Tips on Basic Internal Control for Beginners
Jeff Jackson is the President of Merchant Money. You can find more information regarding cash for your business at http://www.gomerchantmoney.com. We also establish merchant accounts please visit our site www.gomerchantaccountprocessing.com for details.
There are two major categories a business’s transactions are categorized into. They are called cycles and they are:
Category#1: Revenue Cycle
First one is the revenue cycle. In this cycle, a business recognizes the revenue it’s generating. This involves transacting sales with customers, exchanging services or products with corresponding remuneration in the form of cash or receivable which is collected after a specific period.
Category#2: Purchases Cycle
The second is the purchase cycle. In this cycle, a business buys or acquires services or products from suppliers and subsequently pays for it either immediately thereby having a cash outlay, or by incurring a liability to be settled after a given period.
Given these major activities a business gets involved in, a business must come up with controls to ensure each step in each cycle is adequately “protected” from inherent risks. These risks get magnified specially in small businesses heavily dependent on manual processing of business data and other transactions. It is a common misconception that the more people involved in the process, the more risks the business gets exposed to. Well, not necessarily. A lone employee could wreak as much havoc as well if empowered too much with so many roles and functions. Thus, it is imperative that as a business owner, one takes time to really study the roles of various personnel to maximize their services without compromising the company’s safety nets: controls.
The common controls businesses could implement are:
Control #1: Segregation of Duties
Tasks that are in conflict with each other and yet done by one person only may give said employee opportunities to manipulate records and defraud the company. Instead, these must be carried out by different personnel. For instance, those having custody of assets like cash must not be tasked to do record keeping as well like monitoring of receivables or payables. Spread the risk. The inherent risks of your cash, receivables and payables must be spread over. Do not limit the roles to a single employee specially when your business starts to expand and you could not anymore give adequate attention to details.
Control #2: Authorization
Another safety net is to require proper authorization before certain transactions are carried out. For instance, when purchasing inventory or supplies, the purchase order must be approved by someone in authority. Otherwise, you might end up with liabilities for purchases you don’t need at the moment or worse, liabilities for purchases that will not materialize in the company’s premises. Proper authorization could contain the risks in manipulating records for cancelled sales and other similar transactions.
Control #3: Trail
Invest in good record keeping. Most companies fail to appreciate the value of having proper documentation of business transactions. Some think it’s enough to just have cash and sales invoices as official business documents.
Businesses should invest in proper recording of transactions. Start right. Most fail to realize that proper recording makes it easier to trace transaction details in the future should there be complaints from customers, etc. Thus, this also paves way for better costumer service. Though you may still be a small business with few transactions, it pays to start with the right practices. This leads to greater control on risks that grows as your business grows also.
One could start with keeping a clear record of sales and purchases where detail verification can be easily carried out. Make sure entries in your records are adequately supported with the right documents and reports. Or better yet, one could invest in a simple accounting system. There are numerous accounting software packages currently being offered in the market.
Control #4: Generate Periodic Reports
The data collected through your record keeping efforts must be processed and made more useful through periodic reports. Periodic reports like financial statements and other customized in-house reports a company might need will allow a business owner to have a “detailed” bird’s eye-view of the whole business. This enables him or her to make sound decisions for the next period e.g. levels or quantity of items to be purchased, length of credit terms to be offered, etc.
Control #5: Verify and Check
Lastly, top things off with periodic conduct of checks and audits. This will help give assurance on the quality of reports one gets as well as on the integrity of the data one’s records are accumulating and are based on. Conduct physical counts of supplies and inventory, randomly verify payable and receivable balances, initiate surprise inspections.
Subsequently, all these afford one needed confidence in making decisions, and allow one to take bold steps in furthering one’s enterprise.
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