Small Business Internal Controls

Small Business Internal Controls

Entrepreneurs and small owners often forget a very important part of operating a business, internal controls. In fact, poor internal controls and dishonest employees were listed as the reason for 30% of small commercial business failures. (Hrncir, 223) Even with this knowledge many small businesses do not have an understanding of the intent and effectiveness of internal controls.

An internal controls system is the written and spoken set of rules and actions that the owner of a business sets up to make the day-to-day operations of their business run smooth. (Hrncir, 224) Most systems are designed to accomplish four basic tasks:

1. Protect assets.

2. Produce reliable accounting information.

3. Promote operational effectiveness.

4. Require adherence to company policies and procedures.

There are two types of internal controls which are equally important to a successful small business. Financial or accounting internal controls are intended to ensure the protection of company assets. Administrative controls are established to effectively control the operations transactions to promote operation efficiency. (Spencer, 1)

When a company is in its infancy stages documentation of policies and procedures are sometimes the last things to get established. It is important that internal controls are well documented and known by the responsible employees to be effective. The accounting and administrative controls that would be utilized for a small business that I would establish are:

• Utilize a digital dashboard to monitor transactions and the business.

• Establish segregation of duties.

• Restrict system and physical access to assets.

• Escalating approval levels.

• Prerecorded data for repetitive transactions.

• Three way match to payables and inventory receipts.

The use of a digital dashboard which is available on most small business software applications is an important tool for an owner of a small business. This allows the owner of the small business to be constantly aware of the financial health of the business. Information that is readily available on most dashboard applications are vendors to pay today, overdue customer accounts, and cash flow. By monitoring the daily financials it allows the owner to be in tune with the business as well as watch for any suspicious transactions.

Segregation of duties has become an important aspect of internal controls for any business not just a small business since the Sarbanes-Oxley Act has been passed. For example, the same person receiving the cash and checks should be separate from the person recording the receipts in the account records. Another duty that would be separated is the separation of inventory and payable functions. Inventory management also requires segregation of duties. The person who places the purchase order will not be the same person who receives the material, and will also not be the same person who pays the vendor. Even though these duties are segregated it is important that accounting functions are actively supervised and reviewed in a timely basis.

Access should be restricted to assets and systems. The oldest method of restricting access to assets is probably the most effective lock and key. Assets that will be locked up are high value inventory items, blank check stock, customer sensitive information and most importantly cash. System access is controlled by user ID and passwords. This should be controlled on both the application level and workstation level. “User