Internal Controls and Financial Oversight

When it comes to growing your business, you can’t afford to not understand the financial perspective of their business. Whether it is the day-to-day performance, budgets, taxes, or other aspects of accounting for your business, you can’t afford not to do business by the numbers. Financial oversight cannot be fully delegated to employees or co-owners. You have to be in the numbers to monitor results.

Unfortunately, for many small business owners, technology creators, and other innovators, the simple fact is that too few are trained on the ins and outs of the financial side of the business. I’ve had many clients tell me that a particular founder is in charge of the “accounting” because he/she is good with math. (A parallel to this is a person being in charge of human resources because they are good with people. More on that in a different article.)

The Numbers Tell You What Is or Isn’t Happening

Successful businesses (or organizations of any type and size) are characterized by owners, managers, and founders willing to dig in and learn about the numbers. They don’t avoid the responsibility to provide financial oversight of their business. Now I am not advocating that every person gets a degree in finance and accounting. However, I do think it is critical that every business owner, manager, and founder understand the basics of the financial information. More importantly, they need to know how that information is being generated, tracked and reported in their organizations.

Financial oversight and financial controls

Business At Risk: What You Don’t Know Can Hurt Your Business

A couple years ago, I received a call from a client who suspected the CFO of one of her companies was embezzling. Sure enough, he was. Not just skimming, but going at it with gusto: He actually was taking out loans to have more money to steal!

This particular business owner was savvy, sophisticated, and aware of the financial and accounting information. What she wasn’t doing was making sure to keep an eye on more than the reports she was handed.

When businesses don’t have systems in place to make sure that every transaction is legitimate, they are vulnerable. If the business had at least two, if not three, people involved (called segregation of duties), then different aspects of each transaction would be verified as it is processed. For instance,  separating the receipt of payments from origination of invoices and from banking transactions provides multiple opportunities for transactions to be checked. This means that one person originates the transaction, another verifies its authenticity, and another approves it. By having multiple people responsible for different steps, no one person can hijack the system.

Unfortunately, the CFO was trusted to do all aspects of every transaction. He could create a false vendor and invoice, make the payment, and sign the checks. With the loan, he had full signature authority, so he prepared the loan application, and signed it. The CFO also made sure to receive the physical mail, so he could watch for documents related to the transaction.

He was also super savvy in that he created a dummy company with the same acronym as the company for the loan. When the checks came into ABC Company made payable to ABC (the real one), he could deposit them in his ABC Co. (the shell company).

Financial Oversight, Internal Controls, and Operational Awareness

Other clients have called with other types of fraud including employees helping each other clock in and out to draw pay and overtime when they weren’t working. Another client had someone forging authorizing signatures on purchase orders and other documents.

You can’t be everywhere at once. But you have to put in place internal controls that enable transactions to be seen by multiple people (segregation of duties) to prevent a single employee from creating fraudulent transactions, and have financial oversight of the numbers at a level that enables you to increase the likelihood of detection.

I’ve heard from several business owners that they have had significant financial losses from a lack of financial oversight. Stop and take a look at where your business might be vulnerable:

  • Do you accept cash payments from customers?
  • Can employees use company credit or debit cards?
  • Is ordering from vendors done online or by telephone ordering (e.g., without purchase orders)?
  • Are employees empowered to directly purchasing from suppliers, e.g., big box retailers?
  • Do you document employee hours worked with manual time cards?

Proper Authorization and Reconciliations

Yes, it could be full-time job providing financial oversight and monitoring employee activities.  You can’t be with everyone all the time. However, you can put in place sound business practices, internal controls, that will reduce some of your risks.

Cash

If you receive cash payments from customers, use a cash register or other system for recording the transaction. Have a place where the cash is deposited internally that has restricted access. Don’t allow the person who receives cash payments from the customer, be the one that prepares the deposit.

With cash the earlier you can have physical control of the funds moved from the person receiving the funds, to another person recording and depositing funds the better.

Credit or Debit Transactions

When your employees have access to financial resources via debit or credit cards, procurement accounts, online ordering, etc. you have put your financial assets at risk. It is important to establish controls for each type of transaction that places limits on amounts, items, and places where they can make purchases. It is also important to require itemized receipts for transactions.

Another step is timely (when possible and depending upon transaction level) reconciliation and monitoring of bank (debit) and credit card transactions. By reviewing transactions frequently and matching them to authorizations, receipts, and projects, you can minimize your exposure to misuse of company funds.

Qualified, Cognizant Oversight

Internal controls ultimately come down to having the right people doing the right things to detect and prevent fraud. This means that you have to have people with real knowledge of what transactions should be taking place (customer jobs for instance). You may budget hours and who is working on a customer project, rates being charged, materials that have to be purchased and so on. Then you compare the actuals to the budget.

Many times businesses take big financial hits because of a lack of documentation of the transaction, both planned and actual. Recordkeeping and documentation are critical to the success of your organization and protecting the hard-earned dollars you bring in.

Invest in People, Systems, and Processes

You may think you can’t afford to have different people involved in a single transaction. Or, you may think it is too expensive to hire a trained bookkeeper. You may think that it isn’t important to monitor or reconcile your bank and credit card accounts. Asking for receipts on transactions where you sent your employees to make purchases may seem unnecessary.

All of these things are important. You may not be able to do all of them right away. However, you can do some of them starting today.

You don’t want to have the experience that one of my clients had. He argued about all those little pieces of paper coming in. He worried about paperwork overload, if he required receipts for purchase his people made for supplies in the field. To demonstrate why it is important that he stay on top of documentation, we did a test. Fortunately, he had his people buying from a vendor that had the ability to generate a summary of transactions with the detail of items purchased by date, quantity, amount, etc.

When we looked at one of those reports, it was a wake-up call for my client. The third party report revealed that  his “trusted” employees had been stealing from him. He discovered his employees purchased things that weren’t needed for his business. Turned out that they were moonlighting and running after-hours businesses. Without financial oversight, my client had been paying for the materials for his employees after hours projects.

You Work Hard; Now Work Smart

It may cost you some time and money to change how you are doing business internally. Think of it as an investment that will prevent others from unfairly benefiting from your hard work.

Copyright ©2016 Lea A. Strickland, F.O.C.U.S. Resource, Inc.

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