Small Business Internal Controls

What Are Small Business Internal Controls?

The efficient use and protection of resources is a primary management function.

Small business internal controls are measures implemented by business owners to safeguard those resources.

A Definition

Controls are methods and procedures used to protect your cash and other assets and to ensure that your accounting records are accurate.

Typical controls implemented in small businesses include:

• Establishing clear lines of responsibility
• Separating record-keeping duties and cash handling duties
• Installing mechanical or electronic devices like cash registers and
• Purchasing adequate insurance against loss or theft

Clear Lines of Responsibility

Internal controls are about people. Individuals are the ones who carry out business transactions and exercise control over the assets of the business. The first and perhaps most important feature of an internal control system is to hire competent and reliable people and the appropriate assignment of responsibilities to those employees.

Responsibility should be appropriate for the ability and authority of the position the person holds, and the limits of that responsibility should be clear to both you as the business owner and all of the employees. There should be no areas where the responsibilities of your employees should not overlap and there can be no gray areas. Where accountability cannot be assigned because of these overlaps or gray areas, it is very difficult to determine how to take corrective action.

If at all possible, responsibilities and duties should be rotated among the employees every now and then, so that each employee has the opportunity to become familiar with the entire system.

Separation of Duties

Whenever possible responsibility for initiating business transactions and for the custody of the resulting assets should be separated. If an employee who makes a cash sale is also responsible for recording and banking the cash, there is the potential for some of your revenue to disappear into thin air!

If these three functions are undertaken by different people there is less incentive for one or all to commit fraud by misappropriating business assets.

Use of Mechanical or Electronic Devices

Mechanical or electronic devices (such as cash registers) can be used to record business transactions as they occur. This can improve accuracy of your records and prevent the misuse of business assets.

Business Insurance

Another element of internal control is to have adequate insurance cover on business assets to protect your business against loss or theft.

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