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Minimizing Exposure to Fraud – Part 2: Cash Receipts and Internal Controls

Small businesses and nonprofit organizations may have more exposure to fraud since they often do not have the resources or systems available for fraud prevention. The following recommendations can help organizations minimize exposure:

Cash Receipts Controls

  • Reconcile Point-Of-Sale Systems on a daily (or per shift) basis.
  • A cash deposit should be made for each closing to simplify the tracking of this cash.
  • Monitor the cash over/short account for variances between the cash deposit per the POS system and the actual deposit.
  • Review voids and coupons entered into the system.
  • Implement a policy of providing receipts for all cash purchases.
  • This will minimize the opportunity for employees to siphon funds from a cash business.
  • Monitor POS reports for cash refunds or credits.
  • Consider using a bank “lock box” if you receive a high volume of checks.
  • Checks are mailed directly to the bank for deposit.
  • Review receivables and pay attention to adjustments or credits that could indicate subverted payments.
  • Adhere to a numerical sequence for checks and also for invoices, cash receipts, purchase orders or other documentation.
  • Follow up on missing documents.

Employee Reimbursements

  • Eliminate petty cash accounts or keep petty cash balances to a minimum.
  • If petty cash accounts are used, perform frequent reconciliations of cash and receipts.
  • Do not provide employees with company credit/debit cards.
  • Employees should use personal credit cards for business expenses and be reimbursed for valid expense receipts.
  • Employees who use company credit cards are less likely to submit timely expense reports.
  • If reimbursement is needed sooner – Issue cash advances with a signed cash advance agreement that allows the employer to deduct the advance amount from the employee’s paycheck if receipts are not provided.

Separation of Duties

  • Make sure that appropriately authorized personnel are responsible for reviewing and approving all supporting documentation related to disbursements.
  • Make sure that the person responsible for reconciling bank accounts is not a check signer or preparer of deposits.

Employment Screening and Orientation

  • Thoroughly screen individuals and perform criminal background and credit checks before hiring.
  • Be wary of recruits who have falsified information about employment history or have poor credit.
  • Provide training to new and existing employees.
  • Make employees aware of internal control policies and let them see that the control processes are carried out consistently.
  • Perception of strong controls can be a deterrent.
  • Provide employees with an anonymous way to report fraud.
    Report acts of fraud to the appropriate law enforcement agencies.
  • Help ensure that other organizations do not hire people who have a history of fraud in positions where they have an opportunity to become repeat offenders.

Internal Audits & Financial Reviews

  • Perform internal audits on a periodic basis.
  • Having management staff or board members conduct a detailed analysis of bank account activity for a random period of time may uncover acts of fraud, but most importantly it sends a message to staff that procedures are in place to catch those who misappropriate funds.
  • Although cancelled checks may not be returned with bank statements, images of cleared checks can usually be viewed via the bank’s website and should be reviewed in order to identify inappropriate payees.
  • Reports can be provided in printed or PDF format in order to facilitate the review of this information.
  • Online access to check images, along with a PDF report of checks recorded in QuickBooks, make it possible for management and/or board members to review this information from anywhere.
  • Prepare budgets and review actual activity compared to budget for unusual variances.
  • Take action on reports of internal control weaknesses that may be provided by your auditors. Determine if there are ways that the organization can help reduce or eliminate these weaknesses.

Preparing for an Audit

Definition: An audit is an examination of an organization’s financial statements by an independent certified public accountant (CPA).

Who’s Required To Have An Audit: Nonprofits audit requirements vary by state. For example, Nonprofits with charitable contributions greater than $300,000 are required to submit audited financial statements to the Pennsylvania Bureau of Charitable Organizations within 135 days after the end of their fiscal year.

Preparation: To be well prepared for an audit, you should:

  1. Review the auditor’s prior year recommendations to ensure any significant weaknesses have been addressed. Also review the auditor’s prior year adjusting entries to see if any corresponding adjusting entries need to be made for the current year.
  2. Ask your auditors for a list of reports and documents they’ll need for the audit, which will probably require you to assemble:

    • Trial Balance and/or General Ledger Bank confirmation requests
    • Bank statements and reconciliations
    • Reconciliation of activity in balance sheet (and sometimes income statement) accounts
    • Board meeting minutes
    • Updates to internal control procedures
    • Grant acceptance letters
    • New contracts and leases
    • Bills for fixed asset additions
    • Lists of vendor bills and customer invoices (including outstanding A/P and A/R) to enable the auditor to select items for review or confirmation
    • Reports of transactions subsequent to year end up until the audit report date
    • Bank statements and reconciliations subsequent to year end up until the audit report date
    • Draft financial statements, footnote disclosures, and/or Statement of Functional Expenses
  3. Be prepared to discuss:

    • Changes in governance, management, ownership, and personnel
    • Changes in operations and technology
      Economic/industry developments and their impact on your operations
    • Estimates used in the financial statements, such as allowance for uncollectible accounts
    • Significant variances versus budget and prior year Non-compliance with credit agreement covenants

Regulatory or legal actions Independence: To maintain independence, your auditor is not allowed to prepare these documents. If your organization is unable to prepare the documents internally, then it may be prudent to hire outside an accountant (like Bookminders) to assist in the audit preparation.

Inventory Tracking Can Be Simple

Managers often assume that they should maintain a “perpetual inventory system” to track inventory. That is not always necessary.

Certain small businesses do need detailed inventory tracking:

  1. Manufacturers need detailed cost accounting by product, shop floor production tracking, and accurate inventory counts.
  2. Retailers and Distributors need accurate inventory counts and good forecasting systems for precise ordering.

But, for most small businesses, the costs of maintaining a detailed inventory tracking system outweigh the benefits. This is especially true if:

  1. There are few items in inventory that can easily be reviewed periodically.
  2. The value of the inventory is low which does not justify the expense.

Maintaining a detailed inventory tracking system is labor intensive. It usually requires a full-time staff to track purchasing, receiving, production, sales and shipping.

To be useful, the system should be maintained on a real-time basis with up-to-the-minute information. If the inventory system is not up-to-date, then ordering is skewed and shortages and overstocks occur.

For companies whose inventory requirements are simple Bookminders suggests one of two simple methods to track inventory:

  1. Track all purchases as cost of goods sold and make a periodic entry to adjust to the actual inventory.
  2. Track all purchases as inventory and make a periodic entry to adjust to the actual inventory.

Inventory can be managed by physical controls, such as inventory tags and management oversight. Periodic physical inventory counts (monthly, quarterly, or annually) are always necessary.

Do you need a budget?

Does your organization really need to prepare a budget? Yes, it does. Although it seems like a lot of work, a budget is an indispensable tool for converting your plans into a successful reality.

What is a budget? A budget is a forecast of expected income and expenses. It is organized in the same format as a financial statement and most commonly covers a 12-month period.

Why create a budget?

  1. Monitor performance—A budget is a yardstick to measure how your organization is performing.
  2. Cash management—A budget helps you determine how much cash you will have, how you will use it, and whether you have enough cash to achieve your financial goals.
  3. Prevent problems—A budget allows you to forsee problems and alter your plans to prevent those problems. Problems are far less costly to fix on paper than with actual dollars.
  4. Revenue forecasting—A budget forces you to think through how you will bring in revenue and what it will cost to generate that revenue.
  5. Expense management—A budget requires you to itemize your expenses and understand your real cost of doing business, which helps you make sound choices on expenditures.
  6. Securing financing—A budget (and a business plan) will be needed for banks and other lenders to give you a loan.
  7. Capital spending—A budget will help you understand whether or not you can afford to invest in new equipment or other assets.

How do I create a budget?

  1. Revisit previous budgets—If you have created a budget in the past, use it as a model and adjust the numbers as needed. If your organization is a new venture and has no past financial records, rely on your own experience and knowledge of the industry to estimate revenues and expenses.
  2. Review past history—You can export your Profit and Loss statements from QuickBooks to Excel to use as a starting point for the budget.
  3. Use a spreadsheet—A spreadsheet (like Excel) is the easiest way to prepare a budget and it can be imported into QuickBooks when it’s finished.
  4. Budget monthly—You can make a budget using any time intervals (weekly, monthly, quarterly, annual), but it’s usual to create a monthly budget so you can compare the actual results to the budget each month.
  5. Revenues—Revenues are the cornerstone of a budget. It’s crucial to estimate revenues as accurately as possible, based on past history.
  6. Fixed Costs—Some costs, such as rent and loan payments, are fixed (they don’t fluctuate regardless of revenue). Find your fixed costs from the pertinent loan, lease or other documents.
  7. Variable Costs—Some costs, like utilities and supplies, are variable (they fluctuate with the level of activity). Estimate the variable costs by adjusting past expenses for the forecasted changes in activity.
  8. Semi-variable costs—Costs such as salaries, wages and telephone expenses, have both variable and fixed components. For budgeting purposes, you may need to break semi-variable costs into two components. The fixed element represents the minimum cost of supplying your good or service. The variable element is that portion of the cost influenced by changes in activity.
  9. Personnel costs—Be sure to match the level of staff to the anticipated changes in revenues.
  10. The master budget—For organizations with several departments or work functions, the annual budget may be a master budget comprised of several separate but interconnected budgets.

Tips & Hints

  1. Start Early—The budget should be approved at least 1-2 months prior to the start of the new fiscal year. For this to happen, planning will need to start 3-6 months before the new fiscal year.
  2. Keep it simple—There is no need to list your expenses in great detail—accounting for supplies and utilities should be sufficient, without breaking it down into paper clips and light bulbs.
  3. Set Goals—Everything about the budget should point towards the strategic plan the organization has adopted.
  4. Be conservative—To be safe when budgeting, many organizations overestimate expenses and underestimate revenue, which builds in a margin for error.
  5.  Budget a cash reserve—Consider setting aside a cash reserve. Even though your budget will be tight, you will be glad you did this if there is a sudden economic downturn or a big unexpected expense.
  6. Show restraint but not rigidity—Your budget should help restrain you from unnecessary spending. But, if an opportunity arises, don’t ignore it because it isn’t in your budget. There are times to “bust” your budget to take advantage of valuable opportunities.
  7. Review your results every month—Too many organizations make up a budget every year and then stick it in a drawer and forget about it. Budgets only help your organization if you use them. Look over your actual results versus budget every month.
  8. Question expenses—Once you have all of your expenses detailed in your budget, reevaluate each one and look for ways to save.
  9. Watch your cash flow—Cash flow problems kill many small organizations. Watch your cash flow monthly to be sure you maintain sufficient cash.

Payroll Services

You might be tempted to try to save money by processing your payroll in-house with software like QuickBooks Online Payroll. But, Bookminders always recommends that our clients outsource their payroll to a payroll service because there are significant risks to processing your own payroll. If you do your own payroll, you’ll be responsible for:

  1. Fixing your own problems.
  2. Fees and penalties if you file late or make mistakes.
  3. Calculating local taxes.
  4. Printing your reports.
  5. Purchasing regular updates of the tax tables.

The bottom line is that using a payroll service is usually less expensive in the long run for a small organization. A payroll service:

  1. 1. Provides telephone access to a local payroll representative who can fix problems.
  2. Guarantees on-time filing of payroll tax returns, which indemnifies you from late fees and penalties.
  3. Provides complete reports in a form that can be easily entered into your bookkeeping system.
  4. Makes sure you are in compliance with changing tax rules and government regulations.
  5. Provides other convenient services like direct deposit, 1099 preparation, pay-as-you-go worker’s compensation insurance, HR services, benefits administration and time tracking systems.

Even if you have only one or two employees, you should probably use a payroll service. Ask yourself, “is it worth my time to learn all the things I need to know about payroll taxes just to run a 2 person payroll?”

QuickBooks Online Banking

If you have a lot of banking transactions, QuickBooks online banking can be a money and time saver. With QuickBooks Online Banking you will get:

  • More up-to-date bank account balances—Transactions can be posted to QuickBooks before paperwork is received for processing. This can be beneficial if you have a high volume of EFT transactions, credit card/merchant service deposits or other deposits. This is particularly useful for retail or restaurant businesses.
  • Faster month-end reporting—QB transactions can be electronically matched to those cleared at the bank, so you don’t need to need to wait for a bank statement before preparing board reports or other month-end reports.
  • Error detection—Bank errors can be identified sooner and can often be resolved before the bank statement is received.

If your bank participates with QB Online Banking services, they may offer one or both of the following interfaces. Both services are equally effective, but if you have a choice, Direct Connect is the more efficient service.

  • Direct Connect—connects to the bank and downloads bank account information directly into QuickBooks.
  • Web Connect—requires log in to your bank’s website to download activity and import into QuickBooks.

To determine whether your financial institution supports QB Online Banking, go to web.intuit.com/fisearchbasic.

To initiate QB Online Banking services, contact your bank to complete an enrollment application. You may be able to enroll online, by phone, or at a local branch. Usually your application information must match the master account information on file at the bank, so you may want to ask a bank representative to help you complete the application.

Be sure to sign up for the online banking service that has a direct interface with QuickBooks. Some banks offer other services that will let you download and import transactions, but these services do not save as much time.

If someone other than the business owner is accessing the QB Online Banking service, they should not be provided with access to the ability to pay bills, transfer funds to accounts outside of your organization, or generate any type of banking transactions from your account. If possible, obtain a username and password for yourself and a separate (limited access/read-only/download-only) username and password for your bookkeeper.

Financial Record Security

You might think that your small organization is not a target for malicious hackers. But, a Hai survey by the Small Business Technology Institute reported that more than half of all small businesses wholesale NFL jerseys in the U.S. experienced a security breach in the past year. Here are the steps you should take to provide basic security for your financial records.

  1. Protect Your Systems—Equip all PCs and servers with a) an un-interruptible power supply to prevent corruption of data, b) virus detection software, adware/spyware detection and cheap MLB jerseys removal Food tools, and c) a firewall on all computers that connect to the Internet.
  2. Create Backups—Make regular backup copies of all your important 2016 data. Store a copy away from your office.
  3. Use Effective Passwords—Encourage non-obvious passwords and change them every three months. Use password protection for folders and files containing accounting information.
  4. Keep Software Up To Date—Without updates, your anti-virus, anti-spyware and firewall software will not wholesale jerseys protect you against new cyber threats.
  5. Lock Your Records—Lock file cabinets and access to computers that contain financial information. Block all unauthorized access to the QuickBooks data file.
  6. Be Prepared For Emergencies—Create a contingency plan for your organization so you can recover if you experience an emergency. Test your plan annually.
  7. Use A Payroll Service—Use a payroll service and keep employee names and detailed payroll information separate from the accounting system.
  8. Audit Trail—Make sure that your accounting software’s audit trail is turned on, allowing unauthorized cheap NFL jerseys changes in data to be investigated.
  9. Computer Checks—Generate bill payment checks directly from the accounting system to reduce dance the risk of check alteration and duplicate bill payment.
  10.  Educate Your Staff About Security—Develop a “culture of security” in your employees and in Launches your business. You might think that your small organization is not a target for malicious hackers.

Bookminders Launches Licensing Program

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We are committed to our mission of delivering premium outsourced bookkeeping services while offering flexible employment to cheap mlb jerseys those in the accounting profession. For more information please contact Tom Joseph at tsjoseph@bookminders.com 877-517-2665 ext 222.