Importance of Checks & Balances in a Small Business

Small-business owners often have so much on their plates they might not notice rapid or long-term changes taking place that, if not addressed, can deplete cash, cause legal problems, reduce morale or cause a host of other problems. Checks and balances are regular tasks a business performs to keep up to date and avoid surprises that can’t easily be rectified later.

Checks are reviews or audits that examine the performance of people and functions. Examining the performance of a department, your finances or employees isn’t spying -- it’s keeping yourself informed. Balances are steps you take to counter specific events. For example, if your sales decrease, you balance that by decreasing certain types of spending. If sales increase, you might balance your increased production or service needs with new staffing levels.

Checking your financial position regularly and setting benchmarks for cutting or increasing spending will help you avoid cash flow problems. Running a receivables aging report each month lets you know if any of your customers are behind on their payments. This will trigger a shift in funds to pay for bills coming due you had planned on paying with a late customer’s payment. A budget sets spending limits, often tied to income. A monthly reminder to check your debt payments, such as a credit card bill, can prevent a missed payment that could result in a big interest rate hike or damage to your credit report. Comparing your bookkeeping to your bank’s records with a monthly reconciliation is an effective way to catch errors before things out of hand.

If your sales spike, pre-set staffing levels and materials ordering will help you continue to meet customer needs and avoid losing sales. Any time a customer needs to shop somewhere else, even temporarily, there’s a chance the customer might like your competitor better. Understand what effects a rise in sales will have on your business and set actions to ensure you can make, sell and deliver your product or service to customers. When you reach a certain amount of excess cash in your bank account, a balance you set might notify you to consider reducing debt, which saves you more in decreased interest payments than keeping the money in your checking account would.

Whether it’s one large, fraudulent withdrawal or a long-term siphoning of your funds, a fraudulent employee can close your business. Some small businesses require two signatures on checks greater than a certain amount. Others require business expenses or large orders to be pre-approved in writing before they are made, then rechecked when the invoice, expense report or reimbursement request is made. Security cameras help prevent theft. Review areas of your business where employees can cheat you and take steps to create methods for preventing these possibilities. Work with your IT person to set checks and balances that detect potential hacking problems.