Running a business can be tricky and stressful. A business manager focuses on meeting sales targets and keeping costs as low as possible to ensure that the business remains profitable. Many feel it is almost impossible to keep track of the money in the company.
But, adequate financial controls are vital to ensure business profitability, and profitability is essential to ensuring the sustainability of the business. Whatever the size of the company and its turnover, no business can afford to lose track of its money.
So, what are the best practices for accounting control they should implement to stop the money from walking away?
In this article, we’ll go over some accounting control best practices that could help business managers to keep track of the money in the business.
Let's get started.
1. Compile a Working Business Budget
It is said that failing to plan means you are planning to fail, and this holds true for business. Any business should draw up a well-thought-through budget. The budget is a business' financial plan, a forecast of future revenue and expenditure. A budget is usually drawn up for a financial year but could be done for longer or shorter periods.
There are a few characteristics that are essential to an excellent budget:
However, the best budget in the world would be of little help without adequate budget controls. Management should perform budget controls at least once a month, more often if possible, to compare actual and budgeted performance, both for revenue and expenditure. Any variances should be investigated, and corrective measures should be implemented immediately.
2. Separate the Duties of Financial Staff Members
Separation of Duties means that a single staff member would only be allowed control over some of the phases of a transaction, not the whole. One person cannot, for instance, order goods, receive them, authorize payment, make the payment, and record the transaction. Separation of duties decreases the risk of fraud in the business.
It is reasonably simple to implement separation of duties in a larger organization, where several staff members work in the financial department and report to a financial manager. Small businesses, however, often employ a single person to take care of the accounting function. In such cases, the business owner must also be involved in these processes.
Smaller businesses with fewer financial staff could implement a system whereby non-financial staff has to periodically check and control transactions processed by the financial staff.
Remember: This might reduce the risk of fraud, but it is still crucial for the owner to be personally involved in the process to ensure that fraudulent transactions won't happen.
3. Identify Which Managers May Authorize Specific Transactions
The managers from different departments in the business must know precisely where their departments stand financially. A manager should know the budget allocated to their department, the amounts spent, and how much still needs to be spent.
In order to hold a manager responsible for his department's budget and expenditure, the manager must also be the person to authorize all expenses to be incurred by his department. It is important to note that there should also be different levels of approval authority within the company.
When the expenditure to be incurred exceeds a manager's specific level of authority, he should only be allowed to recommend the expense to his superior. The superior will then be the person to authorize the expenditure. Many larger businesses also implement a system whereby certain expenses need to be approved by two persons before it can be incurred.
4. Regularly Review Financial Position and Results
Management and business owners should review the company's financial position and results regularly, at least once a month. Management needs to do this to ensure the business is still on track and to pick up discrepancies early. Where the financial systems allow and the number of transactions justify, more regular financial reviews would be advisable, sometimes even weekly.
Managers need to be able to interpret and understand the information supplied by the financial department. They need to use this information to make decisions and change the company's direction if required. A fair understanding of accounting information should therefore be a requirement for any manager in the business.
When regular financial reviews are done, management should be able to identify financial risk areas. If these risks are identified timeously, management can take corrective steps to effectively mitigate the risk and set the company back on the desired financial path.
5. Arrange External Audit or Review of Financial Results
It is vitally essential for management and business owners to be hands-on with finances. Owners and management are responsible for the day-to-day business operations. They usually are not financial experts, while professionals know what to look for. Having an independent person to review the financial results is always a good idea.
Most businesses have their financial statements audited or reviewed by independent professionals annually. Having an independent professional review the business's financial position at least quarterly is a good idea. Management can then use the report from the reviewer to make decisions and take corrective measures where needed.
The biggest problem with having an independent professional review your financial results is that their services are costly. It is, therefore, necessary for the management or owners of the business to decide what the company can afford. They need to consider whether the risks and transaction volume would justify hiring independent professionals to review the business' finances on a more regular basis.
In business, it takes more than achieving your sales targets and maintaining accurate financial records to keep the company profitable.
As sometimes management can be too focused on achieving targets and lose track of the money, it needs to implement adequate financial controls to keep the money where it belongs – in the business. These five best practices for accounting control, if implemented, can prevent the money from walking away.
(Related article: 5 Small Business Accounting Best Practices to Keep the Books Tidy)