8 Simple Internal Controls for Small Businesses

A recent local news article reminded me again of how expensive it can be for a business to neglect its internal financial controls. In this case, a woman embezzled $750,000 from a Christian supply store over only a year and a half. It was easy -- she just wrote checks to fictitious companies and forged the signatures herself.

Here are links to two more similar stories:
http://www.chiefexecutiveboards.com/alerts/alert008.htm http://www.chiefexecutiveboards.com/alerts/alert007.htm

These are eight simple and almost no-cost financial controls that could save you a lot of money:

1. Sign checks yourself. If your travel schedule and work processes permit, signing your own checks is an excellent precaution.
   
   
2. If you can't sign checks yourself, authorize ONE other person to sign checks in addition to yourself. You can be the backup signer if he or she is unavailable. If someone else must have signature authority, make sure that person is someone different from the person who writes the checks and has access to the check stock.
   
   
3. Keep check stock under lock and key. Clever thieves can fabricate a check, even without your check stock. Don't make it easier than it needs to be.
   
   
4. Approve Invoices yourself. This is a quick and easy process. Again, if someone else must approve invoices, make sure that person is different from the person writing or signing checks.
   
   
5. Have the cancelled checks mailed to your home, instead of the office. This one is big. Open the envelope and just flip through the checks, verifying the vendors and signatures. Even if you only spend 10 seconds on this, shuffle the checks up so it looks like you rigorously examined them. Then take them to the office, to the person who does the bank reconciliations.
   
   
6. Divide up processes for handling receipts and payments. For example, different people should approve invoices, prepare checks, sign checks and reconcile the checking account. Likewise, different people should be handling incoming cash and checks, posting payments, making deposits and reconciling the checking account.
   
   
7. If you take credit cards, the easiest fraud opportunity is for a person with access to the merchant account to give small credits to a card of their own or an accomplice's. Have your detailed merchant account statements reviewed by someone other than the person who enters the transactions, and watch for credits.
   
   
8. Do background checks on all new employees. People with credit problems will be a problem for you, as financial pressures drive desperate behavior. If they can't manage their own money, do you want them managing yours? A recent story of an employee theft revealed that the person had stolen from a prior employer as well -- the new employer just failed to find that out due to lax hiring practices.

There are an amazing number of ways employees can steal from you. Implementing the eight simple precautions above will close off many of those opportunities.