When it comes to starting up a business, it is imperative to make every resource count. Two of the most valuable resources in business are time and money. A simple step to get the most out of these resources is to implement internal controls to actively monitor accounting operations.
What are internal controls?
Internal controls are a system of ‘checks and balances’ that provides reasonable assurance the accounting records are free from material error and fraud. Implementing an internal control system will identify errors and allow small businesses to save time by ensuring the process is performed correctly the first time. The system protects the company’s assets by detecting and deterring potential fraud.
Why do startups need internal controls?
Internal controls can provide a competitive edge when seeking funds from investors. Implementing a system of checks and balances shows the maturity of the company and helps hedge risk to protect your company’s reputation. Internal controls provide investors with reasonable assurance the company is achieving their financial reporting objectives.
Here are a few examples of internal controls:
- Require all checks over a certain amount (i.e. $1,000) be signed by two authorized signers
- Separate the personnel between who deposits the check and who records the receivable
- Conduct a bank reconciliation every month to reconcile the difference between the book and the bank statement balance
Is my startup too small for internal controls?
One of the most common scenarios we see as auditors in small businesses is a deficiency in the separation of duties. It is a popular misconception that startups and small businesses are too small to implement internal controls. While separation of duties may seem unattainable or costly with a small staff, the system is meant to be scalable to size and provides a blueprint for growth as the company scales.
How can I implement internal controls in my startup?
A simple way to begin internal controls with a small accounting staff is to have financial transactions approved by at least one other member of management, and to reconcile the book balance to the bank statement balance monthly. This will insure members of management are aware of the accounting transactions and the balance between the book and the bank reconcile. As the company begins to grow and it becomes difficult to manage all the transactions, the business can begin to hire accounting personnel to handle billings and receipts. Staff accountants can prepare the bank reconciliation and take control of other accounting functions – certain functions should be separated, such as those who record the receivables should not be in charge of recording revenue. It is important to note that management should always conduct the final review, as they are ultimately responsible for the accounting records.
By developing a system of internal controls early on, the business will establish greater credibility and help mitigate risk in the future. If you need help on getting started, or have any additional questions, please contact an Anders advisor. We can walk you through the entire process of developing a strong set of internal controls for your startup.
