Although smaller businesses have to face many of the same financial risks as bigger companies, they typically have less oversight layers and less specialized roles, making internal controls exceptionally important.
With straightforward controls that are documented and followed consistently by bookkeeping services Miami, businesses can help keep their assets protected, compliance supported, and operational surprises reduced. They also give business owners numbers that they can confidently use to run their company.
What are internal controls for small businesses?
Internal controls are the checks, approvals and documentation standards that help to keep money flowing in a consistent and accountable way through a business.
These policies and procedures help businesses safeguard their assets, produce reliable financial reports, and operate within legal requirements.
Why are internal controls important for cashflow and forecasting?
Internal controls enable better decisions to be made as a direct result of better inputs. Planning based upon numbers that aren’t a true reflection of a company’s finances – such as when receivables are misstated or deposits aren’t reconciled – means that over time, purchasing, pricing and staffing can all be impacted.
As a business grows, even small, seemingly insignificant gaps in processing can become costly.
Ultimately, sound controls give a company stability and numbers they can trust, which in turn, enhances forecasting and planning for profitability.
A strong control framework
There are typically five framework categories for small businesses:
- Control environment – expectations, ethics and accountability set by leadership
- Risk assessment – identifying where fraud or error is most likely and costly
- Control activities – access limits, reconciliations, documentation and approvals
- Information and communication – ensuring the right financial information goes to the right people
- Monitoring – reviewing and testing controls to catch problems early
Which internal controls should be prioritized?
It’s best to begin with the areas that have a direct impact on liquidity, and which are vulnerable to mistakes and misuse, such as inventory, cash, disbursements and receivables. Ensuring that initiating, approving and recording transactions without oversight, isn’t in the hands of just one person, is the simplest way to think of this.
Some examples of high-impact controls include:
- Segregating duties
- Carrying out regular bank reconciliations with reviews that are formally documented
- Limiting approvals for big purchases, write-offs or refunds
- Having access controls in place for accounting systems
How can you strengthen receivables controls?
If your controls over receivables are weak, you may notice slower collections, write-offs that are higher, or revenue and cashflow projections that are misleading. By strengthening those controls, such as tightening the path from credit decisions to invoices, collections and reconciliation, you can free up much needed cash.
Steps to take include promptly issuing invoices, setting credit policies that are clear, and reviewing ageing reports on a regular basis. As your business expands, you’ll find that these controls help with consistent customer treatment.
How do you test your internal controls?
Typical methods for testing a businesses internal controls, include such things as reviewing documentation, interviewing those responsible, watching the process firsthand, and re-performing controls to verify the results.
Testing helps growing business show that their processes are still effective, even with the volume of transactions increasing. Many businesses test their internal controls on a rolling schedule, testing a different area each quarter.
Setting up a series of impenetrable internal controls will also help your tax accountant in Miami as he reviews your finances, and plans and prepares your taxes. But complacency can land growing businesses in hot water. As your company grows, controls need to be updated and tested, and by making them scalable from the outset, you can support growth as the company expands, instead of slowing it down.