Keeping control of your growing business

Did you know…

As a company director you have various legal duties including:

  • Keep proper books of account;
  • Prepare annual accounts;
  • Have an annual audit performed (unless the company is eligible for audit exemption);
  • Maintain registers of shareholders, directors, meetings etc;
  • File annual returns with the Companies Office;
  • Safeguard the assets of the company;

…to name a few.

Some of these duties can be delegated.  As your business grows you may find that you no longer have time to do all the things you once did.  For example, I have clients that start out looking after their own books and records.  As the business grows they hand that over to me.

Delegating tasks (like bookkeeping; preparing annual returns; ordering goods etc) is an unavoidable part of business. But while the “task” may be delegated ultimate responsibility and accountability cannot.

So as your business grows, and you delegate some tasks and duties to staff, what can you do to retain control?

The first thing to consider is timing.  Many people will use control over the bank account as their only or main internal control.  This of course is necessary, but the problem is the company may be already contractually obliged to make the payment.  Therefore, the control needs to come before the company becomes contractually obliged.

To ensure the internal controls are adequate you need to go right back to the beginning of the process.  Here’s a step-by-step analysis of the purchasing process:

1. Need for purchase identified

2. Requisition raised

3. Purchase order approved

4. Purchase order placed

5. Order received

6. Order checked

7. Invoice received & matched to purchase order and delivery docket

8. Invoice processed

9 Payment run prepared

10. Payment run authorised

11. Bank payment created

12. Bank payment authorised

This will vary from business to business depending on its size and complexity.  Some of the steps may be merged into one, but they should all be present in some form.

Imagine one individual is able to do each of these steps (up to authorising the bank payment).  If you are authorising the bank payment how can you be sure that each stage has been done properly and with integrity.  If the same person identified the need to purchase, placed the order, received the goods and approved the invoice, how do you know the goods were really needed or worse were actually used in the business?

You can see that if it’s that person’s job to order goods the company may be contractually obliged to make the payment even if you subsequently discover the employee was on the take.

So what do you do?

The steps highlighted in red are hot-spots.  If these steps are done by the same person then you may have a problem.  Ideally these steps should be done by different individuals.  If that’s not possible (as is the case with many micro and small businesses) then additional checks need to be implemented to reduce the risk of fraud and error.

But I trust my employees!

Of course, and so you should.  But you cannot rely on trust.  Many frauds have been perpetrated by trusted employees.  Those employees usually act on an opportunity presented in by a weakness in systems and controls.  Remove that opportunity and you reduce the risk of fraud.

As I said at the beginning it’s all about timing.  It’s better to prevent a fraud than to detect it after the event.

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