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How To Institute Financial Controls In Your Company
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Business New Haven
11/11/2002
By: BNH
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The travails of a handful of public and private organizations during the past year and the resulting furors have placed financial controls in the spotlight. The statements that have caused some of the greatest consternation were those of CEO's claiming not to have a handle on the firm's finances.
Regulators, financial commentators, late-night comedians, homemakers, tight fisted small business people have all had their whack at CEOs for this one. However you feel about a firm mis-posting five billion dollars or so or over-reporting revenues by the hundreds of millions it's best not to get on to high a horse.
According to industry sources financial controls in firms large and small within for-profit and non-profits vary widely and often suffer greatly.
In Connecticut news reports over the past several years have highlighted embezzlements and financial controversies at a host of small businesses, municipalities, non-profits and quasi-government agencies.
According to accounting industry managers financial controls start or as often – stop at the top. Pubic companies and non-profits have boards of directors that should oversee financial controls and today more mid-size and small businesses are being encouraged to adopt advisory boards to aid the management of the enterprise, including to institute better financial control.
The advantages of a board is multi-faceted and goes beyond the role of financial control. Board members however can bring in additional skills to the enterprise and that includes financial experience. Companies creating or managing with an active advisory board should evaluate closely the board, its capabilities and its role.
For entrepreneurs choosing and developing a board can be an important step in what may seem a counter intuitive way of gaining control of the enterprise. Board members can be recruited with experience the entrepreneur or family business does not itself contain.
This is typically the case with financial skills. Many entrepreneurs come from sales or production backgrounds, where their experience has helped them seize on an idea and to develop a business around that. Turning that passion or those unique products into profits is the bane of many an entrepreneur. For those that see a very large future for their enterprise, a board and the outside oversight it implies will help in securing financing and is almost always necessary to obtain outside investors.
Finding an outside advisor that can help evaluate and build a board is an important step. The board should include members with significant accounting and finance experience. The outside advisor can help in finding board members with that experience and to develop an audit committee and process within the board.
Creating A Control Environment
Segregation of Duties
With the aid of board's audit committee or not instituting a control environment is the initial step in assuring financial controls. Segregation of duties is an important part of that process and is especially important in enterprises such as municipalities, non-profits or even smaller firms where the manager or executive may not "see" all transactions. A typical example could be a small medical office, where the "business owner" doesn't want to spend a lot of time with the numbers. Avoid having purchasing and the payment of bills within the responsibility of the same person.
Qualified Staff
Financial experience like any technical skill is an important component of financial control. Your outside financial advisor should participate in the hiring process of key financial personnel, to assure they can perform their duties. Checking references for employees in any accounting function is essential as well. Many standardized computer accounting system will give the appearance of control, remember any system is only as good as the training of the person utilizing it. Employees are often reluctant to make superiors aware when they don't understand a financial transactions. Be sure that training on how your company processes payments, bills etc is well documented and understood.
Budget and Comparisons
One basic financial control is the budget and comparison of ongoing operations to it. With current financial systems most companies should be able to create a monthly budget and run operational comparisons to it. Comparing actual to expected costs is a simple method of controlling expenses and in finding unauthorized expenditures. Accounting industry sources indicate that many companies still avoid budgets and focus on prior -year comparisons. This style of "budgeting" will help to point our changes in the business but will be less successful in helping a manager craft the business to a set of results she is seeking.
Benchmarking
Most business people are unique but few businesses are. Benchmarks for expenditures, revenues, even profit margins are available for most companies and industries. Some outside advisors can help you locate these benchmarks, other sources include industry associations, and directors from within your industry.
Miscellaneous revenue
One source of financial loss and often fraud is income that comes from non-traditional sources. A non-profit with great financial controls for government grants may fall down completely with revenues from a fundraiser. Other companies that typically handle electronic or payments by checks may have no controls for cash payments.
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