Sometimes my work gets deep into Policies and Procedures and how they affect and protect businesses. And when I start talking about it, I can see the eyes of my clients and prospects glaze over. Yes, yes, they say, “I know, but I’m a small company”, “We run a lean staff,” or “I’m just getting started,” and “My staff has been here a long time, and I trust them completely.”
Look. I get it. But my question is, would you put a plate on your receptionist’s desk with $5,000 in cash on it? Of course not. That makes no sense. Someone is going to take that money, in spite of the fact that it doesn’t belong to them. But without the proper internal controls in your business, that’s exactly what you’re doing. And yes, putting in proper internal controls is time consuming, difficult to establish, puts a strain on ancillary staff, creates a headache that doesn’t relate to the primary function of your business. But it protects the primary asset of your company. CASH.
I can tell you many stories about business owners that have had an office manager that has been integral to their business. They do payroll, payables, HR, purchasing, all of the day to day operations of a company, and the only thing that the business owner is concerned about is “what will happen if Sally / Bill gets hit by a bus?” Keep this in mind. That certainly is a worthy concern, but of even more concern is the Office Manager that never takes a vacation, does all the AP work and bank reconciliations themselves, comes back from time off to run payroll, or issue checks. Think about it. There are many cases where a trusted employee stole millions of dollars from their long-time employer.
The purpose of internal controls is not to stop crooks from stealing from you. In this electronic age, that’s extremely difficult. The purpose is to keep honest people honest. If they have to work too hard to steal from you, they’ll get back to their own desk as fast as they can rather than take the risk. Here are some things that you can do to protect your company from this kind of loss.
Banking — Never have the same person that issues the checks reconcile the bank account. Whether it be checks or automatic payments, every payment needs to be authorized by one person, and reconciled by a different one. Wires need to be approved by two people. If you’re too small a company to have two people working on banking, make sure that you review the bank reconciliations every month. Look for checks made out to people or vendors you don’t know. Look for payments that you didn’t authorize. Look for amounts that don’t make sense in payment to a particular vendor.
Purchasing — One good rule is to have new vendors approved before they are entered into the system. If you’re the one approving the new vendors, then you should know who the new vendors are, and who authorized their use in your company, and what their relationship is to the person that recommended them.
Payroll — In this day of direct deposits, you don’t get to sign checks before payroll goes out. But, you still want to check for ghost employees. You might not know the name of everyone in the company, so looking at payroll summaries might not help. But you can arrange to have your staff print payroll stubs for every employee once a quarter or every six months. Have them put in envelopes and you go around the company and deliver the stubs. If you’re left with envelopes at the end, you need to check up on who the payee is. The other item is to verify that everyone is getting the correct amount. Get a roster of every employee and their bi-weekly payroll (if you run bi-weekly). Then, as a cross check, get the most recent payroll summary, and check each employee’s gross payroll against their payroll in the employment records.
Payables — We talked about purchasing a bit ago, but the best way of checking payables is to be the person approving them. If your weekly or bi-weekly payables are small, you can have your staff attach each of the invoices to the cash requirements report (the report that lists all of your bills that need payment.) Look at each invoice to make sure that the products were received, and verify that these are items that you know your company would use, and that the checks are made out to companies you’re familiar with.
Inventory — Just like retail stores have “shrinkage,” you might have a similar issue with employees that have sticky fingers. Companies that have employees that work with expensive tools often have a tool crib that employees check out tools for work, and must return them at the end of the day. For inventory in the warehouse, use some method of verifying that the levels of inventory are correct. Regular cycle counts will ensure that the inventory that you expect to have, is indeed in the warehouse. Any variances need to be researched. Were they the result of mis-shipments, or internal system issues? Or maybe you have an employee with sticky fingers?
Internal controls means that you have processes in place to verify the important transactions in your company and make sure that none of them happen without the proper approval. What kind of a company would you have if everyone did their jobs the way they wanted? Well, working with a set of solid procedures verifies that everyone in your company is operating under the same rules. They are consistently applied and maintained to safeguard the operation of the company and your assets.
If you have a question about how to set up your Internal Controls, a fractional CFO can make sure that your assets are protected. Give us a call, and we can help you establish the specific internal controls that you need to protect your business.
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