Internal Controls for Small Businesses
Updated: Jun 14
Controls for Small Businesses
Protect Your Small Business with a Fractional CFO
It is common for small businesses to need more control due to many reasons. Controls are the processes, procedures, policies, and safeguards that protect your company from poor decision-making or inappropriate behavior by staff.
The key to creating, developing, and implementing controls for your business is to balance the autonomy of managers and the feedback and coaching cycle. You are setting your business up for long-term success with the proper checks and balances, standardized reporting, and ground rules.
Intelligent internal controls protect the business owner while transferring power to the business. The best controls make the default behavior the correct behavior and, in exchange, empower your team to drive results.
More importantly, controls are not about you policing and searching for wrong. Controls are boundaries and systems that help the business achieve certain levels of efficiency while being financially and operationally sound.
Accordingly, adequate controls enable your managers and leaders with readily available, clear, and actionable information on how to coach and redirect your team by letting them know what is going on in an area at any given moment.
Business controls cover five core competencies or areas: financial, operational, marketing, and sales. In addition, business controls come in three forms – detective, preventative, and corrective. This article will cover critical controls for each area of function.
Financial controls are critical as they protect the assets and financial position of the company. In particular, business owners or board members are vested in protecting their assets.
The separation of duties is an essential concept in accounting. Having multiple people involved in each cycle is a crucial check and balance. More importantly, when two or more people sign off on all money flows and processes, the temptations for fraud or theft are less likely. Here are some examples:
Person A logs in checks and cash; person B verifies the amount and makes the deposit.
Person B deposits the money; Person A reconciles the bank statements.
Person B writes out the checks; Person A reviews and signs them.
Conduct a proper background check and prescreening before hiring employees or independent contractors. For example, hire someone who handles money. Your policy may be to conduct a criminal background check and credit check. Another example is to verify employment history and speak with past references to confirm the candidates past.
Reduce liquid cash and reduce the temptation for managers to act unethically. It is important to allocate money to specific accounts and limit access to banking controls as a business owner. Here are some examples of reducing liquid cash:
Implement a reimbursement system for petty cash
If you accept cash payments, at least two employees are involved in the money flow.
Deposits are made for cash or checks, even multiple times daily if the amounts exceed a standard balance.
Implement digital payment processing methods
Allocate funds to separate banking accounts and limit operating account balances where banking information is accessible to customers, vendors, and suppliers. Moreover, keeping low balances in your accounts limits your exposure to potential hacks or cyber thefts. Accordingly, modify the staff that has access to separate accounts.
Develop fiscal levels of authority for purchasing decisions. For example, expenses under $1,000 do not need approval, but supporting documentation must be filed with the manager and submitted to accounting. In addition, expenses between $1,000 and $5,000 require manager approval, and any purchase above $5,000 needs VP approval. Accordingly, fit the system and authority levels to business needs and limit your exposure to poor decision-making.
Complete formal policies and procedures for particulars of your business. More importantly, ensure you secure consumer/confidential data, safeguard financial information, formalize expenses and approved vendors, and create checks and balances with internal audits.
Review your financials and critical numbers regularly to spot red flags. Encourage management to immediately "say something if you see something." It is at the core of your business to follow up on the following red flags:
Ratios: net income percentages, gross margins, and cost of goods sold rates should remain consistent; find the way if something is off
Expenses: non-approved vendors, anomaly expenses, or large transactions should be investigated.
Estimates / Spot Checks: find ways to assess your financial numbers indirectly through inventory turns compared to sales and production output compared to labor hours and sales.
Obtain the right kind of insurance and bonding coverage if appropriate.
Ideally, your operational and financial controls will have alignment and carryover. Ultimately your business operations conduct the transactions that produce financial reporting and results.
Manage costs and expenses within approved operating budgets and limits
Manage and document customer fulfillment with standardized schedules and checklists of deliverables that can be verified in two places by two people.
Monitor and track customer satisfaction through follow-up surveys, informal interviews, or feedback forums.
Create double verification processes for all inventory receiving and counting activities. This is no different from money cycles and two people being involved. For example, Person A physically counts and receives the merchandise; Person B verifies Person A; Person C enters the receipt into the accounting system.
Performance management and review. Managers enforce corrective actions when performance does not meet standards, including training, discipline, motivation, or termination.
Establish and follow an annual Marketing Calendar that lays out critical deadlines and review dates to ensure your marketing campaigns stay on track.
Create visual scorecards for crucial marketing metrics. For example, cost per lead, cost per sale; net leads per lead source; and similar costs or measures for sales or customer acquisition.
Establish a formal approval process for your quarterly marketing plan, creative artwork, and other key marketing activities to ensure budgets are maximized.
Have a checklist your team follows when promoting an event, launching a marketing campaign, or introducing new products.
Have established parameters for your sales team to negotiate. For example, the level or amount of discounts or credits your staff can give without manager approval.
Implement approval process for sales exceptions. For example, suppose your sales rep seeks approval for an allowance over a set dollar amount. In that case, the sales manager must physically sign off on it.
Require standardized sales process, including sales paperwork and contracts, and sales scripts for calls. This can be achieved through training programs.
Require employment contracts that protect the proprietary nature of your client list. Limit databases and systems access to only what is required to do the job, nothing more.
Require salespeople to use only company-controlled contact phone numbers, emails, fax numbers, etc., with clients.
Provide a direct line for client feedback that doesn't allow salespeople to filter out negative messages.
Record clear and accurate sales metrics. These would include closing ratios, retention rates, return rates, and net referral scores.
Read more about Top Five Financial Mistakes Small Businesses Make
Business controls are formalized business systems. Every control has a specific purpose and ensures checks and balances throughout an entire company. Adequate controls improve the outcomes of significant decisions and reduce the likelihood of fraud, theft, or cyber risk.
If you need help implementing controls for your business, reach out to our team today! We are here to help protect your business assets.