Internal Controls and Your Growing Business

December 2, 2011

When your business was in its infancy, you, as owner, had your hand in each and every business process.  You made the product.  You sold the product.  You collected cash for the product, and you accounted for the cash and the product. 

You had to be a “jack of all trades” to get your endeavor off the ground.  However, like every business owner, your goal was to grow a successful and thriving business.  Once that growth began to occur, a natural process of adding staff started— you added a salesperson and maybe even an office manager.  You worked hard to hand select these people to take over key business functions, so you could focus on what you need to do to make and sell your product.

And now, as your business continues to grow, more employees are added, new computer systems are put place, and maybe a new facility is even purchased.   All the while, more and more products are being made and sold. You, who used to have a ground-level view, are now standing on top of a skyscraper.  Your direct management of numerous business processes has increasingly diminished, and you have to rely more heavily on additional people to run your business.  Is it being run effectively? How do you know?  Do you have the right internal controls in place?

Large companies with dedicated Internal Audit Departments have the luxury of consistent internal control assessments and reviews.  Smaller companies do not. So, how can you be sure that all of your company’s processes are being followed correctly, and that any risks relevant to your industry are being reviewed and addressed?  While there is no such thing as 100% assurance, knowing that there is a strong internal control structure in place that includes both preventative and detective controls should give you the comfort to be able to sleep soundly at night.

Evaluation of your current internal control structure includes asking the “How do you know?” questions for each business process:

•How do you know all of your cash is being recorded completely, and you are recognizing revenue accurately?

•How do you know you’re hiring the “right” people?

•How do you know you’re only purchasing necessary items for your company?

•How do you know company information contained within your computer systems is securely protected?

•How do you know you are complying with all relevant regulatory requirements?

If you’ve answered “I don’t know” to any of the above, then there may be areas where you have control gaps.  You want to look closely at each process, identify these gaps and assess the risks associated with them.   Controls gaps can be found anywhere. A common example is the segregation of duties in the cash receipts process.  In many small companies, there may be one individual who performs the entire process: opening the mail, recording cash or checks into the accounting system, making the bank deposits and reconciling the bank accounts.  Since there are no “checks” in place, this gap could potentially expose the company to theft or misappropriation of assets.

All business owners should periodically take a step back and evaluate their company’s current business processes, ensuring they can always answer those important “How do I know?” questions.  At Wallace & Associates, our Encino CPA firm can help you answer those questions, and we offer a wide range of accounting and consulting services to support all of your business accounting needs.

Wallace & Associates serves the greater Los Angeles area, including: Beverly Hills, Burbank, Calabasas, Culver City, Downtown LA, Encino, Granada Hills, Hollywood, Malibu, North Hollywood, San Fernando Valley, Santa Monica, Sherman Oaks, Studio City, Tarzana, Valley Village, West Los Angeles, Westchester.