Internal controls are policies and procedures companies use to help prevent errors and fraud, which can include theft, embezzlement, favoritism or math errors in financial documents. You don’t need to be a certified public accountant or have a finance degree to institute helpful internal controls in your business or set policies for your employees to follow.
Check Co-Signers and Authorized Signers
One of the most common internal controls for small businesses is the requirement that checks be co-signed. This helps prevent one person from writing a check to himself or approving an inappropriate payment. If your business writes many checks each month, you might institute a policy that only requires two signatures on checks that are more than a certain dollar amount, such as $500. Make sure you have a signature card at your bank with the signatures of authorized signers. This allows the bank to check signatures before paying any check.
Many businesses record all of their payments and receipts in a general ledger, which is a record of the company’s financial transactions. The entries in a ledger are based on checks written, cash paid and cash, electronic deposits or credit card payments received. To help spot math errors and fraudulent entries, perform a bank reconciliation each month, comparing your bank statement to your general ledger. Your bank statement will include all of the deposits you made or received electronically and show all of the payments you made. It will also include any bank fees you paid, allowing you to include those in your general ledger.
To make sure you get the most value when making purchases, create an internal control that sets policies for making purchases. This can include only using approved vendors, requiring competitive bids from contractors or conducting a price check of several vendors before choosing one. This might include requiring your office manager to check online prices at several office stores before ordering office supplies, furniture or other equipment.
Create a formal employee expenditure policy to help reduce high travel, lodging, entertainment and meal costs. If you allow employees to book their own travel and lodging when attending conferences or trade shows, they might book flights and rooms that earn them the most reward points, rather than choosing the lowest-cost bookings. Require that all travel expenses be approved by a supervisor in advance and that all expense reimbursement forms include receipts.
Having a third party review purchases, financial records, time sheets, expense reimbursements and other business activities can help spot and reduce errors and fraud. Internal audits allow one employee or department to review the work of another. External audits bring in an outside contractor or firm to review the work of your staff. This might include hiring a certified public accountant to review your books each month or quarter. Performing an inventory review can help you spot whether or not you have a problem with theft, over-delivery or breakage.