Checking a brokerage's cash report before it's used
The checks a brokerage should run on its cash report before directors rely on it, from bank agreement to an independent reviewer and written assumptions.
By Achekam · · 5 min read · For Insurance businesses in South Africa, Nigeria, Kenya
The directors' meeting is on Tuesday, and the cash report is the first item. The office manager has put it together from the banking app, a list of expected commission and a spreadsheet of costs. It says the brokerage can afford the new hire. The directors will read it quickly and decide.
Nobody has checked it. Not because anyone is careless, but because a cash report feels like a simple thing: money in the bank, money coming in, money going out. Yet a report with a wrong opening balance, a forgotten supplier or an optimistic commission date can lead to exactly the decision the business cannot afford. This piece sets out the checks a brokerage should run before the report reaches the board.
Agree it to the bank and supplier statements
ICAEW recommends several controls over cash flow reporting: reconciling reports to bank and creditor statements, showing when they were prepared, having them reviewed by someone other than the preparer, and reconciling them to profit and loss and balance sheet movements.
Start with the bank. The opening cash in the report should be the reconciled bank balance, not the figure in the banking app on the morning someone looked. In Achekam, bank lines are matched by suggestion and a person accepts each match; a line not yet in the books becomes a suggested journal a person approves; and a reconciliation completes only when the difference is nil or every leftover line is explained. A completed reconciliation at the report date gives you an opening balance you can stand behind.
Then the suppliers. Compare the report's payments section with the statements from your larger suppliers and service providers. An unpaid software renewal or an annual insurance premium that the statement shows and the report forgot is the classic hole in a broker's cash report.
A brokerage that holds client premiums in a separate account should show that money apart, never as part of the business's own cash. Keeping client money in its own bank account explains why.
Date it, and name who prepared it
A cash report has a short life. The same figures that were right on Monday may be wrong by Thursday, once an insurer pays or a large claim refund goes out. Put on the face of the report:
- the date and time it was prepared;
- the date the bank balance was reconciled to;
- the name of the person who prepared it.
That tells the directors how fresh the numbers are, and who to ask.
A reviewer who did not prepare it
The review is where most errors are caught, and ICAEW is specific that it should be done by someone other than the preparer. Investopedia identifies reconciliation, comparing one set of data with another, as the most important detective control, with corrective action taken when material differences are found. The reviewer's job is to do some of that comparing independently.
A short review checklist:
- Does the opening balance agree with the completed bank reconciliation?
- Are all known large payments in, including annual and quarterly ones?
- Is each commission receipt dated realistically, based on when that insurer actually paid in recent months?
- Are client money and business money kept apart?
- Are the assumptions written down, and do they make sense?
The reviewer signs or initials the report, with the date. In a small brokerage, that might be a director who did not prepare it, or the external accountant once a quarter.
Tie cash to the income statement and balance sheet
ICAEW's last control, reconciling the cash report to profit and loss and balance sheet movements, catches a different kind of error: a report that is internally neat but disconnected from the books.
In Achekam, the management accounts show an income statement for a chosen period beside the period before and a balance sheet at period end, both added up from the business's own journals. The general ledger lists every posted line, and the trial balance shows each account for a period or at a date and says whether debits equal credits. Use them to check that:
- commission income in the income statement, adjusted for the change in amounts owed by insurers, roughly explains commission received in cash;
- the bank balance in the report equals the bank accounts on the balance sheet at the same date;
- big movements in other balance sheet lines, such as amounts owed to insurers, appear somewhere in the cash report.
ICAEW notes the indirect method is less easily understood than the direct method, though it is a useful control, and this is where it earns its place.
Plain language and written assumptions
ICAEW recommends using the direct method for cash flow forecasts where possible, showing cash inflows and outflows in language non-accountants understand, and clearly documenting assumptions. A director who is a broker, not an accountant, should be able to read every line: "commission from insurers", "salaries", "rent", "VAT". Hide nothing behind accounting labels.
Write the assumptions underneath: which insurers are expected to pay and when, what new business is assumed, which costs are estimates. If commission timing is the big uncertainty, show the effect of a worst case; worst, likely and best cash cases explains how.
Who owns the cash
ICAEW advises that the CEO should take overall responsibility for cash management if there is a risk of business failure. In a small brokerage that usually means the principal or managing director, not the office manager who prepares the report. The checks above give that person a report they can rely on.
ICAEW's nine principles of cash management for finance professionals sets out the reporting controls, the case for the direct method and the role of the chief executive. How often the bank itself should be reconciled is covered in how often to reconcile the bank.
Before the next board meeting, add a prepared-by line, a reviewed-by line and a list of assumptions to the cash report. Those few lines change how far the directors can trust what they read.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
