited;

-mechanical treadles at entrances to parks and toll roads, to accomplish the same kind

of independent record;

-having all monies received deposited daily in the form and amount received;

-duplicate copies of serially pre-numbered receipts (remember the dishonest

postmaster in the earlier series of scam illustrations);

-having the mail room clerk open the mail and prepare control tape, which can then

be independently compared with the bank deposit slip and the accounting entry

recording the cash.

Operating-Type Controls

As noted earlier, the extent to which operating-type controls exist in the cash management

function depends on the nature of the particular entity's responsibilities. All departments that

receive cash need to ensure that it is deposited timely. The government's central director of

finance needs to exercise tight control over cash, partly to ensure timely cash deposit, but also

because that office is likely to have cash forecasting and banking responsibilities as well.

Depositing cash timely allows it to be invested promptly so that it earns money for the

government. Promptly generally means daily. Both the individual department manager

and the central director of finance have important roles here, setting the "tone at the top."

Setting the tone at the top includes periodic reminders to department heads about the

need for prompt deposit of cash and prompt bank reconciliations. Effective control over

cash also means that departments should not be allowed to open a new bank account

without approval from and registry by the central cash manager. As previously noted,

using modern technology helps to reduce the time period between collection, deposit and

investment of cash.

Cash management includes cash forecasting. Cash forecasting is needed to ensure that the

entity will have enough cash on hand to pay bills when due, to make orderly arrangements

for borrowing, and to maximize investment yield consistent with concern for safety and

liquidity. Being able to invest for a slightly longer term enables the entity to earn more

interest, but investing for periods beyond the point that cash is needed can expose the

entity to serious loss. Cash forecasting usually involves both annual forecasts of monthly

cash flows and more precise short-period forecasts of weekly or daily cash flows. Previous

year patterns of cash inflows and outflows provide a good starting point for cash forecasts,

but they need to be adjusted based on current-year budgets and current-year experience

and forecasts.

Managing cash also involves developing appropriate banking relationships. Major

concerns in banking relationships are reducing the risk of loss due to bank failure and

making the best possible bank servicing arrangement.

-To reduce the risk of loss due to bank failure, cash managers should inquire into

the credit-worthiness of the banks they deal with and require the banks to provide

collateral for bank deposits to the extent the deposits are not insured. Arrangements

regarding collateral should be included in a contract with the bank.

-Banks provide service either for a fee per transaction or by requiring a "compensating

balance" - a required minimum balance on which the bank can earn money in

exchange for servicing the account. Finance officers should get competitive proposals

from banks in order to make the best possible arrangement (considering cost and

quality of service), and then enter into a written agreement with the bank that

provides the best arrangement.