Why you need tight internal controls

August 24, 2016 -  By

Strong internal controls help ensure accuracy and safeguard assets. The following are basic controls all landscape company owners should implement to protect their businesses and facilitate profitable growth.

Prepare policies, procedures

A policy and procedure document should be distributed to any employee that has access to company assets and systems and/or authority to bind the company to a legal agreement. At a minimum document the following policies: cash disbursements; attendance and vacation; travel, meals, entertainment and/or other expense reimbursements; use of company vehicles or other equipment, including personal use; guidelines to purchasing on behalf of the company; and petty cash.

Separate duties

Have several people complete various steps in a transaction chain. This can reduce mistakes, and it makes employee theft more difficult.

That said, you might not have the resources to employ more than one person to work in a particular area. In this case, you, as the owner, should participate in a couple of the steps to ensure compliance. Here are a few items that should be split up:

  • Separate posting receipts and deposits from record-keeping functions, such as recording transactions and reconciling accounts.
  • When handling cash, make sure the crew members prepare a daily cash log, the A/R person posts the cash to customer accounts and prepares a deposit slip. A third person should compare the log and the deposit slip and make the deposit.
  • Make sure the person who sets up the payroll rates and other payroll information is different from the one calling in (reporting to payroll company) the payroll each period.
  • Require a supervisor to approve time sheets before preparing payroll.
  • Separate the purchasing function from the payable function.
  • Make sure the same person who writes checks is different from the person who signs checks.
  • Require accounting department employees to take vacations.

Perform monthly reconciliations

All bank, merchant and credit card statements should be reconciled, preferably not by the person who’s in charge of recording receipts or expenditures. The process should, at a minimum, include:

  • Compare all transactions reported by the bank or credit card company to those recorded in the general ledger, and identify any discrepancies. When there is a discrepancy, determine if it was only an oversight.
  • Examine canceled checks, wire advice and ACH transactions to make sure vendors are recognized and endorsements are proper.
  • Account for any check numbers that are not in sequence.
  • Reconcile and prove petty cash.

Protect inventory

Knowing the proper amount of inventory to purchase is as simple as establishing reorder quantities. Those quantities are usually predicated on ordering every week or month. When the quantity of an item falls below the required amount to have on hand, a purchase order is created to restore the quantity to the amount required.

To get the information on quantities and reorder amounts, you can use an inventory module in your accounting system or physically count the inventory. If you use a computer module, I recommend you do periodic physical counts to compare with the quantities your computer system reports. Differences will be related to either improper record keeping or shrinkage.

It’s vital to put physical safeguards in place for inventory, including documenting all purchases and creating logs detailing materials given to crews. Tally these monthly. Your inventory should be protected by lock and key with only authorized people having access. Video cameras also help keep all parties honest and document any break-ins if they happen.

If the controls are tight, end-of-month inventory should be easily calculated by the following formula:

Beginning Inventory
+/- Purchases/Returns
– Amounts given to technicians/crews
= Ending Inventory

This ending inventory should agree with the physical count. In addition, make sure the material usage is in line with the norms of cost of goods sold. If it’s is too high, investigate it. There may be either training issues relating to proper applications or, perhaps, something sinister.

Photo: ©istock.com/Olivier Le Moal

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About the Author:

Gordon is a New Jersey-based CPA and owner of Turfbooks, an accounting firm that caters to land care professionals throughout the U.S. Reach him at dan@turfbooks.com.

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