Managing Financial Duties

How to Implement Proper Financial Controls in Your Small Business.  

Do you reconcile your books? Do you automatically download your bank transactions into your accounting software? What happens after that? Do you perform a manual reconciliation? If yes, congratulations because you are limiting your financial exposure. If not, you should be!  

Simply downloading bank statements is NOT reconciling your books. The purpose of reconciling your books is to ensure all financial transactions are accounted for properly and that no money has left your company without you knowing about it.  

Many small businesses struggle with controlling their finances, but that doesn’t mean that they have money flowing out the door and have no idea how much or where it’s going. Although that may be so in some businesses, many are likely to be cases of poor financial management. 

Conventional wisdom in the financial world involves segregation of duties. That means those that count the beans shouldn’t handle the beans themselves. Unless you’re a one-person shop, the person who handles cash and checks shouldn’t also be doing the bookkeeping. When the same person does both, there is a much higher chance for fraud or embezzlement.

Large companies resolve the issue by having a segregated accounting department. Financial transactions occur throughout the organization, records are created, and those records are sent to the accounting department to be recorded on the company’s books. Those books are then reconciled with the bank statements. In cases where the bank and the books do not match, the items are researched.  

Not every unreconciled transaction represents fraud or embezzlement. In fact, a very small number will ever be fraudulent. Most simply occur because of internal errors. Someone may have entered a six that looked like an eight. Those types of errors are resolved by the accountant. When the reconciliation is complete, a supervisor will review the reports and if satisfactory they will sign off on them. This is the most common and most secure way to ensure you have proper controls on your money.  

What if you are a small business that doesn’t have the resources to have separate departments of dedicated staff to perform these functions? Does this mean your business is more at risk of something going awry? Theoretically, yes. However, there are many workarounds to prevent that from happening. For small business owners, you must think in these terms and do your reconciliations on schedule. Develop a process that makes you feel comfortable that you have control over where your money is going.  

You can never prevent fraud or embezzlement completely, but you can stay on top of your business. If you have trouble doing that (many small businesses do), outsource.