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Internal Controls
Small Business - Internal Controls

Do you have them and why are they important? Internal control is a process through policies and procedures that ensures you company has integrity in its financial statements, compliance with laws and regulations, and has effective and efficient operations. Internal control also safeguards against theft, unauthorized use, and acquisition and disposal of assets.

Management or higher level authorities generally create policies and procedures that employees must adhere to create an environment that sustains the proper controls.  In public companies control policies and procedures are reviewed by the board of directors or audit committee to ensure proper controls are in place and are being followed.  Some internal control policies include:

Segregation of duties – this is where different individuals are assigned parts of duties for related transactions.  Example:  the person writing the cheques does not also sign the cheques and reconciled the bank account.  Different people doing different parts of this process creates check and balances where foul play is more easily detected as well as any potential errors made.

Proper Authorization – a procedure for who has authorization to purchase assets or authorize work on behalf of an organization helps to ensure all company guidelines are being followed.  Price lists that staff must adhere to, management only signing authority, all purchases must be approved alerts staff to acknowledging there are controls and the proper procedures when it comes to receiving goods and paying for them.

Document and Records control – processes for filing and keeping documentation provides for record keeping that supports the financial statements.  Creating invoices that have a proper numbering format, filing of incoming supplier invoices in a manner that can easily be accessed is important in providing backup for the numbers representing the figures on your financial statements.

Physical control of assets – proper asset record keeping, safes, cash registers, employee ID cards, locked cabinets, fences, computer related controls, password, backup and recovery procedures, all ensure proper safeguarding and keeping of company assets.

Cross checking or independent checks through use of other employees.  Procedures where managers check employees work, surprise float or safe counts for staff responsible for cash.  Annual financial review by auditors for financial procedures, regular inventory counts, scheduled audits of different areas of the business by managers lets employees know you are checking for discrepancies.

To help create an environment that respects the assets of the business it is up to managers to set the tone.  Having policies and procedures in place to safeguard company assets lets employees know that your company cares and takes internal controls seriously.  If internal control is not important to your business it will not be important to your staff and your business will feel the effects of the lack of controls through your financial well being.

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