Regardless of what your business does or its size, financial accountability and good financial management are key to your reputation, your profits and your success. Just as governments are answerable to their citizens and public corporations are answerable to investors and shareholders, small businesses are answerable to financial stakeholders and, of course, the IRS.
TL;DR (Too Long; Didn't Read)
The fiscal accountability definition encompasses a set of policies set by the owners of a company to ensure that the organization is managed in a way that is financially sound. These policies should cover finances and budgets, protection of assets and the management of major risks.
Private vs. Public Financial Accountability
Financial accountability and good financial management is important for all organizations. For public corporations and governments, a large part of being financially accountable comes from the fact that financial records become a matter of public record. Annual reports issued by public corporations that detail their financial records are freely available to shareholders.
For public organizations, the Texas Education Agency is a pretty good role model for financial accountability. Its Financial Accountability System Resource Guide, or FASRG, illustrates the state's recommended procedures for such things as accounting and reporting, auditing and purchasing policies to be used in TEA financial reports, which are also publicly available.
For private companies like LLCs, sole proprietorships and partnerships, there is no need to make fiscal policies and financial activities a matter of public record. However, if you think there is no need to be stringent on your policies and accountable for your financial activities, the IRS would likely disagree with you when they begin to look at your books.
Establishing Financial Accountability in Your Business
There is a great deal of risk in establishing a new business. Chances are you have invested a great deal of time and much of your own personal money in getting your business up and running. Failing to follow sound financial management practices and ensuring that everyone in your organization is accountable to you for their interactions with your finances could put your entire business at risk.
You should demand honesty from everyone involved in your organization — including contractors, suppliers and consultants — from the very start.
- Document all financial transactions to ensure transparency to financial stakeholders.
- Be accountable for loans, bill payments and profitability, even if it is financially difficult.
- Incorporate reputation management as part of your marketing endeavors, including watching social media for mentions of your company.
- Have a firm strategy in place for managing and improving your reputation through relationships with customers, suppliers and other stakeholders.
- Make data security a priority. Mishandling confidential data, selling data without permission or becoming a victim of a data breach will quickly demolish your company's reputation for accountability.
Keeping Business and Personal Finances Separate
There is a common misconception among new small business owners that the money in your company can be treated the same as your personal money. While it's true that if you own a sole proprietorship, for example, the money that your business earns is yours, business finances must always be kept separate from your personal finances.
A prime example of poor financial management is when an owner withdraws money from a business account using an ATM. ATM receipts don't count as expense receipts for tax purposes. Additionally, ATM withdrawals are a sure-fire way to trigger an audit from the IRS.
If you operate a cash business, it's important to have effective internal controls for managers and employees alike. These include:
- Separation of duties: Employees receiving or managing the collection of money do not disburse money.
- Two-person rule: Two people process and document cash deposits.
- Limited account signers: A very small business should have only one person authorized to sign checks (the owner), with one trusted backup person who has passed a criminal background check.
- VentureLine: Financial Accountability Definition
- International Federation of Accountants: Five Key Methods to Improve Public Financial Accountability
- Fitzpatrick, Leary & Szarko: Best Financial Practices for Small Businesses
- Texas Education Agency: Financial Accountability System Resource Guide
- Business Economics - A Library of Information: Effective Internal Controls for Cash