Why internal controls?
As your business grows, internal controls become much more important. If you are a freelancer, sole trader, sole proprietor, or any other definition of a one-person business, it’s most likely that you and you alone, control your bank account and credit cards. You probably know exactly how much money you have, how much you are owed, and what your upcoming expenses might be. But let’s assume that you have grown beyond a one-person business and now have employees, or you have a mature business and you’ve already hired an accounting manager or other person in a financial capacity.
The concept of internal controls requires there to be more than one person with the authority to release payments, authorize purchases, or commit the company to a business transaction. Let us explore financial controls in those three areas:
One of the most fundamental rules of managing your company’s bank account is that no one person should have complete control over cash disbursements, other than maybe the business owner or CEO/CFO. Most online banking systems have the ability for one person to create a payment and have a second authorized person approve it, with the bank sending a message to the secondary approver notifying them of the need to approve and release a payment.
However, as a practical matter, you should allow for materiality thresholds, so that it may be possible for one person to make a small payment up to whatever amount you are comfortable with, say $100, £100, or €100.
To put it in simple terms, the CEO should not have to approve the payment for a roll of toilet paper!
When it comes to purchasing goods or services for the company, an internal controls policy should address exactly who can purchase what. As with releasing payments, small purchases can be allowed, but anything large should have the appropriate authority.
One of the worst ways of losing control is the widespread use of company credit cards.
If you, as the business owner, have a company credit card, you will soon be offered additional cards for employees as the issuing banks like to have as many cards in circulation as possible, provided they are backed by good credit. The convenience of having several cards in the names of several key people within the company is a very popular practice, as it makes purchasing goods, charging travel expenses, business lunches, etc., very easy.
But … as soon as you place a company card in the hands of someone else, you lose a lot of control over what that person spends.
Assuming that your employees are all highly ethical and would not use a company card inappropriately, it’s more likely to be a lack of attention to detail or plain laziness that could get you into trouble. One of the most difficult tasks of your company’s accountant will be to accurately allocate expenses for credit cards and could likely be faced with multiple small purchases from Amazon and not knowing what each of them is for.
In prior decades, any business contract that might commit the company to an obligation, partnership, or other commitment, would have required a physical signature on the contract and a paper copy would be retained by both parties. Now, with the advent of electronic document signatures and services that provide this, getting documents signed is much easier and way more convenient.
One problem with this, however, is that the counterparty to a transaction will not know whether or not the person signing the contract is authorized or not, they just seek a signature.
So, having identified what some of the risks are, how do you go about implementing internal controls to make sure that your money is spent wisely?
Firstly, you should have some sort of policy document that clearly states who can do what and how many people are needed to authorize a payment or purchase. You do not need a 20-page internal controls policy document written by an expensive lawyer, but a simple one-page guideline that states clearly and in simple language, who can do what and under what circumstances a second authority is required.
Software programs are available to monitor and approve certain functions, such as expense reimbursements, which will implement the number of internal controls and authorizations that you want.
And finally, it is essential to keep receipts of purchases, so that records are established and maintained and can be produced in the case of a tax audit.
Again, we have moved a long way from keeping paper receipts with handwritten notes on them. It is now fine to take screenshots, download PDF files, and also take pictures of receipts with your smartphone. Those records are far more easily accessed and maintained than keeping pieces of paper.
Remember, you work hard for your money. Don’t let it slip away through sloppy practices!
Find out more about how Wedo can help you keep track of your money: