Another great week has slipped by. This is a new opportunity for our weekly posts and consideration of some pertinent enterprise or business management issues. I candidly do hope that our weekly posts are adding value to practicing entrepreneurs, budding entrepreneurs, entrepreneurship scholars and all other stakeholders.
Now, let us consider ‘internal controls’ today. This is a common phrase in enterprise management, and of course many people know what it is and what it entails. However, some do not. For this reason, I will start by defining internal controls briefly. Internal controls are simply all those rules, limitations, guidelines (generally called controls), whether physically, financially, administrative etc that an enterprise puts in place in order to meet business objectives, ensure effective and efficient business operation, protect business resources, and ensure that staffs adhere to business policies and guidelines. Very easy, isn’t it? Again, as I sometimes say, you can go academic with these definitions – but please let us agree not to confuse people anyhow. For goodness sake, not everybody understands and likes complex business lingo. Isn’t this true?
As an example, you might decide that payments above Euros 1,000 (you can pardon me if you don’t like the EU) must be approved by the MD/CEO before cash is disbursed. By the way, the limits also depend on the size of business or enterprise we are talking about. The above limit might be just petty cash in your business, and you might only consider Euros 10,000 and above as an MD/CEO. This is an example of a financial control. I certainly don’t think you have time to approve even purchase of biscuits or tea packs for office use. But if you like it as an MD – you can go ahead. No comments! You might again decide that no staff accesses the office beyond normal working hours – and this is an example of an administrative control.
You might decide to have a reception for your business, where all business matters are first logged before being forwarded to different respective officers. This makes a lot of sense, don’t you think so? It creates some sense of order and this should improve effectiveness and efficiency of the business. You can just imagine a situation where each one of your 40+ staffs get business and proceed to organize execution without control. In fact, the name of your business might easily change to Chaos Ltd – because there can be so much confusion that the business simply becomes disaster. I think those are enough examples. Now you should be able to enumerate some controls for your enterprise – in the areas of finance, administration, marketing etc. Right?
Back to what I want to consider in this article now. What are the key issues an entrepreneur must know and consider regarding internal controls in the business? You might have your points – but allow me to say the following.
- You should appreciate internal controls, understand them and implement them wisely in the positive interest of your enterprise. I have sometimes met entrepreneurs who place no care on controls completely, only to surface before a business adviser or consultant after they have taken a hit (read loss). And a big one for that matter. Controls might not be aimed at getting thieving employees red-handed, but they do protect business resources in various ways. Imagine a situation where you handle hard cash in hundreds of millions (I leave you to guess some currencies that make sense here), and one staff just decides to disappear with the cash. Possibly you might remember that cheques are useful. Don’t you think so? Or alternatively a manager that signs a contract worth USD 2m without proper costing and evaluation – and you realise that you are losing USD 1m in that deal. Mr. Entrepreneur, try and be smart! Do you agree with me?
- The benefits of internal controls are countless. There are literally hundreds of benefits of well-planned and implemented internal controls. Though the aims are narrowed down to principally four issues, namely protection of business resources; ensuring compliance to enterprise policies and guidelines; ensuring efficient and effective business operation; and meeting enterprise goals and objectives, these various areas have numerous benefits that accrue from controls. I simply can’t enumerate them all. Some piece of wisdom here, find time and take a look at the big businesses today that operate globally. For sure they have controls and controls. They might be annoying and irritating sometimes, for example having a problem that needs resolution in Kenya and you are referred to one call center in whichever distant part of the world, possibly Asia. Sometimes these controls become so hopelessly complex that the business suffers very much. Ever heard about the elephant and the flea story in business? If not you better get access and make your own assessment. Nevertheless, these controls make those business giants what they are.
- The disadvantages of wrongly implemented controls. By the way, there are people and enterprises that oftentimes wrongly understand and implement controls, and eventually controls become detrimental and destructive to their business. A very simple example is this, where you dictate that no vehicle must leave company premises without the Controller approving, even a medical or security emergency might be hindered by this rule because everybody operates like a robot in the enterprise, and no one wants to challenge the authorities that be. Can you guess the possible results of mismanaging such emergencies? Wrong procurement controls might result in wrong procurement and waste of time and money. Complex staff recruitment controls may make the process take ages while critical functional gaps exist due to abrupt staff exits. Now, I leave this to you.
- The business environment should encourage operation of internal controls. Are you an entrepreneur who implements controls that technically cannot operate in the business environment in which you are? Do you insist that all cheques must be signed by yourself when you know that you are routinely mobile and not easily accessible? Do you want imports to be completed in three weeks in a remote part of the world where import transactions take ages to close? Are you going to blame your staffs for not obeying the rules? Can’t you think and make better use of your controls? Is your enterprise environment encouraging to operation of internal controls?
- Look beyond the controls. For a word of caution, you need to look beyond the controls – I’m not saying override them at will – and consider other bigger enterprise operational issues that might suffer setbacks by your controls. There is much more to a business than internal controls anyway, and if you have been practicing business for some years I guess you will agree with me on this one. Sometimes controls are expressed in absolute numbers but the enterprise, the market you are in, the demand you are meeting etc focuses on value addition and customer delight –not just your numbers you always brag about. Do you understand what I mean?
- Periodically review and modify your control guidelines. You should also be aware that keeping the same controls indefinitely without reconsideration and modification, is like putting on the same pair of shoes even when you are growing daily? I wonder whether you have ever had that experience of trying to put on undersized shoes – whether in a real genuine situation or just out of curiosity and possibly for fun. Mr. Entrepreneur, never get so static and live in the past! Even under normal business growth, internal controls need review say every two to three years. For fast growing enterprises you might need to do this more frequently, otherwise you go the way of dinosaurs. Don’t blame your business failure on internal controls, or rain complaints to your staffs because things have gone wrong as your enterprise is using stone-age controls not befitting modern and dynamic business. OK?
Candidly, this has been a long one today – and I do hope you were not about to run away from the article due to its length. Thanks a great deal for your time and patience.
With all goodwill – and best wishes,
The Wise Entrepreneur