Do You Have Effective Internal Financial Controls in Your Business?

One of the very first private consulting jobs that I took on, several years ago was for a well-established company in the Midwest.  Day-to-day management of the company fell to the owner’s wife when he suddenly passed away. Since she was new to the daily operations, she began to scrutinize the financial information more carefully as a means of educating herself on the business financial condition. It didn’t take her too long to know that something wasn’t quite right but she couldn’t put a finger on the problem.

We worked together to analyze costs, analyze pricing and develop strategies for positioning the business to be put up for sale. Meantime, she shared with me that she had a concern that one of her employees was stealing from the company. So we turned our focus to the development of internal controls while we tried to identify whether or not her concern was valid. As it turned out, the tightening of internal controls caused the person in question to leave the company after over 20 years with the business. The owner, and her sons, were completely devastated to find out that the employee had been stealing from them consistently for many years. This employee was highly valued by the business and was considered almost like family after many years of service. The moral of the story is simply that no business is too small to institute effective internal financial controls.

How can you begin to develop controls? First you need to identify the areas that are high-risk in your business. High-risk areas may include: Cash receipts and disbursements, customer credit and collections (writing off bad debts), purchasing and storage of inventory, payroll (including worker’s compensation insurance fraud). Under no circumstances should an accountant, bookkeeper, or the Controller of the business be given check-signing authority. Fraud can easily be concealed if this person has authority to sign checks. The owner/manager should sign all checks. If there are multiple owners, at least two signatures should be required. Do not create a signature stamp that can be used in your absence.

Following are other recommendations:

• In a small company, if you cannot separate duties to provide a check and balance system, consider job-sharing through a cross-training arrangement.

• Require that employees who work in high risk areas take vacations. Pay attention as to whether employee life/styles seem to match what you may know about their salaries.

• Limit access to accounting records and year-end entries.

• Make surprise audits and inspections

• Discuss computer controls with your accountant or a computer security specialist

• Be sure that you pay attention to the legal aspects of internal controls. Be sure any controls that you put in place do not violate the privacy rights of employees or customers.

Article written by Susan Hoosier, Longview Small Business Development Center  To locate your local SBDC advisor please visit the SBDC web site http://www.wsbdc.org/

Do You Have Effective Internal Financial Controls in Your Business?

One of the very first private consulting jobs that I took on, several years ago was for a well-established company in the Midwest.  Day-to-day management of the company fell to the owner’s wife when he suddenly passed away. Since she was new to the daily operations, she began to scrutinize the financial information more carefully as a means of educating herself on the business financial condition. It didn’t take her too long to know that something wasn’t quite right but she couldn’t put a finger on the problem.

We worked together to analyze costs, analyze pricing and develop strategies for positioning the business to be put up for sale. Meantime, she shared with me that she had a concern that one of her employees was stealing from the company. So we turned our focus to the development of internal controls while we tried to identify whether or not her concern was valid. As it turned out, the tightening of internal controls caused the person in question to leave the company after over 20 years with the business. The owner, and her sons, were completely devastated to find out that the employee had been stealing from them consistently for many years. This employee was highly valued by the business and was considered almost like family after many years of service. The moral of the story is simply that no business is too small to institute effective internal financial controls.

How can you begin to develop controls? First you need to identify the areas that are high-risk in your business. High-risk areas may include: Cash receipts and disbursements, customer credit and collections (writing off bad debts), purchasing and storage of inventory, payroll (including worker’s compensation insurance fraud). Under no circumstances should an accountant, bookkeeper, or the Controller of the business be given check-signing authority. Fraud can easily be concealed if this person has authority to sign checks. The owner/manager should sign all checks. If there are multiple owners, at least two signatures should be required. Do not create a signature stamp that can be used in your absence.

Following are other recommendations:

• In a small company, if you cannot separate duties to provide a check and balance system, consider job-sharing through a cross-training arrangement.

• Require that employees who work in high risk areas take vacations. Pay attention as to whether employee life/styles seem to match what you may know about their salaries.

• Limit access to accounting records and year-end entries.

• Make surprise audits and inspections

• Discuss computer controls with your accountant or a computer security specialist

• Be sure that you pay attention to the legal aspects of internal controls. Be sure any controls that you put in place do not violate the privacy rights of employees or customers.

Article written by Susan Hoosier, Longview Small Business Development Center  To locate your local SBDC advisor please visit the SBDC web site http://www.wsbdc.org/

Do You Have Effective Internal Financial Controls in Your Business?

One of the very first private consulting jobs that I took on, several years ago was for a well-established company in the Midwest.  Day-to-day management of the company fell to the owner’s wife when he suddenly passed away. Since she was new to the daily operations, she began to scrutinize the financial information more carefully as a means of educating herself on the business financial condition. It didn’t take her too long to know that something wasn’t quite right but she couldn’t put a finger on the problem.

We worked together to analyze costs, analyze pricing and develop strategies for positioning the business to be put up for sale. Meantime, she shared with me that she had a concern that one of her employees was stealing from the company. So we turned our focus to the development of internal controls while we tried to identify whether or not her concern was valid. As it turned out, the tightening of internal controls caused the person in question to leave the company after over 20 years with the business. The owner, and her sons, were completely devastated to find out that the employee had been stealing from them consistently for many years. This employee was highly valued by the business and was considered almost like family after many years of service. The moral of the story is simply that no business is too small to institute effective internal financial controls.

How can you begin to develop controls? First you need to identify the areas that are high-risk in your business. High-risk areas may include: Cash receipts and disbursements, customer credit and collections (writing off bad debts), purchasing and storage of inventory, payroll (including worker’s compensation insurance fraud). Under no circumstances should an accountant, bookkeeper, or the Controller of the business be given check-signing authority. Fraud can easily be concealed if this person has authority to sign checks. The owner/manager should sign all checks. If there are multiple owners, at least two signatures should be required. Do not create a signature stamp that can be used in your absence.

Following are other recommendations:

• In a small company, if you cannot separate duties to provide a check and balance system, consider job-sharing through a cross-training arrangement.

• Require that employees who work in high risk areas take vacations. Pay attention as to whether employee life/styles seem to match what you may know about their salaries.

• Limit access to accounting records and year-end entries.

• Make surprise audits and inspections

• Discuss computer controls with your accountant or a computer security specialist

• Be sure that you pay attention to the legal aspects of internal controls. Be sure any controls that you put in place do not violate the privacy rights of employees or customers.

Article written by Susan Hoosier, Longview Small Business Development Center  To locate your local SBDC advisor please visit the SBDC web site http://www.wsbdc.org/

Revisiting Your Credit Strategy

Monitoring and understanding your cash flow is probably one of the most critical aspects of business management. Cash flow has always been important to businesses, but many business owners have recently been reminded of this in a very unpleasant fashion; i.e. the cancellation or reduction of a vital credit line.

Business owners typically concentrate their efforts on year-end tax planning and strategizing for increased sales in the coming year. It is rare, in the planning process, to see businesses pay equal attention to planning for cash flow by reviewing the business’ credit strategy (the way that bills are paid and the way in which you receive payments for goods and services that are sold).

Following are some tips on things to consider when you review your credit strategy:

• Think twice about paying early on your business debts since you may use up cash reserves that may be critical for survival.

• You may need to consider asking your customers for more financial information to determine whether they have the capacity to pay for goods and services purchased on account.

• You may need to reconsider the length of time that you are allowing your customers to pay on their accounts or you may need to consider asking for a larger deposit or a greater percentage of the total cost of a project to reduce the risk of bad debts.

• Consider taking credit cards, if you are not doing so already, since the bank’s merchant fees may be a small price to pay for not worrying about collecting from some of your customers. It may be more important for you to have the cash in the bank!

• Use the maximum time allowable to pay your suppliers on account unless you will lose the benefit of a discount.

• The economy is still tight and funding is tough to find, so do not assume that your existing strategy will continue to work for you. Instead, be proactive about addressing any policies that might increase your risk for bad debts.

• Clean up your financial statements, strengthen your equity position in your business, and continually monitor your cash flow position.

Article written by Susan Hoosier, Certified Business Advisor and Certified Economic Development Professional, with the Small Business Development Center, which is part of the 24 statewide offices of the Washington Small Business Development Center network (WSBDC).

Revisiting Your Credit Strategy

Monitoring and understanding your cash flow is probably one of the most critical aspects of business management. Cash flow has always been important to businesses, but many business owners have recently been reminded of this in a very unpleasant fashion; i.e. the cancellation or reduction of a vital credit line.

Business owners typically concentrate their efforts on year-end tax planning and strategizing for increased sales in the coming year. It is rare, in the planning process, to see businesses pay equal attention to planning for cash flow by reviewing the business’ credit strategy (the way that bills are paid and the way in which you receive payments for goods and services that are sold).

Following are some tips on things to consider when you review your credit strategy:

• Think twice about paying early on your business debts since you may use up cash reserves that may be critical for survival.

• You may need to consider asking your customers for more financial information to determine whether they have the capacity to pay for goods and services purchased on account.

• You may need to reconsider the length of time that you are allowing your customers to pay on their accounts or you may need to consider asking for a larger deposit or a greater percentage of the total cost of a project to reduce the risk of bad debts.

• Consider taking credit cards, if you are not doing so already, since the bank’s merchant fees may be a small price to pay for not worrying about collecting from some of your customers. It may be more important for you to have the cash in the bank!

• Use the maximum time allowable to pay your suppliers on account unless you will lose the benefit of a discount.

• The economy is still tight and funding is tough to find, so do not assume that your existing strategy will continue to work for you. Instead, be proactive about addressing any policies that might increase your risk for bad debts.

• Clean up your financial statements, strengthen your equity position in your business, and continually monitor your cash flow position.

Article written by Susan Hoosier, Certified Business Advisor and Certified Economic Development Professional, with the Small Business Development Center, which is part of the 24 statewide offices of the Washington Small Business Development Center network (WSBDC).

Revisiting Your Credit Strategy

Monitoring and understanding your cash flow is probably one of the most critical aspects of business management. Cash flow has always been important to businesses, but many business owners have recently been reminded of this in a very unpleasant fashion; i.e. the cancellation or reduction of a vital credit line.

Business owners typically concentrate their efforts on year-end tax planning and strategizing for increased sales in the coming year. It is rare, in the planning process, to see businesses pay equal attention to planning for cash flow by reviewing the business’ credit strategy (the way that bills are paid and the way in which you receive payments for goods and services that are sold).

Following are some tips on things to consider when you review your credit strategy:

• Think twice about paying early on your business debts since you may use up cash reserves that may be critical for survival.

• You may need to consider asking your customers for more financial information to determine whether they have the capacity to pay for goods and services purchased on account.

• You may need to reconsider the length of time that you are allowing your customers to pay on their accounts or you may need to consider asking for a larger deposit or a greater percentage of the total cost of a project to reduce the risk of bad debts.

• Consider taking credit cards, if you are not doing so already, since the bank’s merchant fees may be a small price to pay for not worrying about collecting from some of your customers. It may be more important for you to have the cash in the bank!

• Use the maximum time allowable to pay your suppliers on account unless you will lose the benefit of a discount.

• The economy is still tight and funding is tough to find, so do not assume that your existing strategy will continue to work for you. Instead, be proactive about addressing any policies that might increase your risk for bad debts.

• Clean up your financial statements, strengthen your equity position in your business, and continually monitor your cash flow position.

Article written by Susan Hoosier, Certified Business Advisor and Certified Economic Development Professional, with the Small Business Development Center, which is part of the 24 statewide offices of the Washington Small Business Development Center network (WSBDC).