Working Capital control is one of the most important task of the Finance Manager in a business organization. It is because each and every business must be able to pay its day-to-day expenses. And, in order to do so, the business must have sufficient Working Capital.
Working Capital is the lifeblood of the firm. It refers to liquid assets that are the funds that are available for a business immediately to pay for its urgent costs and daily expenses.
Working Capital equals to Current Assets minus Current Liabilities.
Let’s take a look how to better control Working Capital.
1. The nature of cash and the importance of internal control over cash.
Cash includes coins, currency (paper money), checks, money orders and money on deposit that is available for unrestricted withdrawal from banks and other financial institutions.
The importance of having a strict control over cash is due to its ease to be transferred and this asset is likely to be misused by handlers.
2. Basic procedures for achieving internal control over cash receipts.
The control of cash from the time it is received until it is deposited in a bank is called preventive controls. Procedures that are designed to detect theft or misuse of cash are called detective controls.
Retail businesses receive cash from two main sources:
- Cash receipts from customers
- Mail receipts from customers making payments on account.
Change fund is the cash available for changing purposes.
Differences between cash sales recorded and cash on hand are recorded in the cash short and over account. This account is debited and is recorded in miscellaneous administrative expense in the Income Statement.
3. Summarize basic procedures for achieving internal control over cash payments, including the use of a voucher system.
A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. It uses:
- Vouchers.
- A file for unpaid vouchers.
- A file for paid vouchers.
A voucher is any document that serves as a proof of authority to pay cash and is a special form for recording relevant data about a liability and the details of its payments. The voucher is recorded after it has been approved. Vouchers are filed:
- UNPAID: Closer due date order to latest due date order.
- PAID: Ordered in numerical order.
4. The nature of a bank account and its use in controlling cash.
Check is a written document signed by the depositor, ordering the bank to pay a sum of money to an individual or entity.
- Drawer: Is the one who signs the check.
- Drawee: Is the bank on which the check is drawn.
- Payee: Party to whom the payment is to be made.
A bank account is one of the primary tools a business uses to control cash.
There are two major causes for differences between bank statements and accounting records of businesses are. Firstly, a delay by either party in recording transactions. And secondly, the bank may debit or credit the depositor’s account for transactions about which the depositor will not be informed until later such as bank fees.
5. A bank reconciliation and journal of any necessary entries.
A bank reconciliation is a listing of the items and amounts that causes the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger.
Items reported on the bank statement as credits represent additions made by the bank to the depositor’s balance and debits represent deductions made by the bank from the depositor’s balance.
6. Accounting for small cash transactions using a petty cash fund.
Petty cash fund is used for small payments such as postage, office supplies and miscellaneous administrative expense.
When opening a petty cash fund, petty cash is debited as increased and cash is credited as decreased.
Petty cash is debited only when the fund is initially set up or when the amount of the fund is increased at a later time. Petty cash is credited, if it is being decreased.
7. Summary how cash is presented in the Balance Sheet.
Cash equivalents usually report cash and cash equivalents as one amount in Balance Sheet. Compensating balance requirements should be disclosed in notes to the financial statements.
Working Capital is the money needed for day to day trading of a business. It is the amount left after all debts have been paid. Working Capital equals to Current Assets less Current Liabilities. When problems with Working Capital occur, or liquidity problems, companies go into survival mode.
