You may hear the term “internal control” but not actually know what it means and how it can impact your business. Blame us accountants for that ignorance because we tend to explain it with abstract terms and obtuse pyramid visuals that make even our eyes roll!
So we’ll keep it simple with the basics of what you need to know about internal controls to benefit your business. Three major areas of concern are:
1) Are all your business transactions recorded?
The easiest way to make sure transactions are recorded is to reconcile each bank account every month. We recommend you look at the bank accounts before anyone else, and multiple reasons exist for this advice: You can see how much cash came in and how much is left. You’re also able to look at the checks to make sure you know who received your hard-earned cash. If you deposit every day or on a specific day of the week, you can be sure the set deposit schedule was followed. If there’s a gap, you know what to investigate.
Take a look at the company credit card statements, too. Do you recognize the merchants? Or did one of your former employees spend the weekend in the Bahamas with your company credit card?
One big no-no is never ever, ever, ever sign blank checks because you want to leave to play golf Friday afternoon and your accounts payable clerk has not yet processed the bills to pay. You may think you’re signing checks for your bills but your AP clerk may be using them to pay his or her personal bills.
You believe your employees are loyal to you but let’s face it, personal circumstances and human nature may tempt people to “borrow” from company funds. Unfortunately, they often can’t repay what they’ve borrowed, and in numerous circumstances the worst case scenario happens: the situation mortally wounds the business and forces it to shut down, resulting in everyone losing their jobs.
2) Are transactions properly classified and summarized for the correct amount in the correct accounts?
Now, you need to make sure the deposits are properly recorded as sales or against receivables. If you mess up this important element, your records may show your top clients didn’t pay their invoices when in fact they have. When you send your collection clerk after innocent clients, you undoubtedly appear unorganized and incompetent . . . and you could lose some key customers over careless mistakes.
Similarly, you need to properly record the expenses in the correct account. Improper account coding, such as charging the utility bill to marketing cost, can distort your financial reports. If severe enough, your financials can become such a mess that you quit relying on them and so lose a valuable tool for managing your business.
Recording the proper amount is also critical. If you accidentally short-pay a vendor, he or she may put future orders on hold. Conversely, if you over-pay your vendor he or she may simply consider your overpayment to be a well-deserved tip.
3) Are your business assets properly safeguarded?
Finally (and simply), keep an eye on your stuff. This rule not only includes restricting access to checks and company credit cards, but also the other items such as company equipment and vehicles.
Have ID tags for significant equipment, so you can keep track of your important and expensive assets. Keep them stored in a secure place and hold employees responsible for equipment when using it.
Another important asset to safeguard is information. Use unique user IDs with complex passwords to prevent hackers, or keep hard records locked up. The government implemented specific requirements under the Red Flags Rule that obligate you to protect customers’ personal information. (We’ll save the Red Flags discussion for another day.)
For more security tips, shortcuts, and helpful hints on how to maintain the internal control of your business, browse our blog entries. If you have questions, contact Patrick & Robinson CPAs at 904-396-5400 or Email us at office@CPAsite.com.
We know running a business can feel like a juggling act. Let us help you keep things spinning high!