Kaiser Media

Financial Growth Brings Many Challenges to Small Businesses

Imagine the excitement when your small business gets invited to submit a proposal for a long-term contract that would significantly increase your profits. Your chances of winning the contract are terrific!

But if you win, you’ll need to make substantial investments by purchasing an expensive piece of machinery, hiring and training new employees to use the machinery, and committing to ongoing equipment maintenance. 

As you contemplate if these significant investments are a wise business move, you’ll need the benefit of historical, current, and forward-looking financial data you can trust to make an informed, intelligent decision.

Are you confident you can rely on your financial statements as you weigh the pros and cons of submitting the proposal?

Reliable Financial Statements Are Essential To Your Success

Your enthusiasm for the new contract will quickly turn into sleepless nights full of worry if you’re unsure that you can rely on your financial data during decision-making. On the other hand, if you’re confident your financial data is complete and accurate, you’ll make an educated decision and enjoy the excitement of growing your business!

Your ability to rely on your company’s financial statements is an integral tool in a smart decision-making process. However, only financial statements that are complete and accurate can be relied upon to make sound choices. As your business grows, your decisions will become more complex with far-reaching consequences.

To ensure your company’s financial information is reliable, you’ll need a solid foundation of financial safeguards to support your business as it grows. These safeguards are your internal controls.

What are Internal Controls, and Why are They Important?

Internal controls have two parts:

1. Policies – Descriptions of the proper way to do things in your business
2. Procedures – Steps to follow for how best to implement the policies

Internal controls are important because they are the checks and balances, a.k.a "the financial safeguards," established within your business to:

• Ensure accurate accounting records
• Combat fraud
• Comply with regulations and other external requirements
• Preserve the hard-earned reputation of your business

These financial safeguards also help ensure your business uses accounting best practices, minimizes mistakes, and eliminates shortcuts that lead to incomplete information.

Additionally, as your business grows, you may need to raise capital from external sources to pursue new opportunities. Commercial banks, private investors, and government lending programs, to name a few, will want to see your financial statements before they extend financing. Your company will make a positive impression with these sources of capital if you have a solid accounting function that produces accurate financial statements for their timely review. Internal controls help make this scenario a reality for your business.

With appropriate policies and procedures in place, your internal controls and accounting processes can scale up with your business as it moves forward — ensuring the decisions you make, both large and small, are based on accurate financial information.

6 Internal Controls Essential for Growing Businesses

Internal controls are critical within a growing business. As you expand your operations and client base while continually working to maximize your profits, you need to be confident your financial information is accurate. Accurate financial information is the basis for analyzing profit margins, pricing, and overhead levels – inaccurate information can lead to poor management decisions in all these areas.

While there are numerous internal controls you should have in place in your business, there are a few essential, high-level controls you should adopt immediately.

Explore the six high-level internal controls you should put in place now.

1. Your leadership must set a tone at the top, communicating your company’s commitment to implementing and applying internal controls. Demonstrate your commitment by discussing internal control topics at regular employee meetings and including ongoing information in employee newsletters and other communications to reinforce internal control best practices. Also, regularly reviewing reports and asking relevant questions lets employees know you're personally involved in monitoring the effectiveness of the company's internal controls and their impact on business operations.
   
   
2. Hold regular management meetings to review financial information. You should evaluate financial results and key performance indicators (KPIs) during these meetings. It's also prudent to compare the current financial information to prior periods and budgets to identify and explain variances.
   
   
3. Prepare, approve, and track actual results to your annual budget. While having a yearly budget is a must, it's essential yours is accurate and up-to-date, and that you're utilizing the budget to monitor your company's performance frequently. Promptly identifying budget-to-actual differences can indicate action is required sooner rather than later to investigate potential issues and make needed adjustments.
   
   
4. Implement segregation of duties and mitigating controls. To prevent a person or group of people within your company from perpetrating and concealing errors or fraudulent activity, ensure the duties of one employee or department automatically provide a cross-check on the work of other employees or departments. In other words, no one person or department should authorize a transaction, execute the transaction, record the transaction, and have custody of the assets resulting from the transaction.
   
   While segregating duties can be challenging in a small company with minimal accounting personnel, business owners or non-accounting personnel can mitigate risk by assuming specific responsibilities to overcome a lack of segregation of duties. For example, they can assume tasks like regularly reviewing a detailed listing of transactions and asking the accountant/bookkeeper questions about specific transactions, reviewing reports that show recently added “new vendors” or “new customers” to ensure all are valid, and checking the bank statement on a timely basis to ensure all transactions appear appropriate.
   
   
5. Establish channels for employees to submit complaints or concerns anonymously. Anonymity provides an opportunity to report fraud or problems without fearing retaliation.
   
   
6. Provide accounting personnel with the appropriate education and experience for the level of work performed. Proper training helps employees understand the company's accounting policies, processes, and procedures and the regulatory requirements that govern their work. Correct training, hands-on experience, and regular evaluations can ensure your employees have the necessary skills, knowledge and confidence to perform their duties accurately and efficiently.

By establishing these six internal controls, you're laying a robust financial foundation for your business as it grows. The financial safeguards provided by these recommendations will help protect against shortcomings in your accounting system and reduce the possibility of errors or irregularities, thereby increasing your confidence in your company's financial information.

Internal Controls: An Ongoing Process

Often, companies establish their internal controls with a "policies and procedures" manual and consider their work on internal controls as done. While there are once-a-year tasks, such as preparing the overall annual budget, managing most internal controls is an ongoing process.

Establishing accountability is vital. Business owners should make it easy for employees to monitor and manage controls by carving time out of their employees' busy schedules to address internal controls. Hold regular meetings for employees to report their status and consider how their activities impact your business.

Once your internal controls are in place, continue to analyze all aspects of your company to determine what processes and procedures to adopt next. With dozens of available internal controls, consider partnering with an accounting expert who will assess your business and recommend the appropriate controls.

Experts have the insight and experience to identify the essential controls for your unique company and can guide you in effectively establishing, documenting and implementing these controls.

Kaiser Consulting offers a Small Business Essentials Controls Assessment to help business owners take the necessary steps to build a solid internal controls foundation for their growing business.

Article authored by:
Hilary Dodson, CPA, CGMA
Shareholder + Resource Manager
Kaiser Consulting
Contact Hilary

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Kaiser Consulting offers a full suite of accounting, finance, and information technology compliance and data security solutions delivered with industry-specific expertise to help organizations navigate the complexities of growth and change. Our accomplished professionals collaborate with executives and management teams to reduce business and operational risks, bridge resource gaps and optimize company-wide financial performance. A trusted advisor since 1992, we proudly serve enterprises of all sizes, including privately held and publicly traded businesses, multinational Fortune 100 and Fortune 500 companies, closely held entities, visionary start-ups, and mission-driven nonprofit organizations. Headquartered in Columbus, Ohio, we are a member of the Atlantix Partners family of companies – a nationwide network of seven premier finance and accounting consulting firms representing 300+ professionals that expands the breadth and depth of our selection of accounting, finance, compliance, data automation, and technology service offerings. We help clients throughout Ohio, the Midwest, the United States and beyond manage immediate needs, meet short-term targets and achieve long-range goals. Our commitment to experienced and knowledgeable professionals gives your enterprise a distinct advantage in identifying potential business issues, implementing solutions and eliminating obstacles before they are encountered. To learn more, visit https://kaiserconsulting.com.