A small business can have reasonably cost effective internal controls. Let’s talk about how and relate a horror story of what happens when your internal control is actually imaginary control.
A business owner has a relative that really needs a job. The relative is hired to be the company accountant. Things seem to be going well. Then about one year later the Internal Revenue Service shows up with a warrant for the business owners arrest.
The company uses Quickbooks. The relative would make the payroll tax deposits out to themselves and then change the payee in Quickbooks after the fact. The relative always went to the post office and would throw in the trash at the post office all correspondence they didn’t want anyone to see – i.e. IRS notices. The payroll taxes were not paid, the IRS notices were ignored so what choice does the IRS have but to make an unpleasant visit.
A solution for small business
There is a national internal control model (Referred to as COSO) that says it all starts at the top. Over time, whatever is important to the owner will filter down to the employees. If you as the owner don’t emphasize good controls, no one else will either.
- The owner should to go to the post office and pick up the mail. If the business owner above had picked up the mail they would have seen the IRS notices as well as other correspondence.
- The business owner needs to open the bank statement and look at it as well as look at the cancelled checks. By looking at the bank statement they could have seen the payee on the cancelled checks, observe if check numbers are out of order, see if amounts are directly drafted out of the bank account and if so to whom. The owner does not need to reconcile the statement. Just look at it. After all, your employees should not know what you really look at and how often.
- The business owner needs to review timely reports. Look at your accounting reports to see if they make sense. Is your payroll reasonable? Is your gross profit percentage where you expected it to be? Are your bank account balances where you thought they would be (Thought not hoped :-)? And investigate variances! Do not ignore them. Variances are indicators of problems.
Are there other steps you can take to strengthen your controls? Yes, but one step at a time.
To sum up
Dave Ramsey’s seven baby steps are designed to provide an action plan, especially for those who are struggling with where to start. Think of the above steps the same way. They are an action plan for internal control for the small business owner who is not sure where to start.
Smokey the Bear says that only you can prevent forest fires. We say that only you the business owner can implement reasonable cost effective internal controls.
If you would like to discuss this topic in greater detail please contact us.