As we approach the end of 2016 and start to look towards 2017, now is a good time for companies to perform an internal checkup to ensure that the fundamentals of running their business are strong. At a minimum, management should look at the following four areas.
Internal Control Procedures
Companies should test the quality of their internal control procedures and confirm that they are appropriate for the current working environment. Strong controls ensure that company assets are protected from theft and fraud (a significant risk in today’s economy!), and contribute to timely, accurate financial reporting. As companies downsize to reduce their costs, there is increasing risk to organizations as a result of poorly designed controls and non-compliance with existing control procedures. It is important that management address areas where such control procedures should be modified. For example, there are certain operating activities that should not normally be performed by the same individual in order to avoid conflicts of interest (one example would be where the same person writes checks, signs checks, and reconciles bank accounts). In small and mid-size companies, downsizing has caused incompatible functions to be performed by the same individual or department.
Business owners should consider bringing in outside professionals to perform audit procedures on the internal control system to identify critical weaknesses and recommend improvements.
Management should ensure that daily cash balances are reviewed. There are two reports that should be reviewed – the cash held by the bank along with the cash balance reported in the company’s general ledger. Many entrepreneurs focus on the bank balances and ignore the general ledger or book balances. They need to understand that the bank balance is where the company is at that point in time. The general ledger balance is where the bank balance is headed, once all the outstanding checks and deposits clear. The book balance is the key.
Management must ensure that it has cash flow forecasts for at least the next quarter, but ideally on a rolling 12-month basis. Many universities teach the three fundamental principles of finance – they are:
1) Get the Cash, 2) Get the Cash and 3) Get the Cash!
How do we accomplish this? By ensuring that controls are strong and management is anticipating all future cash receipts and disbursements, based on reasonable assumptions for the business, and making the timely and appropriate adjustments to business practices to ensure that cash balances are adequate to meet the company’s current and anticipated cash needs.
It is also important to perform rolling 12-month earnings forecasts. Such projections will enable management to plan and manage through the normal ups and downs of monthly activity, plan for those months where additional sales efforts are needed, anticipate hiring needs or contractions to meet business demands, control costs, and facilitate tax planning.
Management should review these forecasts monthly against actual results and take the appropriate actions to ensure that the business is functioning according to its business plans, and that necessary changes are made to its plans and related business activities on a timely basis.
Training and Development
It is always important to ensure that the company has the right people in the right positions. Management should examine the core competencies of each job function and determine the skill sets of each of its employees to ensure that there are no gaps in skills covering those functions. To the extent gaps are identified, training should be provided where the skills can be developed or recruiting should occur to fill those skill deficiencies. Each department head or manager should periodically (at least annually) re-evaluate the core competencies and related skill sets of its employees.
There are many other activities that management should undertake in its day-to-day oversight and stewardship of the company. Focusing on these four areas should go a long way toward not only strengthening your company’s current financial position, but also positioning your company to get through these challenging times. The world around us is chaotic and complex, however, this is the time to be more introspective and strengthen the things that we can control. By doing this, we raise the prospects for starting the New Year stronger and better positioned to create wealth and prosperity.
For a complimentary consultation to review the four key controls discussed above, contact me at 845-216-1203 or firstname.lastname@example.org.