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According to many industry experts the basic reason why many successful companies have collapsed is improper cash management. Having surplus cash in the current accounts are considered as a sign of efficiency of the companies but sitting on such large cash/bank balance can turn out to be a disaster if not handled properly.

The internal Auditors of the company can be of immense help to circumvent such a situation. The internal audit department must be profoundly involved in the day to day activities of the companies and should have sufficient independence in order to be able to perform various internal control checks and report the loopholes in the system.

Fundamentals of cash management to be followed by the management:

????? Cash Inflows should be always more than cash outflows

????? As far as possible number of current accounts or cash credit accounts should be minimum as handling balance in various bank accounts complicates the cash management process

????? Appoint a treasury manager exclusively for handling liquidity depending upon the size of the company

????? Keep a track on the daily bank balance movements in all bank accounts including bank accounts at branches and sites.

????? Regular inter bank transfers in order to avoid accounts running into debit balances despite having surplus balance in other bank accounts

????? Analysis of average cheque inflow- outflow cycle of the company e.g. average no of days the company holds the cheques before handing over to the vendors and expected cheques to be received.

????? Regular reconciliation of bank balance with the book balance

????? Keep a track on the daily movements in the Fixed Deposits and other term deposits of the company

????? Regular checking of the interest receivable/payable calculation to ensure correct interest is credited/debited by banks

????? Keep regular track on the loan accounts and cash credit accounts.

????? Avail sweep account facilities provided by banks wherein excess bank balances in current accounts are automatically transferred to interest bearing short term FD accounts.

????? For export oriented companies review the need of maintaining Export Earners Foreign Currency Account (EEFC A/C).

????? Regular cash in hand counts and deposit of excess cash in the bank accounts

????? Export Packing credit facilities are optimally utilized.?


Internal Auditor?s Role in cash management:

Internal Auditor?s main task is to ensure that the above stated fundamentals are appropriately followed by the management. Subject to certain changes depending upon the size and nature of the company following checks should be performed by the internal auditor:


1)??? Check whether the average daily bank balance is in accordance with the size of the company and the management is justified in maintaining such a balance, considering the frequency and volume of daily transactions of the company.


2)??? Check the working capital loans taken by the company and ensure that there is no co-existence of excess unutilised surplus bank balance in current accounts and substantial working capital loans. As far as possible such loans should be repaid with the excess unutilised balance at banks.


3)??? Excess unutilised balances should be invested in high interest bearing fixed deposits, gilt edged securities or high rated corporate debentures or other investments depending on the risk taking ability of the companies.


4)??? Check whether the inter bank transfers are efficiently taking place and the balances in the banks are continuously moving and are not lying idle for a long period.


5)??? Check the calculation of interest on loans debited by the banks.


6)??? Check the terms of loans and specifically look for the scope of negotiation with the banks for reduction in the interest rates. Ensure that the terms of loan are not prejudicial to the interests of the company.


7)??? Check the Fixed deposits of the company and the rates of interest offered by the banks in the market. Ensure that FD accounts are opened in the banks providing highest interest rate prevailing in the market. Scrutinise the physical FDRs.


8)??? FD interest rates are fluctuating from period to period according to the government policies. Ensure that when Interest rates are increased by the banks then earlier FDs should be pre maturely withdrawn and new FDs with higher rates should be procured, if beneficial.


9)??? Analyse whether having continuous working capital loans and simultaneous fixed deposits is beneficial for the company. If the loans are temporarily taken for, say short term mismatch in cash flows, then loans can be taken by mortgaging the FDs of the company at 1% or 2% higher interest than FD interest.


10)? If the company is involved in various import-export transaction then check whether high balances in EEFC accounts is beneficial, considering the trend in the rupee exchange rate. EEFC account can be an efficient tool in the hands of the management for foreign exchange risk hedging.


11)? If the company has an export oriented business then companies can avail Export Packing Credit (EPC) at much lower interest rate than the commercial borrowing rates.


12)? Ensure that EPC limits as per the agreement with the banks are optimally utilized.


13)? If the company has a good reputation in the market then the management should strive to get the short term loans without any collateral.


14)? Check whether the sweep account facility is beneficial for the company. If the company already has a sweep account then ensure whether it is working properly.


15)? Check other bank accounts such as duty drawback account where the drawback of export duty is credited. Ensure that the balance in such account is immediately transferred and is not lying idle.


16)? Check whether the cash inflows are higher than the cash outflows. In case of companies having project based accounting, the receipts from the project should be always more than the payments at a particular point of time. If the company is in a good bargaining position then the purchase order may contain terms such as ?payment shall be made upon realization of dues from the client?.


17)? If the company is not an investment company, it is advisable not to indulge in stock market trading activities or speculation business for making quick cash. A forward contract is a safe instrument for risk averse companies to avoid forex losses.


18)? Check whether the gains or losses on cancellation of forward contracts are properly debited or credited in the bank.


19)? Eliminate the common misconception in the minds of the management that they have to maintain minimum balance in the banks equivalent to the no of cheques issued as this conception ignores the fact that there shall be receipts of cheques also that may set off the cheques issued.



Efficient management of cash can be a boon to the companies facing the brunt of recession. By mere following basics of cash management companies can make a big impact on their balance sheets at no extra cost. ?Due to Recession? has become a popular quote to conceal the inefficiencies of management and according to me recession cannot be the sole reason for the failure of such companies. This statement can be vouched by many efficient companies which have clearly circumvented the impact of recession by mere strengthening of internal controls and reduction in wastage of precious cash resources and let me assure you Internal Auditors have played a pretty significant role in the success of such companies.


Published by

Vikas Kalyanshetty, ACA
(Chartered Accountant)
Category Audit   Report

3 Likes   91 Shares   29796 Views


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