Balancing Control Costs of Protecting Business Cash and Assets
As a small business owner, you’ll always be trying to balance the cost of protecting your cash and assets with the cost of adequately separating those duties. It can be a big mistake to put in too many controls that end up costing you money.
For example, you may put in inventory controls that require salespeople to contact one particular person who has the key to your product warehouse. This kind of control may prevent employee theft, but it also may result in lost sales because salespeople can’t find the key-holder when they’re dealing with an interested customer. In the end, the customer gets mad, and you lose the sale.
When you put controls in place, talk to your staff both before and after instituting the controls to see how they’re working and to check for any unforeseen problems. Be willing and able to adjust your controls to balance the business needs of selling your products, manage the cash flow, and keep your eye on making a profit.
Generally, as you make rules for your internal controls, be sure that the cost of protecting an asset is no more than the asset you’re trying to protect. For example, don’t go overboard to protect office supplies by forcing your staff to sit around waiting for hours to access needed supplies while you and a manager are at a meeting away from the office.
Ask yourself these four questions as you design your internal controls:
What exactly do I want to prevent or detect — errors, sloppiness, theft, fraud, or embezzlement?
Do I face the problem frequently?
What do I estimate the loss to be?
What will it cost me to implement the change in procedures to prevent or detect the problem?
You can’t answers these questions all by yourself, so consult with your managers and the staff that will be impacted by the changes. Get their answers to these questions, and listen to their feedback.
When you finish putting together a new internal control rule, be sure to document why you decided to implement the rule and the information you collected in developing it. After it’s been in place for a while, test your assumptions. Be sure you’re in fact detecting the errors, theft, fraud, or embezzlement that you hoped and expected to detect.
Check the costs of keeping the rule in place by looking at cash outlay, employee time and morale, and the impact on customer service. If you find any problems with your internal controls, take the time to fix them and change the rule, again documenting the process.