Maintaining a healthy financial position is critical for any business. Thus, to ensure that your business is protected from such risks, it’s essential to have the correct internal control practices in place.
The Purpose Of Internal Controls
Internal controls are the measures, processes, and systems put in place to help ensure business operations’ accuracy, efficiency, and effectiveness. They’re an integral part of any business’s overall risk management strategy. Specifically, they aim to:
- protect a business from financial risks such as fraud, theft, and mismanagement of funds;
- prevent errors, and protect the company’s assets from being misappropriated or wasted;
- identify and correct problems quickly and efficiently, helping ensure the business remains profitable; and
- create an environment of trust among employees and customers, helping to increase customer satisfaction and loyalty.
These are only a few benefits of having the proper internal control practices to manage business financial risks and avoid potential losses.
Common Internal Control Practices For Businesses
Whether you’re a small business owner or a prominent corporate executive, financial risks can significantly impact your business’s success. Here are some of the most common practices to start with.
1. Separation Of Duties
Separating duties can be done in business finances by assigning different people to handle other aspects of the financial process. For example, you can assign one person to manage accounts receivable, another to handle accounts payable, and a third person for bank reconciliations.
SoD’s importance lies in two things: awareness and control. It’s essential as it ensures that everyone involved understands their role and responsibilities, which can help to ensure accuracy and accountability. In addition, it controls access to financial systems and data. Limiting access helps ensure that no one can access sensitive business financial information. It reduces the risk of fraud and other financial mismanagement. Plus, it encourages team members’ honesty because they know someone else will double-check their work. Furthermore, it limits errors because there are multiple checkpoints throughout the process.
Having more than one person review the transactions helps prevent mistakes from slipping through the cracks. A further benefit of this practice is greater efficiency since multiple people complete tasks simultaneously instead of relying on a single individual. This also saves time since each task can be completed quicker than if it was all handled by one person. Additionally, if any errors or omissions are discovered during reviews, they can be addressed quickly, ensuring accuracy throughout the process.
2. Access Control
Access control is another essential internal control measure that helps businesses reduce financial risks and protect their assets. It can be implemented in various ways, including physical locks and passwords or software applications.
Physical access controls are typically the first layer of defense for any business. They’re designed to safeguard tangible resources, such as cash, equipment, inventory, and data. They also involve various techniques that prevent unauthorized physical access to your premises or the property. Some examples include locking sensitive documents, setting up alarm systems, and adding locks to file cabinets or doors.
Access control can also be implemented electronically, such as with passwords or biometric authentication. Password-protected software applications can also grant access to sensitive data, ensuring that only those with the proper credentials can view the information. This is particularly applicable when information is stored in the cloud, where risks are always present.
When used in conjunction with other internal controls, such as separation of duties and monitoring, access control helps provide an additional layer of protection for your business.
3. Record Keeping, Reporting, And Monitoring
Record keeping is the process of recording and documenting all financial activities in a business. It involves tracking income, expenses, assets, liabilities, and other financial transactions and preparing and maintaining financial statements. Record keeping in business finances can be done using various methods such as accounting software, spreadsheets, or manual record keeping.
Related to the practice of record keeping is monitoring. Finance monitoring aims to protect the company’s physical and financial assets. It’s used to identify, detect, and prevent irregularities or errors in the financial system.
In business finances, monitoring can take many forms. One of the most common forms is the use of internal audits to track the accuracy of financial transactions. Internal auditors review all transactions, such as payments, receipts, deposits, and investments, to ensure they comply with financial regulations and policies. They also assess the effectiveness of internal control procedures and recommend changes or improvements if necessary.
In addition to internal audits, companies may also conduct risk assessments. Risk assessments help identify areas of financial risks, such as fraud or misappropriation of funds. Companies can then put in place measures to mitigate any potential risks and ensure the security of their economic systems.
Finally, companies should also develop procedures for regular financial reporting. This includes preparing standard balance sheets, income, and cash flow statements. Regular reporting allows companies to quickly identify potential issues and problems, enabling them to take corrective action promptly.
The last common practice businesses employ is training. Training involves educating employees on the company’s financial policies, procedures, and processes so that everyone understands their role in mitigating risks and helping the business succeed. Areas can include understanding the company’s internal controls, budgeting processes, and accounting systems. Employees should also understand the importance of accurate record-keeping, proper budgeting and accounting, and compliance with applicable laws and regulations.
Training can be done in various ways, from classroom-style training to more informal methods such as online courses or webinars. To ensure employees are adequately trained, businesses may also consider utilizing external trainers or consultants specializing in financial risk management. These professionals can provide guidance on best practices for creating and implementing a comprehensive financial risk management program. Additionally, they can offer customized training programs based on the specific needs of your business.
By providing employees with knowledge and understanding of your company’s financial policies and procedures, you can equip them to take proactive steps to mitigate financial risks.
Implementing the four internal control practices mentioned above can help reduce your business’s financial risks. By separating duties, controlling access, recording and monitoring transactions, and training your team, you ensure that no single person has complete control over all financial activities, reducing the risk of fraud or other errors. Ultimately, having strong internal controls in place is essential to running a successful business and can help ensure your finances remain secure.
This list is only partial when it comes to tips on implementing internal control for your business. There are many more to discover. You can protect and ensure continued financial success with the proper knowledge and strategies.