I would like to thank Diane for her comments. What brought me great satisfaction was the part of her comment that said, " .....it forces me to think about how I run my business." That is one of my major objectives in writing this blog, that is, to get business people to THINK AND TO ANALYZE how they are running their business.
All too often we all get into a rut or a comfort zone. We continue to do things, both business and personal, because we have become comfortable doing them that way. We don't take the time and effort to ask ourselves, "Is there a better way?" No consultant, coach, or whatever a person chooses to call himself or herself can be an expert in all businesses. I have often had people say to me, "How can you help me with my business? You don't know anything about running an X company." The answer is quite simple. A good consultant or coach forces you to THINK AND ANALYZE how you are running your business. Maybe I can't tell any of you how to best manufacture your product or sell your services, but I can ask the questions and discuss the issues to force you to think and to analyze. We will discuss this more in future postings. Now onto the subject at hand.
There are many ways to protect your business. When people think about protection, they think about such areas as insurance, lawsuits, incorporation, etc., and we will be discussing all of those issues in the near future. The one protection that most companies neglect is financial control. I have seen embezzlement take place in major corporations (including a bank where I did business), medical offices, and small service companies. Any business with poor financial controls is a candidate for embezzlement. I have seen embezzlement by partners, long term trusted employees, and the newly hired person.
No system of financial controls will guarantee the prevention of embezzlement. However, a good system will accomplish two objectives -(1) make it extremely difficult to embezzle, and (2) catch the embezzler quickly before he steals a lot of money.
Here are two short real-life examples. A computer service business had two partners. One was Mr. Outside who was responsible for sales and the other was Mr. Inside who took care of all of the administrative duties. Mr. Outside was happy as long as he only had to sell (he really disliked "paperwork and numbers") and as long as there was a nice balance in the bank account. One day Mr. IRS Agent visited the company. Mr. IRS Agent informed Mr. Outside that "no withholding deposits had been made for the past six months." Mr. Outside was astonished. It turns out that Mr. Inside had been keeping the money - along with some other funds - for himself. The company was out of business seven months later and Mr. Outside was near bankruptcy and looking for a sales job.
The second example involves Dr. T and his long-time trusted office manager. Dr. T liked his profession but just like Mr. Outside, he really didn't like paperwork. Mrs. Long-Time Trusted Employee was more than happy to handle everything herself. One day Dr. T received a call from Mr. Patient who complained that his insurance company had paid Dr. T but he was still getting bills from Dr. T's office. Well, you know the rest of the story. Dr. T survived, but his bank account was about $75,000 lighter.
You need to follow three very important policies for financial controls - (1) division of duties and responsibilities, (2) personal oversight, and (3) vacation policy. Division of duties makes it more difficult for an embezzler to hide what he is doing. Personal oversight enables you to catch the person quickly. Vacation poilicy requires someone else to perform the duties which the employee is on vacation.
Although it is impossible to list all cases in this posting, let me give you some examples. Under the topic of division of duties, the person who makes the payroll withholding deposits should not be the same person who opens the mail. Why? If withholding deposits are not made, you will receive a notice from IRS via U.S. mail. Do you want the person who stole the withholding deposit to receive the notice? (I do recommend outsourcing your payroll for that reason and for others that I will discuss in future postings). The person who purchases the inventory should not be the same person who records the receipt of that inventory. The person who pays the bills should not be the same person who balances the checkbook.
I can hear you now. "I am a small company. I don't have all of those different people." In that case, YOU had better be the other person. If you feel that you are not knowledgeable enough, what should you do? You have two choices. You can learn by taking classes. Your local community college probably offers accounting classes that you can take. Your other choice is to outsource the function to your CPA. He or she may have the resources themselves or they may be able to recommend an accounting service that can help. Your CPA is also a great resource in reviewing your overall funancial controls.
As for personal oversight, it is quite simple. First, get into the habit of spot checking ALL financial duties such as checking vendor balances, receivable balances, physical inventory, etc. Secondly, I always selected what I considered to be a major protection item and performed that duty myself. That item is balancing the checkbook and reviewing cancelled checks. I have always said that I can't guarantee that no one would embezzle from me, but I could guarantee that I would catch them at the end of the month.
Finally, beware of the loyal financial employee who never wants to take time off. There are many stories (read the early history of the Hormel Company) about cases of embezzlement that were discovered by employees who were substituting for someone on vacation when they noticed that something seemed out of line.
Remember, YOU and YOUR FINANCIAL CONTROLS are the first line of defense in protecting your company. Don't neglect that duty.
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