Benefits necessitate costs. Costs should not exceed the benefits. These postulates hold in all organizations’ decision making processes relative to investing in internal controls.
The dramatic increase in the number of businesses has heightened the pleasure and pressure in the business arena. It has put businesses in a state of reconditioning and competition. The only way to get ahead is to be relevant in terms of internal controls. Needless to say, whether the business has thousands, millions, or billions of capital, it has to armor itself with the most effective and efficient internal controls.
In light of the above, I would like to focus on the need for small businesses to invest in internal controls, and the reasons they hesitate to do so.
Small businesses should invest in internal controls.
In small businesses, a few people work on tasks. They do not have enough resources to accommodate more employees. As a result, that person entrusted with the bulk of functions can freely and easily commit mistakes and fraud. Though we respect human dignity, problems inevitably arise when one person handles multiple functions.
The above can be observed when one recording transactions is also the one holding and depositing cash. That person might record transactions inaccurately or incorrectly. The sadder truth is nobody gets to notice such. Intentional or not, being alone makes a greater space for mistakes and fraud.
The same scenario can also transpire if the one who orders the goods receives the goods. That person can falsely or erroneously prepare reports on cash and inventory. These situations demand the role of segregation of duties as a significant internal control procedure.
Systems, programs, facilities, and equipment are also significant elements of internal control. Small businesses think they can get by with simple machines and programs. Like large businesses, small ones are susceptible to losses, theft, and fraud due to weak systems, programs, and facilities. In short, small companies should gear towards investing in internal controls necessary for their protection and growth.
To recapitulate, small businesses are susceptible to losses due to fraudulent transactions and mistakes. They should invest in people, systems, programs, facilities, and equipment to safeguard their assets and realize maximum wealth.
Small businesses do not invest in internal controls. This is the reality.
On a practical note, the status of businesses should be carefully assessed before investing in internal controls. Considering limited funds, small businesses may not be crisply enticed by physical systems, facilities, and equipment, and a big number of employees. Rather, they focus on using their meager funds for their physical operations.
Cost-benefit analysis is another hindrance. A strong internal control demands a high cost. For small businesses, it would be very inefficient to invest in internal control, as the return or benefit may not be enough to pay for the cost.
In essence, small businesses are into liquidity. They are in a stage of development where they need to trust a few individuals and controls to cut back on costs.
Indeed, the fierce competition calls for strong internal controls at every stage, especially in the growth stage. On the contrary, small businesses are young in terms of funds, so they can only capitalize on very few employees and controls. In conclusion, small businesses should invest in internal controls after a stringent cost-benefit analysis.