Tag Archives: small business

August 22, 2016

Internal Controls: Why They’re Important

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When you hear the term “internal controls,” what comes to mind? Auditors hovering over mountains of paperwork while you sweat bullets? Creating a bunch of needless, extra work? Suits and ties, Yes Men, Sally from Accounting breathing down your neck for not following protocol? I totally get it; that’s where my brain was, too.

According to the Wikipedia definition, “Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization (https://en.wikipedia.org/wiki/Internal_control).”

When broken down simply, Internal Controls is just the formal phrase for making sure your organizational ducks are in a row. Most medium- to large-sized businesses have some form of this or another. Once shareholders, donors (in non-profit organizations), and multiple stakeholders enter a venture, it’s impossible to run a tight ship without them. Small businesses, on the other hand, typically don’t worry too much about instituting internal controls. I’m going to share with you why you should.

  • It will force you to look at your workflow. In order to implement controls, first you have to look at your current processes to see what you already have in place and what needs adjusting. How do you receive inventory? Do you match the shipping document to your purchase order to make sure everything came through right? Do you just pull everything out of the box and throw it on the shelf? Do you take a regular count? If you don’t have a basic workflow for something like inventory each and every time a box crosses your door, you may be losing money on lost, stolen, or missing product. Instituting internal controls (i.e. a defined, repeatable workflow) will help minimize shrinkage. Another huge bonus? Now you have a process in place to teach current and future employees that is repeatable and scalable. Less room for error, more time for sales!
  • An extra set of eyes. Does Tony open the bills, write the checks, sign the checks and then mail them back out? How do you know Tony has the right amounts? Or that the bills coming in are accurate? Or that Tony isn’t just writing himself checks? A great rule of thumb in dealing with cash/checks/finances in general in your business is to make sure NO PROCESS INVOLVES ONLY ONE PERSON START TO FINISH. If you have processes that start and end with one employee, it’s time to take a step back and see how you can interject yourself or other trusted advisors to double check work to ensure accuracy and to prevent fraud. In the example above, you may decide that you will open and “approve” bills, while Tony writes the checks. You then sign those checks and Tony mails them out.
  • Compliance. Yes, even as a small business, being in compliance with all of the rules and regulations put out by the IRS and state authorities will prevent you from having to pay penalties and interest. These agencies don’t care how big you are; if you owe it, they will get it. If you don’t have appropriate documentation to argue with their assessment, there won’t be much you or your advisors can do.

It is very possible to go overboard with implementing internal controls. Specifically in the case of non-profit organizations, many times insurance companies or stakeholders require a certain level of transparency/internal controls. However, it’s important to ask yourself if you’re over-complicating a process or procedure in the name of transparency. Sometimes this cannot be helped, but it’s always a good idea to ask those who require controls such as these for explanations so you are able to implement appropriate controls that don’t overburden your company’s system.

Dynamic Bookkeeping loves to work with non-profits and other small business who wish to establish efficient workflows and internal controls. Contact us for more information!

November 24, 2015

Money In, Money Out: Common Misconceptions (Part 2)

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In my last post, we covered money in: various ways money may come in to your business that could be something OTHER than income.  In this post, we’ll cover money out.

The vast majority of money that will be flowing OUT of your business will be in the form of expenses: paying bills, paying your employees or purchasing your raw materials to make your product.

There are a couple of other ways money comes out of your business that may NOT be an expense. Our first example would be in the event of a customer refund.

Let’s say your business sells widgets for $25.00 each. Mr. Smith buys a widget, gets it home and discovers he doesn’t actually need it, so he brings it back in for a refund. Instead of classifying the refund as an expense, it will ACTUALLy be categorized against the SAME INCOME account that the sale originally went to. This in effect takes the original income out of your sales. If you incorrectly classify a refund as an expense, you’re going to end up paying taxes on the non-existent income. Why? Because that revenue is still going to show up in your sales account! The only way to NOT pay taxes on that revenue is to completely remove it from the sales account.

We know if you have employees to pay, this will come out of the expense funnel. But what about if you need to pay yourself?

If you cut yourself a paycheck right along side your employees, then YOUR paycheck will also be an expense. However, if you are a sole proprietor, partner, or take any draws from your company in general, your paycheck will actually be a DRAW from Owner’s Equity (commonly called an owner draw or shareholder distribution). A draw is not subject to standard payroll taxes (social security, medical and federal withholding) and will only show up on your balance sheet, not your profit and loss statement. ***A word of caution – there will still be federal taxes owed. Contact your tax preparer or CPA to discuss the implications of taking distributions from your company and to obtain a recommendation about how much to set aside to pay for your self-employment taxes.***

Properly classifying transactions is SO important and can have very far-reaching effects if not done correctly.  If you are ever unsure where a transaction goes, do not hesitate to contact your accounting professional for assistance.  Investing in a good accountant’s services NOW is much less expensive than paying additional taxes and penalties to your federal and state governments later.  We are always ready and willing to help answer these questions.  Feel free to reach out!