Current obligations must be paid as they become due. It means that cash must be readily available to cover current liabilities. Readily available implies cash that is free from any contractual restriction. Cash is restricted when it has been set asside for a pre-defined purpose. For example funds set aside for payment of dividends to shareholders. Regulators maintain a close scrutiny on restricted assets to ensure that investors are not deceived with respect to the true amount of cash available to meet immediate needs of the corporation.
Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity the risk of changes in interest rates is insignificant. To be classified as cash equivalent an investment has to have an original maturity date of three months or less. Examples of cash equivalents are treasure bills, commercial paper, and money market funds.
Implementing internal controls is crucial to cash management since it involves several processes within the organization such as billings, collections, deposits, and disbursements. Usually personnel in charge of cash management functions rotates, the handling responsibilities is delegated to personnel with limited fiscal experience or understanding, and he inherent risk of loss or opportunity for personal or corporate gain are additional concerns for cash management.
A good cash management program should include among others:
a. The time-value of money, this should be recognized as a part of each cash management decision
b. Cash related transactions should occur only after the approval of someone with assigned authority
c. Cash transactions must be fully documented with a clear audit path
d. Proper recording in a timely manner of cash transactions is crucial to the accuracy of financial statements
e. Reconciliation of cash items in a regular basis
f. Documents used in cash-related transactions must be properly safeguarded against misuse, tampering, or unauthorized disposal
g. Review, comparison, and analysis prevent errors or fraud
h. Each cash adjustment needs to be restricted only to those with approval functions
i. Collection duties handling of imp rest funds or petty cash, and disbursements should be restricted to those with assigned authority
j. Access to cash and cash equivalents must be restricted
k. Employees responsible for cash management must acknowledge their responsibility based on a through training that discloses what is expected from them.