Five Internal Control Ideas for Small Businesses

 

If we had to define the term internal controls for small businesses, we’d probably phrase it like this: “Checks and balances that business owners put into place to ensure that their accounting stays accurate and that their employees don't do things they shouldn't.” That second part might sound a bit harsh, but the reality is that over two-thirds of fraud is committed by employees in positions of trust, and most small businesses have loose environments with little or no supervision. 

With that in mind, here are a few ideas to think about if you want to improve your company’s internal controls:

1. Establish good general controls.

Lock your registers and file cabinets. Keep your blank checks in a secure place. Manage your passwords carefully. These are all basic, common-sense security measures – but they’re easy to overlook when you’re overwhelmed by the day-to-day details of running a business.

2. Be aware of the classic fraud tricks.

Cash and inventory are by far the biggest sources of fraud for small businesses (especially retailers). The most common tricks used by employees include skimming (taking cash from the register or keeping cash payments from customers and then adjusting the sales receipt), stealing inventory, embellishing expense reports, and writing checks to fake vendors (such as friends or relatives).

3. Don’t let one person do everything.

Segregation of duties isn’t always possible at small businesses, so a good rule of thumb is this: Don’t let one person do everything. Your bookkeeper should not be the check signer. Your bank reconciliation should be done by someone other than the person who writes the checks. Daily cash receipts should be crosschecked and deposited into the bank by somebody other than your manager. If you have employees, you (the owner) should know your approximate average payroll for each pay period and approve each payroll run before it gets submitted for processing.

4. Keep an eye on your bank rec.

If there’s anything strange going on with your business (like phony checks or unauthorized withdrawals), it’ll usually show up during the bank reconciliation (or "bank rec"). Although you may think it's just a tedious monthly chore, the bank reconciliation is actually a key procedure and crucial check-and-balance for every small business. In fact, one of the cheapest and most effective internal controls you can get is to have your bank rec done by an outside accountant every month. Even if your bookkeeper says they can handle it in their sleep, an outside bank rec is a smart move because you'll know it's being done by an objective, independent professional.

5. Stay hands-on with your accounting.

Believe it or not, the single most important internal control for any small business is the overall environment created by the owner. You should stay hands-on with the financial side of your business, not just hand everything over to a bookkeeper and trust that it's being done correctly. Take an interest in the accounting, review large invoices before they get paid, look at key financial reports on a regular basis, and ask lots of questions. In addition to keeping you informed, these types of actions show employees that you’re paying close attention to the numbers... and that's a very good thing.

Legal stuff: This information is provided for educational purposes only and does not constitute advice for your specific situation.

William Keller