Internal Controls for a Small Business: The Basics

Separate duties where you can

The basic principle is that no single person should handle a transaction from start to finish. The person who orders goods should not be the only one to receive them, approve the bill and release payment. The person who collects cash should not be the only one to record it.

In a team of six, perfect separation may not be possible. Do what you can: have someone different open the post, record receipts and deposit cash, or have the owner personally review the bank statement. Where separation is impossible, add a review step by someone else.

Put limits and approvals on spending

Decide who can spend how much, on what, without asking. Write the limits down: for example, the store manager may approve routine purchases up to an amount you set; anything above needs the owner's sign-off; any new vendor needs a second person to confirm the details.

Use purchase orders or at least a simple written request for non-routine buying, and match the invoice to what was ordered and what was received before payment. Changes to supplier bank details are a common route for fraud, so confirm such changes by calling a known number, not a number on the new letter.

• Written spending limits by role
• Purchase request before significant buying
• Three-way match: order, receipt, invoice
• Call-back check for any change in supplier bank details

Handle cash and bank accounts carefully

Count cash at the end of each day with two people where possible, record the figure and bank it promptly. Keep petty cash on a fixed float with vouchers for every payment and top it up only against those vouchers.

Reconcile bank statements to your books every month, or weekly if volumes are high, and have someone other than the person who keeps the books look at the reconciliation. Limit who can initiate payments online, and consider requiring two approvals for large transfers.

Protect stock and assets

If you hold inventory, count it regularly, including surprise counts of a few high-value items. Compare the physical count with records and investigate differences. Keep storage areas limited to people who need access and keep a log of movements.

Record fixed assets such as machines and vehicles in a list with location and responsible person, and check them at least once a year. A shortage found early is a small problem; found after three years it is a dispute.

Review the numbers, and know the warning signs

Look at a short monthly report: sales, expenses, cash, receivables, payables and stock, compared with the previous month and the same month last year. Unexplained changes deserve a question. Ask for the explanation yourself instead of delegating the curiosity.

Be alert to warning signs: someone who never takes leave, reluctance to share records, round-figure expenses, missing documents or a lifestyle that does not match income. These do not prove wrongdoing, but they justify a closer look. Encourage staff to raise concerns safely, and take advice from a professional before acting on a suspicion.