Without the proper "controls" in place, a small business can struggle or go under, especially in this tough economy. Although there are no guarantees, the following are basic guidelines to follow in six areas:
1. Sales: It is important that accurate sales figures are used to establish company revenue and direct inventory purchases. Implement detailed procedures for cash, checks, credit cards and online sales.
- Use an invoicing system for shipping goods.
- Ensure that sales figures are correct and commissions are not paid until funds are received.
- Reconcile sales with payments. Double-check sales against original invoices.
- Obtain proof of delivery when goods are shipped.
2. Accounts receivable: Failure to collect past due accounts can create cash-flow problems and erode profit. Establish credit and collection policies in writing, and follow through on their implementation (e.g., review credit balances on a regular basis).
- Separate accounts receivable from cash reporting.
- Have accounts "aged" regularly and authorize an independent review of the report.
- Cross-check noncash credits and bad debt write-offs.
- Establish numerical or batch-processing for billing.
- Initiate security measures for outside communications.
3. Accounts payable and purchases: Many companies are prone to mistakes in this area. Below are procedures for your staff to follow:
- Record purchase and accounts payable procedures.
- Initiate controls to cross-check duplications.
- Check pricing information and prices of competing vendors.
- Focus on large billings and items that may be disguised under smaller entries.
4. Cash accounts: If your business processes a significant number of cash transactions, it can easily fall prey to theft, especially if internal controls are substandard.
- Have employees balance cash at the end of their shifts.
- Safeguard checkbooks and other methods of disbursing funds.
- Reconcile all bank accounts on a regular basis.
- Separate cash deposits from other functions at the bank.
- Divide responsibility for cash disbursements and purchases from the approval process.
5. Payrolls: Thanks to recent technological advances, it is easier than ever for employees to commit fraud if tight internal controls are not established.
- Ensure that electronic passwords are protected and changed frequently.
- Review bank account deposits to ensure that wages are being disbursed properly.
- Separate responsibilities for payroll preparation, disbursement and distribution.
- Investigate variations in payroll expenses and monthly budgets.
- Train backups for critical payroll responsibilities.
6. Physical assets: It is also relatively easy for physical assets to be misplaced or misappropriated. Protect valuable property from external, as well as internal, access.
- Lock up laptops and other electronic devices.
- Record all asset purchases and maintain detailed records.
- Assign responsibility for supervising physical assets to a particular employee and a backup.
- Divide responsibilities involving expensive equipment among employees, if possible.
Finally, coordinate these activities with your business advisers. They can help you install some meaningful controls.
