One of the biggest accounting challenges faced by small businesses is caused by the fact that these organizations are small. When you’re running a big corporation with a large accounting department, it’s relatively easy to follow accounting best practices regarding separation of duties. But when very few people are involved with processing transactions, the business owner or a member of senior management needs to get involved with key aspects of the accounting process. This includes ensuring that a broad range of financial controls are in place.
Here are the financial controls that I believe are most important for small businesses to have:
• Cash Management – Bank reconciliations should be prepared on a monthly basis by someone other than the person who handles the banking, and then reviewed and approved by senior management. Companies that are victims of embezzlement schemes typically do not do monthly bank reconciliations at all, or do not have these documents properly reviewed.
For money coming in to the company, deposits should be made daily. For money going out, checks should be signed by owners or senior managers; the use of signature stamps should be eliminated or greatly minimized.
• Purchasing – Purchase Orders should be issued for all purchases. In addition, all new accounts with vendors or suppliers should be approved by the owner or a member of senior management. The person approving this account formation should also be responsible for informing the vendor that your company requires Purchases Orders for all orders, and providing the vendor with a list of personnel who are authorized to pick up purchases from Will Call.
• Inventory – When shipments arrive, the person who signs for the delivery should also note this receipt in the Receiving Log. While this is a very low-tech, “old school” tool, it is an excellent way to force the warehouse personnel to turn in the receiving paperwork. Of course, incoming shipments should only be accepted when they come with the proper paperwork. Similarly, outbound shipments should only be processed when they are accompanied by a delivery ticket or delivery receipt (which will become the customer’s receiving documentation).
Periodically completing a physical inventory is extremely important. Whether you do this once a month or once a year, you need to reconcile the physical inventory counts back to the balance in the account ledger to see if the variance is higher than what you’d expect with normal inventory shrinkage.
• Accounts Payable – When the accounts payable clerk goes to process an invoice for payment, he or she should match up the invoice with the purchase order and receiving document. Item descriptions, number, quantity and price should all be compared. The accounts payable clerk should indicate somewhere on the invoice that they have performed these steps and that they have approved the invoice for payment. Many organizations use a rubber stamp that has a spot for the person to initial to ensure this step takes place. If the invoice is for a service that does not create a receiving document, the invoice should be given to the department head responsible for ordering the service and they should indicate their approval on the invoice as well.
Once the checks have been printed, a list of all checks with the payees and amounts, along with the stack of approved invoices, should be given to the check signer. The check signer should be either the company owner or a member of senior management who is not involved with the rest of the accounts payable process.
• Payroll – Every time you hire a new employee you should have a profile sheet that shows who the person is, their rate of pay, assigned department, etc. Then someone other than the payroll clerk – preferably the owner or a member of senior management – should be the one to get the employee set up in the payroll system. When the payroll is being processed, the owner or a member of senior management should review an input sheet or edit report to ensure accuracy. Take your time with this step, because it’s a lot harder to fix the payroll after you push the “accept” or “send” button than before!
These are the most important financial controls for small businesses to have in place. If you take care of every item on this list, you should be in pretty good shape.
Want to bring in an outside expert to review your financial controls and recommend areas for improvement? Give me a call. As a part-time CFO, this is one of the many services that I provide.
When it’s time to begin your annual budgeting process, do most of your team members want to run for the hills? If so, I’ve got good news for you – the budgeting process, including budgeting for growth, does not need to be a painful experience. In fact, if everyone arrives prepared, the process I’m going to describe here can usually be completed in two two-hour meetings.
Here’s what you need to do:
• Analyze your current level of business. Before you can budget for growth you need to have a basic understanding of what’s driving your current level of business, so that you can evaluate whether or not you can reasonably count on this level continuing.
• Take a close look at your goals. Your goals will drive your budgeting priorities. What changes need to happen in order for you to reach these goals? What additional resources (people, cash flow, machinery, etc.) will you need?
Before you get too far, take a close look at whether achieving your desired growth goals would actually strengthen your company’s financial position. As I discussed in a previous article, it’s possible to grow yourself right out of business!
For example, say your goal is to increase sales by 10% through a new contract with a big box store. In this case your sales volume would go up, but if the big box store squeezed you on price then your gross profit margin would go down. If they demand longer credit terms, you may have to borrow money to finance these new receivables. Add in the cost of any additional people you need to hire to service the business, and you might actually lose money on the deal.
• Develop a plan of action and get 100% buy-in. How will you obtain the necessary resources to reach your goals? What do you need to budget for, and who will be responsible for performing what? As part of this step, be sure to assign some metrics to your goals so you’ll be able to measure and report on performance.
• Crank out the numbers. Going through the above steps will give you a good foundation for a business plan. All that’s left in the budget process is to decide how detailed you want your budget to be and calculate the numbers for each line item.
Budgeting does not need to take months…and even a minimalist approach can result in the solid plan you need.
As I discussed in my last article, “Don’t Grow Yourself Out of Business,” a lot of businesses make big plans for growing sales without making corresponding plans for growing capacity. You can push your people to work longer hours. You can bring in a part-time CFO such as me to handle your increased reporting needs and create a financial dashboard that will let you track things to ensure you’re actually making money. But unless you’ve got a lot of cash, without adequate credit to finance your business expansion, you’re business is not going to expand.
For example, say your construction company is planning to grow by 30% over the next 12 months. You typically get 90% of the progress payment within 60 days and the remaining 10% remains as retention to be paid when the job has been completed by all trades. To accommodate your sales increase your payroll will go up. But until the retention payments start to roll in, where is that money going to come from?
Or perhaps you have a manufacturing company with a 90 day production cycle. How will you pay for 30% more raw materials if you won’t receive payment until 30 to 60 days after the product ships?
You need a strategic
To address this issue, start by determining exactly how much credit you’re going to need. Your strategic business plan should address this by looking at how your sales increase will impact your anticipated cash flow and each of your expenses.
Look at your financed
and unfinanced credit
Do you have unused credit that you can tap now? Are your suppliers willing to work with you to fill the gap? After all, if your suppliers are comfortable increasing your credit and continuing with your current terms, you’re set. But if this is not the case, you’ll need to work on expanding your financed lines of credit.
Give your lender the
information they need
Before a bank or other lender will increase your line of credit, they’ll want to see believable projections showing what your company will do in the next 12 to 36 months. Getting loan approval often depends on getting this aspect of your loan package right. If your internal finance people are not experienced with this, you’ll want to bring in outside talent that is.
Need help with any aspect of this process? Give me a call. As your part-time CFO, I’m here for you.