Entrepreneurship can be both bliss and burden. Bliss in a sense that you get to decide on what you want to do with your time. You have all the time in the world to do the things you want to do. And of course, you are financially independent, and you are your own boss. But at the same time, entrepreneurship can be a burden because of all anxieties it gives you. And these anxieties can hinder you to keep on going.
One of the worries of most entrepreneurs is the possibility of becoming a victim of fraud or theft inside their own companies. You probably heard some entrepreneurs share how they were robbed by their own employee or how they were charged with illegal dismissal because they failed to follow the set procedures for employee termination. That is why, it is important for a business to establish internal controls, in order to prevent any anomalous activities in the organization or to suffer from negligience of the employees.
To help you get started, here are the Top 5 Tips on How to Establish Internal Controls for Your Business, from our guest mentor, Mr. Norman Gabriel.
Assess the risk level in the different areas of your business. Ask yourself: “What areas of the business am I most prone to fraud or error?”
High-risk areas are normally related to the handling of cash and inventory, it may be where the process is controlled by a single person, or areas where there is no clear process or standard in place. Whatever it is, you need to identify those high-risk areas and start establishing better controls there. Don’t attempt to put controls in all the areas at once. It will be overwhelming!
After you address the high-risk areas, then you can proceed with the moderate-risk areas, and lastly, the low-risk areas. This way, you are spending your time and energy on the critical areas of the business first and creating your “small wins” that will give you the momentum to complete the implementation.
Building an honest and ethical culture, will start from you. As the owner and the leader of the organization, you need to set a good example to your members for your employees to emulate. If you have set rules for the company, make sure you too will follow it — no exemptions. This is the easiest way to take control over your business and your people — by instilling to them the importance of acknowledging the regulations set by the company, whether you are an employee or the owner.
Implementing controls and systems in organizations that has already established good culture will be a lot easier compared to the ones with no company values at all. You also need to assess first their readiness to accept changes in your company policies and processes.
Just like with any change, there may be some resistance from your employees at first. However, if you have established a very good relationship, and there’s a high level of trust between the management and the employees, then changes will be a lot easier to implement.
Hiring the right people for your company is crucial, especially for sensitive positions like accounting, HR, warehouse, and Research & Development (R&D). You cannot afford to put people with integrity issues in those positions because your company will surely suffer.
That is why proper internal controls starts with screening the applicants properly and performing due diligence like validating their information before you print that offer sheet. Don’t just hire because of the academic excellence. Have someone who has integrity and is trustworthy to help you run your business. And put your most trusted ones on the most critical roles.
Driving clarity on the roles and responsibilities is also important within a team. This allows the members of the organization to know what to do and how to exactly execute their tasks.
It is important that these tasks are clearly relayed and explained to avoid misunderstanding and confusion. Set an open communication with your people, so it will be easier for them to make clarifications when some instructions are not clear. Also, have a structure that will have a natural check & balance set-up. As a principle, no single person should have complete control on any business process. Otherwise, it will be prone to error or manipulation.
Internal controls should be the responsibility of everyone in the organization. But with regards to executing and overseeing the internal control, always consider/check if there’s a conflict of interest. There should be someone who will check the activities of everyone (even the owner) from time to time.
Have a simple, yet effective way of monitoring your business operations. For example, you may conduct inventory and sales reconciliation regularly or make reporting of sales as frequent as possible. Knowing the current sales and running inventory frequently will lessen the chance of theft or fraud as this will lessen the “window” to manipulate the numbers at the end of the day.
When it comes to cash on hand, it is always best to limit it (e.g. deposit at least once a day or when a specific threshold is met), and have a safe/vault for large amount of cash. You don’t want to just have those bills lying around and tempting everyone who sees it. It is also advisable to invest in security and CCTV cameras to discourage theft and to monitor people with unusual behavior or those with issues.
Lastly, if you have stores, you may do surprise visits and observe your employees from a far, before showing up. This way, you can see the “normal” activities of your employees when they are alone at the stores.
Norman is an internal audit practitioner and currently leads the Asia Pacific Internal Audit Team for a multinational company. He has more than 10 years of audit experience (internal and external) in several multinational companies and universal local banks.