As previously discussed in our “Two Tips that Will Help You Achieve Internal Controls” article, having a segregation of duties over cash disbursements is critical if small businesses are to minimize employee theft and other risks. In this article, we will provide suggestions on how to achieve protection of your company’s cash disbursements or cash outflows.
The suggestions below are most effective when placed within a written policy and procedure document that will be approved by senior management and shared with personnel to achieve its successful implementation and ongoing practice:
1. Specify and limit staff members who may enter into binding contracts
Generally, senior management should be the only personnel able to enter into contractual agreements with third parties. This will ensure that contracts are aligned with the company's objectives and appropriately reviewed by counsel. Limiting control over this function is key in avoiding legally binding agreements that could financially hurt your business.
2. Write a Disbursement policy detailing the process for approving expenditures
Staff charged with the function of approving payments to vendors should be those who are aware of the company's finances as a whole. There should also be checks and balances that ensure payment is made for services that were actually requested and performed and for the actual receipt of goods ordered. Informed reviewers of vendor payments should check the amount for reasonableness.
3. Consider having two check signers for large checks and/or wire transfers
Before a large check or wire transfer is approved, associated invoices should be reviewed. Check signers for large checks should be a part of senior management. Also, a special process for wire transfers is suggested and can include the use of passwords that approve pending wire transfer requests. This type of review and other similar functions are offered by most banks for added protection.
4. Review of payroll costs should be performed by an independent member of management
The cost of labor is the most significant cost for most small businesses, therefore, internal control over this function is highly recommended. A member of senior management should be charged with the responsibility to review the approval process over employee hours, overtime, rate of pay and incentives. Additionally, the setup of new employees should not be the responsibility of the staff member who also approves payroll or cut the actual payroll checks.
Protection over your business' cash flows are key if you are to be successful and have longevity. Employee theft is the most common risk small businesses are susceptible to. The U.S. Small Business Administration provides a link to statistics on employee theft and fraud, click here to see its impact on small businesses.
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