The following are the 8 Most Important Reasons Why You Need Effective Internal Controls In Your Small Business Business:
- Helps you to protect your cash
- Monitor debtors accounts
- Protect your cash
- Make right purchases
- Track your Bank accounts
- Monitor your Fixed assets
- Monitor your Stocks
- Track your payments
Internal controls are concerned with protecting the all the assets owned by your business.
In other words, if properly implemented it can be used to prevent or detect frauds in your business.
Internal Controls help to protect your Cash
Internal control for cash is very important because it will help you to ensure that:
- All cash to due to your business are collected.
- Cash received are correctly recorded in the CASH BOOK
- You identify and block any leakages in your system that could lead to loss of funds.
- All outgoing payments are approved by you
- There is value for your money
- All financial transactions are correctly recorded.
Most importantly, internal control should allow you to know by whom, why, when and for what purpose cash is leaving your business.
Monitor Debtors Accounts
Internal control for debtors is also important because it can enable you to detect or prevent frauds in accounts receivable.
For instance, a dishonest employee can manipulate a debtor’s account by:
- Not debiting the debtor’s account with the actual value of the goods supplied to the customer. In this case, the aim of the employee will be to collect the difference from the debtor later for his personal use.
- Deliberately reducing the balance in a debtor’s account. Thus, making it possible for the debtor to pay amount less than what he actually owes.
- Writing off, without your approval, part of a debtor’s account. This will enable the debtor to pay less than the debt he owes. The dishonest employee will gain but you will lose.
- Intentionally omitting to enter the value of a sales invoice in a debtor’s account. Here again, the aim is usually to collect the money from the debtor for the items not entered in his account.
Therefore, you should check the entries, additions and subtractions in debtors’ accounts.
In financial matters, accuracy is very important.
Make purchases the right way
Since internal control is intended to protect your investments, it should guide you when purchasing stocks.
For instance, internal control measures and procedures should require you to:
- Obtain prices from at least three suppliers
- Compare prices to ensure that you are buying at reasonable prices
- Ensure that you purchase stocks from the right sources
- You buy stocks that your customers need, not what you like.
- The items you purchase are of high quality to meet the needs of your customers
Above all, remember that when you buy cheap, you will sell cheap.
You will keep your existing customers and get new ones.
Track your bank account(s)
Yet another importance of internal control system is that it should enable you to reconcile the figures in the bank statement with those in your cash book.
Internal control procedure for preparing bank reconciliation statement is as follows:
- At the end of each month, collect statements from your he bank
- Tick all the entries in the bank statements against the figures in your cash book.
- Take note of bank charges, COT and similar charges.
- If you discover any differences, you should get them sorted out with the bank
- And prepare bank reconciliation statement
If you follow the above procedure consistently, you might be able to detect or prevent frauds in your transactions with your bank.
Most importantly, you need effective internal control system to track your transactions with bank.
Monitoring your business account is important to ensure that internet fraud stars do not hurt your account.
Monitor your fixed assets
In the same vein, internal control system should cover the assets of your business.
Examples of Fixed assets include, Motor vehicles, Plants and Machinery. Others might include furniture, fittings and equipment.
Internal control measures should ensure that:
- Your vehicles are serviced at regular intervals so that they can continue to perform optimally.
- Drivers maintain log books for their vehicles to monitor their movements.
- Plants and machinery are maintained as recommended by the makers
- Your assets are safe in their various locations
- And that they are in good working condition.
Internal Controls help you to manage your stocks
Internal control for stocks is very important because it should enable you to protect your investments in stocks.
In most businesses, investments in stock and inventories can be quite high.
Therefore, your internal control systems should enable you to make sure that:
- Goods delivered to your shop are physically counted.
- Items supplied to your shop are in good conditions
- Supplies to your shop are exactly the stock items you ordered.
- Goods received are immediately entered into their respective bin cards or computer system.
- Stock records are balanced automatically at the end of every transaction. This way, you can easily know the balance of each stock item.
- The store keeper is not issuing more stocks to customers than what they paid for.
- You block all ways by which dishonest employees can steal stocks from your shop.
You should regularly inspect your stocks to find out those that are nearing expiry dates.
This will also enable you to plan how to sell them off quickly to avoid losses.
Similarly, you should be able to identify stocks that are experiencing low demands. So that you should avoid buying them in the future.
Track your payments
Internal control for payments is very important because it will enable you to ensure that:
- Except for little amounts, large amounts should be made through bank.
- All payments are verified and approved before money leaves your business
- The right amount is paid to the right person at the right time.
- Receipts are obtained for all payments your business makes.
- Such receipts are filed away for future reference.
You can, therefore, see that internal control is a very important tool for protecting the assets of your business.
Your business will not survive if you leave your business in the hands of some smart guys out there.