What, Why, Where, Who, When, and How + Recommendations!
While LSL CPAs has posted about a dozen articles relating to internal controls over the last decade—like this one from 2010, “Internal Controls Can Save Your Business” — each post has a unique theme supporting the necessity for robust internal controls.
This post relates to internal controls and your business’s ability to grow.
Internal Control Business Growth Q & A
Q. WHAT are internal controls?
A. They’re basically tools and measures to protect the company from various threats it might face. Internal controls can be detective (to help identify problems) or preventive (to keep problems from happening). An employee handbook is an example of a preventive internal control. Internal controls can be based on software programs or on written policies and procedures.
Q. WHY are they important?
A. Good internal controls are needed to ensure the effectiveness and efficiency of companies’ operations. Internal controls are for management teams and owners who want to make sure that their financial reporting is reliable, their assets are safe, and they’re complying with laws and regulations. Good internal controls make internal and external audits go smoothly without fear of having a negative, costly outcome.
Well-thought-out internal controls support growth, expansion, good employee morale, happier customers, and better cash flow.
Q. WHERE do you look to find flimsy (or no) internal controls?
A. It’s usually pretty easy to see where a system isn’t working properly. For instance, if you’re frequently running out of inventory for a critical product or manufacturing input, that’s a red flag. Anything that looks like it could be done more quickly is another sign. Are there checks from big customers sitting in a stack on the A/R person’s desk? And do you notice your bank balance is lower than it should be given your huge sales last month?
Is anyone checking employees’ work? Are two people doing the same job, but not their own job because they need to be clearer on their roles? Are people running into each other in the hallways because they’re always behind?
Q. WHO is responsible for implementing?
A. Internal controls should be happening every day in every department of the company. Managers are in charge of overseeing internal controls, but It’s the employees who must be responsible for doing their jobs efficiently, effectively, and with a dedication to profitability and customer service, whether it’s an internal customer in another department or an external customer who’s buying goods or services from the company. For that to happen, monitoring the workflows in accordance with the internal controls is the job of middle managers, department heads, and even fellow employees as a measure of cross-training and double-checking people’s work for accuracy.
Q. WHEN is the best time to implement them?
A. Internal controls should be set up when the business is opened. In the real world, though, having an employee handbook when there are three employees is unrealistic. Having an inventory control software program is overkill when the company is selling one item.
Even so, the best time to define and implement internal controls is before things go wrong. The smallest of companies should be proactive when implementing controls. The worst time is when something is going (or many things are going) wrong. Here’s the problem: If checks are bouncing, sales are lost due to inventory outages, or the employees are quitting because they don’t know what their job is— IT IS TOO LATE. After a “bad” audit is a good time to implement controls because you’ll know exactly what to fix. Audits should be seen as opportunities to improve.
Good News: You don’t have to put everything in all at once! However, you DO have to decide what your MOST PRESSING problem is and start with that. Frequently, you don’t have to spend a lot of money. You can simply activate an app that’s already in your accounting software program, but hasn’t been used. One example might be implementing online employee time cards, which may or may not require a slight upcharge depending on your basic accounting package.
Q. How does the management team get people to accept internal controls?
A. This one is hard because sometimes the management team has to be convinced they need to change. Take a deep breath. Exhale. Close your eyes. Are the workers happy with the way things are done now? If not, take another deep breath. Ask yourself or your management team for the ONE thing that should be better. Change it. If the employees don’t want to change how they do something, it may be time for them to go.
If the company is excited about the potential to grow and become a “PLAYER” in the upper echelons of the industry, they (and you) need to take the step. Take control of the workflows, enhance the cash flow, solve inventory errors, and fire up the customer service team so your customers can’t imagine going elsewhere. The sales force will be confident they can fill orders, your suppliers will be assured you can pay your bills, and your families can sleep at night, attend college, and find great jobs.
- Pause, take a step back, and look at your current processes—especially where you see some holes or problems. (We get it! Sometimes this is the hardest step of all!)
- Assess areas where there is the most risk if you do nothing and focus on those controls first.
- Decide if, by segregating employees’ duties, you can get the best from each of your employees so you will all enjoy growing with your business.
- Ask, have you outgrown your current systems?
Solutions through technology
Software programs can solve almost any intractable problem businesses face these days. From collecting and depositing payments to ordering inventory at the proper time. Technology boosts—from collecting and depositing payments to ordering inventory at the proper time—offer substantial time savings with fewer errors and temptations for employees to make bad decisions. These programs can be simple at first. Industry reviews help you choose the best one for your situation, and your CPA can offer suggestions.
Solutions through training
Leveraging technology to detect and prevent problems is one way to attack internal controls. But it’s not the only way. While technology can automate receivables and payables, the data must be input correctly and in a timely fashion. Employees want to do well. They want to feel good about their job and have a future that fulfills them their work and the money they can spend now and save for their future.
The culture of “doing your best” is enhanced by having a sound employee manual, regular reviews, and frequent trainings on new programs and systems. These can be self-guided. QuickBooks has many training modules, as do other programs. Training is itself one of the many varieties of internal controls.
A building needs a strong foundation. The taller it grows, the better the foundation must be, and so it is with internal controls—especially for fast-growing companies. If the controls are not strong, even the most exciting company will not be able to grow. Having sound systems and policies represents a commitment to being efficient, effective, and fair to the employees. The greater undertaking is to be profitable and provide a good product or service, so the internal and external stakeholders continue to support your exciting growth.
YOUR CPA can help you take that difficult first step back to implement your internal controls so you can take that exciting huge leap forward.
Other LSL Posts on Internal Controls
These more recent posts are pandemic-related. Here’s one from the middle of the pandemic in May 2020: Internal Controls in a Remote Environment. Here’s another one in February 2022, Internal Control Considerations During Staff Turnover. If these aren’t perfect for your business, please see our Blogs under the Resources tab and put Internal Controls in the search box.
As always, please get in touch with any time for questions relating to this topic!