5 Internal Financial Controls You Need for Your Business Now
Q: I just opened a shop near Seattle and was told that I need to establish internal financial controls for the business. That sounds great, but I have no idea what it means. Can you help me, Lozelle?
A: Congratulations on the opening of your store! Thank you for your question–you’ve come to the right place.
Thinking about establishing best practices for your finances from the beginning shows that you are a savvy business owner who will put the hard work in to achieve success. I’m not just referring to the long hours that are undoubtedly put in to keep your shop doors open. Entrepreneurs also have to educate themselves about the financial side of their business like accounting and bookkeeping. This helps maximize their investment of time and money.
Getting your books in order is essential, but what is often forgotten is the need for basic guidelines and procedures that establish the financial integrity of your numbers. These controls can also serve as guidelines for oversight for any elements of financial management that you outsource for your business.
Internal controls are the financial rules of your business. What I like about the process of setting rules for our business is that, once established, we feel compelled to follow them. Another motivator? The lack or absence of strong internal controls creates an opportunity for fraud. Are you opening the door to a potential thief?
Here are my suggestions on some essential ground rules.
Separate financial responsibilities.
Establish division of duties for employees involved with your finances.
As your business is new, you may not yet be at a point where you outsource accounting help. When you do, you should have ideas on specific areas of responsibility for different people.
Why? Because giving one person all of the control and knowledge for your books drastically increases opportunities for theft and mismanagement.
A good way to do this is to list out the different financial areas of your business, like payroll, payments, and bookkeeping. Then consider how can you divide these responsibilities among team members in a way that makes sense for your store.
Define financial oversight for your business.
Checks and balances are essential for the smooth functioning of our government and are just as critical to ensuring the protection of your company. Centralizing all of the authority to access and review your books with one person is a recipe for theft fraud.
As we discussed above, you should figure out all of the financial tasks that must be completed for your business, and then divide those duties between team members. Who will oversee the whole? My strong suggestion is that it be you.
Outsourcing financial tasks for your business is smart. You have to maximize your time and focus. However, business owners need to understand the financials of their business. Take the time to educate yourself about what needs to happen, why, and when with regards to your money. I’m not saying that you need to get a degree in accounting (not that there’s anything wrong with that!), but it is an area where knowledge is key. You can take advantage of resources through organizations like SCORE or explore financial coaching or training programs through places like Closing Your Books.
Monthly review of statements.
One of the biggest recipes for disaster for a business is dealing with your finances only once a year. A lot happens in any given year, and by not paying close attention to those events, you’re endangering the short and long-term health of what you’ve worked so long to bring to life,.
Set a day in your calendar to review the previous month’s financial statements (bank, credit, etc.) closely. Note and address any irregularities. Make this a habit.
Establish your documentation.
Now is the time to think through, standardize, and create templates for any forms and procedure that will be part of the financial reconciliation process. To help guide you, consider the fact that at some point, if not already, this process will involve others on your team who are approved to use your business accounts or to be reimbursed for business-related expenses. What sort of proof or explanation would you like to see to approve these costs?
Remember, you don’t have to recreate the wheel. There are tons of samples in existence–peruse the internet for ideas and adapt as needed.
Set up inventory control systems.
You didn’t mention the specific nature of your store, but you mentioned that your business is a shop, so I assume that there is inventory. I don’t have to tell you that this is a significant investment for those who sell products. And as you’ve likely discovered, the process of getting stock on your shelves doesn’t always go according to plan.
There may be goods that are damaged during shipping. Perhaps some products have gone missing. Because many hands are involved in getting your goods from Point A to the shelves of your story, you must create detailed systems to account for those individuals. Who is authorized to receive goods? How do you document and track damaged items? These are just a couple of the questions you’ll want to consider.
Creating your financial controls is establishing the rules of your business to keep your money on track. It’s a concept often lost in our fast-paced world. The fact that you’re paying close attention to financial advice to establish best practices for your shop is a sign that I can look forward to visiting your store the next time I’m in Seattle. You’re in this for the long haul!
Best of luck to you, and thank you so much for your question!