Internal Controls: Are yours in place?

Have you ever reviewed your P & L and thought to yourself; "these percentages don't make any sense. How could sales be up and we made less money?" Or, perhaps your COGS is out of whack. Listen to your gut! If you are excellent at what you are in business to do but not so much on the bookkeeping side - trust but verify! There are many ways that fraud can take place; even in the most innocent ways.

I started working for a new client recently and I was reminded that sometimes what comes natural to some of us, doesn't to everyone. Many of us do business each and everyday in our small businesses based on trust. We have employees who have been with us for years. Trusting those who you believe will never wrong you. . .

Let me just start by saying, internal controls are not saying to an employee, "I do not trust you!" Internal Controls are smart business! Let me say that again! INTERNAL CONTROLS ARE SMART BUSINESS! They are necessary!

We won't get into a long drawn out conversation about the whys and what's but I want to share with you some basics for your own protection as a business owner. 

As a business owner, you wear many hats; marketer, sales, production, accounting. As you grow you need help and are looking for ways to take some of the pressure off. You hire someone to assist you with paying bills and keeping track of expenses so you can focus more on sales and production. Here are three simple tips you can implement right away.

1.  Have a segregation of duties -  when the mail is brought in from the mailbox, it should be opened with at least one other person. For example, if the person who enters the payables and cuts checks is getting the mail, the mail should be opened by the owner or with a second employee.

We all get junk mail - such as credit card offers. Some offers now arrive in the mail as a check and all you have to do is fill it out and deposit it to activate the loan. You can control this by being the one who shreds these offers or by having one other employee watch as the mail is opened to aide in ensuring accountability of doing the right thing.

2.  The person who enters the payables in the computer should not be a signer on the bank account.

If an employee has access to enter a bill, write a check, and sign a check - you have no control over your bank account. Distribute the checks to the employee and keep a list of the check numbers you have assigned. Review every check before signing it and/or also take a look at the supporting documents for the bill that is being paid. Be the check signer!

3.  The bank statement should be opened and reconciled by someone other than the person who is writing the checks. Believe it or not, bank statements can be manipulated as part of an embezzlement scheme. Be the one who opens the statement when it arrives in the mail. Or if you get yours electronically, make sure it comes directly to you or is not accessible to your employee.

Internal controls go far beyond these three tips and cover a multitude of processes. Every business is going to be a bit different because industries are different, each business has a unique way to get the job done, and possesses different exposure points. My main point today is to just briefly let you know that internal controls are one of the most important factors you want to get right in and for your business. It is never personal, it is simply smart business. Sometimes just being involved will keep people honest.

Implement internal controls today if you do not have at least some basic controls in place. You can start with the three points above and build from there. Put your thinking cap on and run your business processes through your head asking yourself how can my processes be manipulated? Hire a accountant to help you with this process if necessary. This is sad to say but you have to think like a thief. This was a difficult concept for me to learn when I was an auditor for the state because my brain just does not function this way. My natural thought pattern was that everyone is good and wouldn't steal or embezzle funds. It became a challenge to uncover holes in processes; to help (at the time) government entities fill gaps in their processes, to ensure the safety of public funds. Now, I am simply fascinated by the process and want you to know how to protect your life investment.

More on this subject later. . .  have a blessed day!