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Policies & Procedures – Important Risk Management Components

When looking for financing, borrowers must demonstrate to prospective lenders that they have excellent controls in their business capable of handling business issues as, or before, they arise.

Good policies and procedures are important risk management components for your company, whethere it is large or small. When evaluating your credibility as a prospective working capital borrower, it is especially important for lenders to be able to understand and evaluate your company’s internal control procedures as they are applied to your working capital assets and liabilities..

Preventive and detective financial internal controls are generally considered to be the primary purpose of procedures. However, a more expansive list of benefits* that good procedures facilitate include:

  • Accuracy: Effective procedures provide detailed instructions for completing transactions operationally and administratively. It takes far more time to correct a transaction error than it does to complete the transaction correctly the first time. Therefore, error avoidance is an excellent reason to use procedures.
  • Efficiency: It is much easier for the accounting staff to process business transactions and issue financial statements when there is a regimented approach to dealing with each type of transaction.
  • Best Practices: When a business routinely examines its operations with the intent of creating procedures, the documentation process often brings to light questionable or inefficient practices. If brought to the attention of management, there may be an opportunity to use best practices to upgrade your company’s processes to a more efficient and effective level.
  • Computer Systems: An accounting or enterprise-wide system typically works in conjunction with a set of procedures. If there is not a consistent set of procedures surrounding the system, employees may have difficulty entering information, and may not know the sequence of events needed to process transactions through the system.
  • Controls: When it becomes evident there is a control weakness in your company, the system of procedures can be adjusted to correct the problem.
  • Handoffs: Many processes may involve handing off work to a different department. Any handoff involves a considerable risk that work will not be transferred correctly, resulting in a transaction lapse that may ultimately impact a customer. A procedure states exactly how a handoff is to be completed, and thus reduces the risk of a transaction lapse.
  • Governance: If your business has a top-down organizational structure, procedures are needed to ensure that business decisions made by management are carried out properly.
  • Roll-Out Consistency: It is vastly easier to roll out a new business concept when all of your business locations use the same set of procedures.
  • Training: Procedures can form the basis of your employee training manual to address the basic functions of your business.

Unfortunately, many small- and medium-sized businesses do not have written procedures governing the way accounting and management activities are to be carried out, or procedures exist that are no longer appropriate or are disregarded. Funding sources recognize these situations and are aware that the likelihood of mismanagement and fraudulent activity becomes significantly greater.

This is just one of the many areas that FinanSource investigates and provides guidance on as a part of its consulting activities to help its clients obtain the growth financing needed to achieve their goals and objectives. Contact Us today to help your company grow and thrive in today’s economy!

*List of benefits from Bragg, Steven M: Accounting Procedures, ed. 2, The CPE Store, Inc., 2014.

2017-05-03T14:29:48+00:00