Why Financial Controls Matter

Growing a business is full of hard choices many of which are about how to spend precious few dollars.  Too often, accounting, financial reporting, and financial controls are grossly under-valued in terms of how vital they are to a company and that often leads to expensive problems downstream.  Here are some examples of common problems that lead to bad decisions and costly errors:

  •  Accounting programs often have grown haphazardly over the years and become so cumbersome and bloated with GL codes and classes (in QuickBooks) that they are difficult to work with.  As a result, financial reports are hard to produce, are late, and usually inaccurate.  So what?  Well, the reason for accounting in the first place is to track and report the transactions of a business so that the business owner can make critical business decisions based on current, relevant data.  Timeliness and accuracy are critical. Without that the business owner is flying blind and can easily make decisions based on gut instinct that are costly and sometimes fatal to a business.  Also note that sometimes overly complicated accounting systems have been created by a staff accountant to hide theft.
  •  A company’s key accounting person is not equipped to do the job he/she is in.  Often that person has ‘grown up’ with the business and is like a family member.  And, while he/she may have been able to do the job when the business was young, the requirements of the job have outgrown him/her.  The problem is hard for most business owners to see because of personal relationships but an outside expert can spot it easily.  If not corrected, this situation will hold a company back and might even kill it.
  •  Monthly financial reviews are not the norm or don’t happen at all.  Too often business owners have not instituted a discipline whereby the financial condition of the company is reviewed on a regular monthly basis.  Such reviews should include the backward facing financial statements from the company’s accounting system as well as forward looking forecasts that will enable the owner to identify issues, opportunities, and decisions that need to be made quickly.
  •  There is a lack of checks and balances in the company to prevent, or at least minimize, the risk of internal and external fraud.  Moreover, trust is the primary financial control.  Unfortunately, fraud is far, far more common than most business owners realize or want to acknowledge.  Ninety percent of all frauds fall in the generic category of “asset misappropriation.”  Not surprisingly the most common asset that is “misappropriated” is cash.  No surprise there but theft can also include the theft of inventory, cash-like items, and fixed or other assets.  Once an employee discovers that it’s easy to do, thefts will continue until it is discovered and then it’s often too late.  Here are some examples that may be going on in your business; use of corporate credit cards for personal items by the person who reconciles your credit card statements, theft of petty cash, creation of fictitious vendors to siphon cash out of the company and into a personal bank account, etc.  Unfortunately this is only the tip of the iceberg.  The list goes on and on.

You can see why financial controls are important. They include a solid infrastructure with defined checks and balances, competent staff, regular financial reviews by the business owner, and professional oversight of the whole process.  The payback is significant and will enable a company to grow successfully and achieve the owner’s goals for it.

photo credit: tight budget via photopin (license)

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