Every Small Business Should Establish Controls

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Image of small business owner working from home and reviewing her business' internal controls

Every week, reporters publish stories about companies that have lost thousands, even millions of dollars because of fraud.

They recount the dreadful details of business owners who learned – too late – that a lack of basic controls left their companies vulnerable to pilferage, embezzlement, and other types of misappropriation.

How do these lessons apply to small businesses? After all, small firms generally can’t afford to hire internal auditors or set up separate divisions to break up incompatible duties.

A small company can’t always protect itself in ways larger firms might, but management can establish controls in certain high-risk areas, such as the following:

1. Cash disbursements

If at all possible, the owner/manager should sign checks. This control has a dual purpose.

Management can see how the company is spending its money and the cash disbursement function is kept separate from bookkeeping or accounting.

If the same person signs checks and enters disbursement transactions in the accounting records, embezzlement is harder to prevent.

Requiring two signatures on checks above a certain amount also provides greater control.

 

2. Customer collections

Consider having the owner/manager open the mail, especially if customer collections are a regular part of your business.

Alternatively, you might ask someone separate from the accounting function to open the mail and prepare the deposit slip. Making daily deposits is also a good control.

 

3. Personnel practices

You can prevent problems later on by performing background checks before hiring key employees, especially those who will be handling cash or other high-risk assets.

But, financial pressures, addictions, and other factors can corrupt even good employees. That’s why managers might consider discreetly monitoring employee lifestyles (without invading their privacy).

An observant manager might note that certain lower-level employees are living well beyond their means, or that warehouse staff are carrying off company materials to remodel personal residences.

 

Perhaps a small business’ greatest control is the “tone at the top.” If management sets a high standard, employees generally follow.

However, if a manager is perceived as lax – he/she doesn’t respond quickly when evidence of misappropriation surfaces – employees might conclude that theft isn’t such a big deal.

 

Remember this: A company that fails to establish minimum controls is providing a golden opportunity for fraud.

 

Have questions about establishing controls? Let’s talk!