How to Create Internal Controls for Your Business

by | Feb 8, 2022 | Accounting

As your business grows you find new challenges in your systems and processes. First you may have informal processes that frequently change. Then, over time you start to document, delegate, and outsource these processes. As you continue to grow you make adjustments so they are scalable and provide more efficiency.

One area that business owners tend to overlook is internal controls. We may not think about these until we are faced with one of 3 situations – an audit, we suspect fraud, or notice errors occurring.

In all 3 scenarios we begin to look at our processes not as a way to increase efficiency and profits but as a way to improve quality and prevent fraud.

In this article we will discuss how to create internal controls for your business. Let’s first start with defining what internal controls are.

What Are Internal Controls?

Internal controls are a set of rules and procedures to ensure accurate financial reporting. Typically the focus of internal controls surrounds bookkeeping and accounting processes but they can relate to operational activities as well.

Internal controls can be small steps like double checking the math on an invoice or making sure a bill received is from an approved list of vendors. These steps can sometimes feel tedious but the intention is typically to reduce the chances of fraud or error. They can also relate to improving other metrics in your business like quality.

What Is The Objective?

The first step in developing internal controls is analyzing what the objective is. For example, if you are looking to strengthen your accounts receivable process you may have many objectives.

Maybe your business collects cash when fulfilling accounts receivable and so you want to decrease the chance for fraud.

Maybe you are an online service based business and charge by the hour. How do you ensure invoices are collected on time and if not collected, what is your process for collecting late fees? Who is collecting the delayed payments? Who is confirming the correct payment was made?

Try to have a deep understanding of each process, the steps, and the objective of each step. It may seem unnecessary at first but it will build into the following points.

How Risky is This Process?

Once you have determined the objective of your process, we will want to assess risk. Some processes are going to have more inherent risk than others. For example, earlier we discussed cash. Cash can always present more risk since it can easily exchange hands. Let’s consider this example more closely.

Assume you own a hair salon that accepts both cash and card payments. Whoever closes the store at the end of the day could likely have access to the cash when no one is around. Even throughout the day, the cashbox could be subject to miscounts and errors.

So we create an internal control to watch the cash in the cash box. At the beginning of the day we count how much cash is in the cash box and enter it into the POS system. Then at the end of every day we count the cash again and reconcile it with what is shown in the POS system. If there is a difference we can make note and further analyze our process.

We just turned a risky process that handles cash into a process with an internal control that decreases risk.

Risk can be difficult to assess so you will want to think about anything that could affect the integrity of your finances.

  • Cash
  • New employees who are still in training
  • High employee turnover
  • No formal processes developed

These are just a few examples of how normal parts of owning a business could be causing risk.

What Resources Do We Have Available?

Something else you will want to consider is the resources available when determining your capabilities and limitations. When it comes to developing internal controls you may want multiple people to review an invoice before it is paid. If you are a one person team, this is beyond your capabilities.

It is also possible you have multiple people but find it inappropriate for them to handle business finances under their current position.

Applications can also make internal controls more efficient and secure, however, if you have limited financial resources then you may not be able to afford the additional tech.

Consider your current applications, financial resources, and your team members. Once you have those in place you are ready to begin implementing internal controls.

The concept of internal controls can be tricky at first yet as you become more familiar with your processes you will find it can actually be an excellent tool at improving your business in ways you once did not think possible.

To learn more about internal controls of begin working with an accountant to help you effectively implement internal controls, schedule a consultation with us by clicking the button below: