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Different Ways to Improve Your a Small Business's Internal Accounting Controls and Oversight

Internal controls are critical to any company's performance, yet many business owners are unaware of what they are or why they are necessary.


First, why do we need internal control before going into it? And how would it be helpful to your business?


Major Reasons Why We Need Internal Controls


Minimization of fraud risk - According to this ACFE accreditation, the most significant fraud risk is tied to personnel. Because there is no indirect control over the employee, fraud occurs primarily in small businesses. Owners are too busy executing their company activities and everything else to pay attention to business operation activities, which is where fraud occurs.


Statutory requirements - Statutory requirements mean how we must comply with filings and particular regulations. Some internal controls should help us identify filing requirements, streamline compliance, and fulfill those requirements on time.


Assist in effective business management - If you run a successful business, there will be no doubt about internal controls if they are properly applied. Internal control helps reduce personnel waste and ensures that your staff knows exactly what they need to do.


Expansion - As we expand our business, it is critical that our existing controls and processes are improved, streamlined, and ready to combine with the new sector of business. Organic expansion refers to growth within the company; Maybe we're starting a new business chain, or maybe we're working on a new product. Inorganic expansion refers to growth outside the company; Inorganic expansion means that we are pursuing some expansion mergers, adopting or purchasing a new business, and there may be some technologies or a new and distinct application that is distinct from our present business application or technologies.


So we have to streamline and manage these things, and if our internal controls are not proper, then it will be a very difficult and time-consuming task.


These are the four key reasons small firms or businesses require internal control. However, we will provide the eight best practices that we will discuss, and by adopting these practices, you may effectively manage your internal controls.


POLICIES AND PROCEDURE


In small businesses, it is hardly found that there will be a set of policies, procedures, or guidelines that are well-drafted among the employees so that workers know what to do or whom to contact to sign or approve expenses or bills. It is very important for a business with these policies and procedures to have a set of guidelines to have a vision for the employees and stakeholders involved with the business. It is to help them see what exactly they need to do in particular situations.


Policies and procedures can be informal. Guidelines with the details that have to be there will suffice.


Here is a list of example policies and guidelines;

  • Asset usage guidelines.

  • Leave and attendance policies.

  • General administrative policies specifying approval limits concerning general office expenses such as conveyance, tours and travel, refreshments, etc.

  • Simplified accounting procedures (for in-house accounting functions).

  • Cyber security-related documents include data protection policy, information security procedures, acceptable use policies, backup and retention policies & user management.

  • Operational procedure/policies; procurement stock control and workplace safety policies and related procedures.

And these are the policies that small businesses should have because they are simple rules that are easy to design for the team and the owners. They are basic documents that can be prepared in-house.


SEGREGATION OF DUTIES


This is very important and the best practice that we will discuss next. This is the basis for every internal control that every company, organization, or small business should have.


What exactly does segregation of duties mean?


It is a basic building block of sustainable risk management and internal controls for a business. The principle of SOD is based on shared responsibilities of a key process that disperses the critical functions of that process to more than one person or department.


Consider what would happen if a single person held the keys, lock, and code to a nuclear weapons system. Emotions, compulsion, blackmail, fraud, human error, and misinformation can result in terrible and costly one-sided actions that are impossible to undo. Consider the software engineer who has the authority to push code into production without quality assurance or authentication of access permissions.


Without SOD, either of these scenarios indicates the potential for disaster. As a result, the risk management purpose of SOD controls is to avoid unilateral acts in essential processes that have permanent consequences that exceed an organization's tolerance for error or fraud.


APPROVAL MATRIX


Approval procedures are critical for business operations. They are involved in everything from invoicing to product launches and marketing initiatives. Following approval workflow protocols ensures that a company's cash, resources, reputation, and legal standing are protected.


Here is an example of an approval matrix; an employee’s request to take time off may involve a simple, straightforward approval workflow:


The employee submits the request.

A single manager reviews the request and approves or denies it based on employee eligibility.


Not all approval procedures, however, are that simple. Instead, for larger projects, they can become quite complicated, requiring involvement and control from a variety of agencies and stakeholders.


Why use an approval matrix?


You want your employees to feel empowered and be able to solve problems promptly. However, depending on the category and scale, multiple persons are usually allocated to decision-making.


This also eliminates the emotional decision-making that frequently occurs during times of stress. An approval matrix decreases errors and fosters organizational responsibility and ownership.


ADVANCED PHYSICAL ASSET MANAGEMENT


In today's economy, businesses are under pressure to remain competitive by lowering costs. You'll also need to keep track of your physical assets.


What are physical assets? And why are they important?


Physical assets are tangible goods that your company owns and whose value is determined by the company’s capacity to sell, utilize, or barter them in business transactions. Your company's manufacturing equipment, product stock, property, office furniture, and liquid capital can all be physical assets. A physical asset may be used in the business, sold by the firm, or bartered for other assets.


Understanding how assets are used in the business and optimizing them to get the most out of them before retirement is necessary to understand why physical asset management is vital. Inventory must be monitored to ensure that it does not reach the end of its shelf life before being sold. Equipment must be maintained and serviced to avoid downtime when it malfunctions.


Physical asset management involves approaches and processes to prevent these scenarios while lowering your company's total cost of ownership. It is a highly complex process that must be managed by professionals constantly looking for ways to improve it. When used correctly, you'll gain a long-term benefit that affects not only your bottom line but also the safety and reliability of all your physical assets.


RECONCILIATION PROCESS


A good internal control system provides a mechanism to verify that transactions and activity are for the correct purpose, amount, and allowable.


Reconciliation is the process of comparing transactions and activities to supporting documentation. Further, reconciliation involves resolving any discrepancies that may have been discovered.


The reconciliation process is automated in most firms, employing accounting software. However, human intervention is essential to discover such anomalies because the system may miss some transactions. Given the amount of time required to complete the bank reconciliation process, some companies attempt to minimize its impact on the period-end closing process by running a daily reconciliation.


PROFIT Bank provides free bank accounts with built-in accounting software that automates bookkeeping, saving small businesses time and money. We automatically develop and manage your Profit and Loss Statement, balance sheet, and cash flow statements for you. Why do we need internal control before going?


SUFFICIENT STAFF TRAINING


It's critical in any business to ensure that your staff has all of the required information and abilities to carry out their daily tasks efficiently. Staff training is one way to do this in an organized fashion, and it allows businesses to invest in employees who have a lot of promise and can grow into major characters in the company.


By allowing employees to learn and grow inside your company, you're increasing their chances of staying with the firm and developing a more skilled workforce that will benefit your organization.


What are the advantages of employee training?


A staff training program will most likely benefit both the employee and the organization. This comprises:

  • Increased efficiency

  • Improved productivity

  • Increased responsibility

  • Less assistance required

  • A set of guidelines for employees who have been trained

  • A more open corporate structure

  • Tracking personal improvement provides opportunities for employee development.

By employing this approach, businesses can keep proactive people with a positive attitude and allow them to grow with the company, saving money that would otherwise be spent on replacing staff.


DOCUMENTATION


Strong internal control systems rely on supporting documentation to detail the foundation for decisions. Documentation procedures explain which decisions require documentation and what type of documentation is required. A purchase order approval, for example, may necessitate a requisition. The documentation protocol states that an employee must prepare a requisition before requesting purchase order approval and the information that the requisition must include.


EXISTING CONTROLS ARE SELF-EVALUATED


So this is a management method that examines whether a company's internal control is reliable, checks if all of the practices have been properly executed, and checks if we need to change something or add to the practices mentioned.


This is also to see if a person within a company organization performs tests to ensure that the major internal controls are operational and, as a result, flaws are detected or removed.


Here is a self-evaluation checklist you can apply to your small business;


Transparent and effective feedback/suggestion platform for employees

  • If you want secure and committed employees, you must embrace transparency in feedback. While it is common for businesses to be upfront with their consumers, it is easy to overlook being transparent with your staff.

  • This is where open feedback comes into play. Employee performance management requires constant feedback. As a result, your feedback methods must be as effective as possible.

Review with external auditors

  • External auditors perform the same functions as internal auditors. However, they will be the last to assess security control integrity. Internal auditors are typically the teams who assist with a year-long trial practice run so that support teams can identify and mitigate control vulnerabilities before the final external audit report findings are planned and properly finished. The final external audit results report is usually presented to top management at the end of the year. A business is normally required to report any serious security weaknesses discovered in an annual shareholder's financial report as a "material weakness," as such findings can jeopardize the company's reputation and integrity in the eyes of its shareholders and the public, as well as cost the company millions of dollars in customer confidence damage control.

Compliance reporting mechanism.

  • A compliance report is a document that demonstrates that your company complies with all applicable regulatory requirements and standards. Creating specific compliance reports frequently necessitates gathering data from throughout the entire organization. It's also crucial that the individual writing the report is knowledgeable about the specific business activities under scrutiny and the legislation that applies to the compliance initiatives.

  • In smaller businesses, however, the legal department or another trained individual may be responsible for compliance reporting.

Given the time it takes to execute these procedures, several businesses try to limit their influence on the period-end closing process so they can utilize time on their businesses.


PROFIT Bank experienced professionals can assist you in developing an effective and efficient internal control framework for your business. We provide a broad range of assurance services and are here to make the process easier for you and your company.


PROFIT Bank will provide free bookkeeping & auto-reconciliation; focus on growing your business while we categorize and reconcile your transactions.

We provide free financial statements; we auto-generate your P&L, balance sheet, and Cash Flow statements to help you track profitability.