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Internal Controls: How to manage risks in your business?

A small business owner in Burlington who is thinking about how which internal controls to implement to help manage risks in her business.

Running a business is a risky venture. As a business owner, you have likely thought about risks in your business. There are many business risks, such as liability risk, reputational risk, or risk of fraud. These risks can be a source of daily stress or anxiety for business owners if not appropriately managed. Internal controls are a framework that can help small businesses manage several types of risks. They help protect the company from fraud, waste and mismanagement of resources. With good internal controls, you can ensure that your assets are safe and operations run efficiently. An effective internal control system can help you achieve your business objectives while minimizing risks. But how do you develop adequate internal controls for your small business? We’ll discuss internal controls and their importance and provide tips on developing or improving them for your organization. With the right tools, you can ensure your business runs smoothly with minimal loss or disruption risk.

Why internal controls are essential for your businesses

Internal controls are essential for any business, regardless of size. They help protect your company’s assets and operations by preventing fraud, waste and mismanagement. An effective control system provides a process for different areas and workflows in your business. It can help:

  • establish processes and procedures around critical functions like invoicing and payments
  • improve operational efficiency around business workflows by removing redundancy
  • reduce human error with financial transactions
  • keep employees accountable for their roles and responsibilities
  • identify areas of risk, such as those susceptible to fraud and error.

Developing or improving internal controls for your small business

Internal controls can provide a framework for your business to look for risks that can harm your business.

Assess the current systems

The first step in developing or improving internal controls for your small business is to assess current systems and identify areas of improvement. While internal controls seem common sense in many ways, setting time aside to review current processes and procedures can help ensure they meet your expectations. Look at workflows in your business. What are the current procedures and policies? Focus on both operational and financial processes. Processes can range from new customer acquisition to invoicing and billing to making payments to vendors, all the way to your accounting workflows.

Identify areas of risk

The next step is to identify areas of risk. For each workflow, consider questions like:

  • Are there documented policies or procedures?
  • Do the systems make sense in your business and help achieve the goal or business objective?
  • Is there room for error, fraud or other potential weaknesses?
  • How can those weaknesses be addressed?

Identifying risks is often the focus of this step. Often risks stem from the potential of human error or if there is risk of fraud. However, this is also a great time to examine whether there are redundancies or duplicate steps in your processes or workflows.

Implement internal controls

Once you’ve identified areas of improvement, the next step is to set up internal controls. Execution of this step is crucial to ensuring that your internal control system is robust.

To implement the controls your business will need to:

  • document the required procedures and processes
  • inform employees that these procedures are to be followed
  • provide adequate training for them to perform their responsibilities.

Monitoring and reviewing internal controls

Once you have implemented internal controls in your business, there should also be regular reviews to ensure the systems are working.

Business processes often change, but internal controls still need improvement. A regular review cycle will ensure that the processes and procedures make sense even as your business evolves.

Internal control tips for small businesses

If you are ready to set up an internal control framework for your business but need help knowing where to start, your accountant or CPA can be a valuable resource. They can help you determine suitable systems and processes for your business. In the meantime, here is a list of controls common to many businesses.

Segregate tasks and responsibilities

One of the most critical internal controls for small businesses is segregating responsibilities. Assigning separate roles and responsibilities to different employees is a good way for companies to reduce risk. For example, the person who enters invoices should not be able to approve payments. By separating these responsibilities, you can help to prevent errors and fraud in your business.

Establish clear lines of communication

In a small business, it is crucial to establish clear lines of communication. A system is vital for employees to report concerns about possible fraud or wrongdoing. Consider setting up an anonymous tip line or advocating for a culture where employees feel comfortable speaking up to help to create a well-functioning workplace.

Implement access and physical controls

Physical controls help to protect your assets and prevent fraud. For example, consider installing security cameras or requiring employees to wear ID badges. Suppose you operate in a digital business environment. In that case, you should limit access to specific software or modules, such as payroll or accounting, only to employees who need it.

Regular Reviews and Reconciliations

Taking the time to review your financials and banking records can help you protect your business. Spot-checking inventory, reviewing cash balances daily or monthly or reviewing payments before sending them out are just a few examples of procedures to help your business. These reviews can help protect your business from honest mistakes and fraud.

Establish procedures for handling cash and bank accounts

Ensuring that only the right people can access bank accounts and cash is vital. You can work with your bank to set up correct employee access. If your business deals with cash, it’s essential to have strict procedures for handling it. For example, you might require that all cash receipts be deposited into the bank daily or limit the cash kept on hand at your business.

Protect your digital environment

In today’s business world, it is vital to protect your digital environment. Good controls can range from having strong passwords to other security measures to prevent hackers from gaining access to your systems. Backing up your data regularly is vital to avoid losing important information.¬† Ensuring only the necessary personnel have access to bank accounts, your business records, and other vital files and documentation are critical ways to protect your business.

Communicate with employees

Ensure your employees know about the internal control procedures in place. Explain why these procedures exist and how they can help to safeguard your business. Training on internal controls can also be a helpful way to ensure that your employees are up to date on the latest policies and procedures.

CONSULT EDELKOORT SMETHURST CPAS LLP IN BURLINGTON FOR RELIABLE ACCOUNTING ADVICE

At Edelkoort Smethurst CPAs LLP, our financial and small business experts can provide you with recommendations for streamlining your accounting function to work best for your business. We can provide services to support your accounting function, whether you need partial or complete support. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting expertise, contact us online or by telephone at 905-517-2297.