You examine the numbers, and everything looks great. Sales are up, revenue is up, and your team are hitting their goals. So why do you find yourself feeling like you are just spinning your wheels to break even? What if there was a leak within your business, a leak that is quietly draining you of precious cash that you worked so hard for? The reality is that many businesses are losing money; it’s not because they are lacking sales, but because they are lacking sound internal controls.

This is the stealth profit killer. It is not bold-faced fraud; it is small-scale inefficiencies, the sort of thing that becomes a significant loss over time. Figuring out and fixing leaks is a foundational competency of finance professionals you would learn while completing a CMA course or when meeting the requirements for CPA eligibility.

What is a “cash leak”?

A cash leak is an inefficiency or weakness in the way your business operates that causes you to lose money. Cash leaks are not always clear and can be lurking right in plain sight when you look at your business’ daily operations. The biggest cause of cash leaks in a business is a weak internal control system that does not eliminate errors, waste and theft.

Common Cash Leaks in Business:

Inventory Inefficiencies

• Stock Shrinkage: losses from theft, damaged goods, or mistakes that you cannot account for.
• Overstocking: investing money in inventory that does not move off your shelf. While you are paying storage on these items, the inventory binds your company’s capital.

Billing and Accounts Receivable Problems:

• Missed Invoices: Not billing customers for the services you have provided.
• Slow Collections: Not following up on overdue accounts and invoices will slow down your cash flow.

Expense Control Problems:

• Duplicate Payments: Paying the same vendor invoice for the same goods or services more than once.
• Not Authorised Purchases: Employees making purchases that were not authorised in a timely manner and imposing administrative costs.

The Role of Internal Controls 

Internal controls are the procedures and processes that an organisation uses to ensure the integrity of its financial and accounting information and promote accountability and fraud prevention. This is probably one of the more basic topics for any aspirant to a CMA course or checking CPA eligibility. A solid control system is a veil of protection for your finances.

Key Principles to Implement

• Separation of Duties: No one person should have control of a transaction from start to finish. For example, the person that records the payment should not be the same person that approves the payment. This is an essential concept taught in any CMA course.
• Authorisation & Approval: Every transaction must have clear authorisation from a designated authority. This includes purchases, refunds, and payroll adjustments.
• Documentation: You should also keep records of all financial transactions; often a good paper trail is your best protection against mistakes and is also usually necessary for an external audit (another part of the requirements for CPA eligibility).

Your Next Steps: Plugging the Leaks

Don’t wait until a monumental failure occurs to fix your internal controls. Start by assessing your processes. Here are some questions to ask:

• Are we effectively segregating duties? 
• Do we have a clear approval route for all of our payments? 

Some Possible Internal Controls  

• Segregation of duties: No one individual should complete a transaction from start to finish.  
• Periodic or regular checks: Periodically check for errors and corrections.  
• Limits: Set clear thresholds for approval of expenditures.

If you are a student or current professional and looking to validate your knowledge in this area, consider taking a CMA course so that you are empowered to become a strategic leader in the area. In a similar way, developing these skills will be necessary when you start to work towards your CPA eligibility.

Conclusion

Cash leaks can be unnoticeable, but their impact on profits is noticeable. By instituting and maintaining solid internal controls, you can protect your assets and create a more effective, supportive, and ultimately more profitable organisation. Don’t let all of your hard work perish—plug the leaks and protect your profits!

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