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Outgoing Financial Controls

Outgoing Financial Control Systems manage the flow of money out of your business. Think of an automobile consuming gasoline. The more efficient the engine is, the further it will take you on a gallon of gas. Your business works the same way with money. The more efficient you are with your money, the further it will take your business.

The five basic categories of Outgoing Financial Control Systems are:

  1. Purchasing systems
  2. Cash Disbursements systems
  3. Accounts Payable systems
  4. Inventory systems
  5. Payroll systems

Purchasing Systems

Every business needs to make purchases. You may need a new vehicle, the services of a lawyer, or raw materials to manufacture your products. Whatever the case, you need these things to run your business. Unfortunately, the money available to purchase them is not limitless. For this reason it's important to conserve your money whenever possible, spending it only when you need to, and doing so as efficiently as possible.

This may seem like a rather obvious statement, but it's surprising how many business owners permit their daily needs to dictate this process, taking a reactive approach rather than a proactive approach to spending their money. Some money may need to be made available to take advantage of opportunities that suddenly arise, but even this money needs to come from someplace.

To apply a system to your purchasing activities, begin by identifying your ongoing purchasing demands for each of the following four categories.

  1. Fixed Assets (major purchases, such as equipment and vehicles).

  1. Support Services (external support, such as Internet or cell phone service).

  1. Raw Materials and Inventory (these become the products and services that you sell).

  1. Office Supplies (consumable purchases, such as stationery and coffee).

Do individuals other than you make purchasing decisions concerning any of the above? If so, do they have the authority to spend the company's money? If not, why not?

If so, they should follow specific guidelines or work within specific parameters. For example, they may purchase specific products for specific reasons up to a maximum dollar amount. Identify these guidelines for your business below.

Purchase Order Form

A key source document for your purchasing system is the “P.O.” form. This is where you record your purchases before they arrive. When an invoice or a box of supplies arrives, you can then check them against the purchase order to find out if they are valid. By limiting the number of people who can write-up purchase orders and by defining parameters for their use, you can keep the process from getting out of hand.

For example, you may choose to give your maintenance manager the authority to write up purchase orders for parts and equipment to a maximum of $1,000 per month. Anything over this would require the approval of the general manager. Purchase orders should include space for a signature and should be sequentially numbered. If your accounting system is computerized, you could build these types of restrictions in automatically.

If you already use one, review its effectiveness. If you don't use one, create one.

Cash Disbursement System

It's not usually a good idea for a business to spend cash. There is greater risk of error or fraud with cash than there is with cheques or credit cards because cash is more difficult to trace. Use a cheque drawn on a “business only” account whenever possible and never mix your personal spending with your business spending. This will allow you to more easily track your expenses whenever the need arises.

Following are some points to consider when designing or updating these systems.

  1. Establish a petty cash fund to handle small, one-time purchases.
  2. All other disbursements should be made by cheque.
  3. For security reasons, the person who prepares the company cheques should not have signing authority (unless it is you).
  4. Two signatures are better than one.
  5. An invoice (or at least a receipt) should support all cheques.
  6. All invoices should be dated and marked “PAID” as soon as the cheque is written.
  7. All spoiled cheques should be marked “VOID” and held on file.
  8. Your financial records should be reconciled regularly with your bank accounts (at least monthly) to make sure they match.

Identify the policies and system procedures you will follow when spending cash in the space below. You will use this information when designing your Cash Disbursements System.

Petty Cash

The one exception to the “never pay with cash rule” is your “petty cash” fund. If it is important for your business to make small purchases with cash, make sure that you have a foolproof system for controlling that cash. Following are some points to consider when designing your petty cash system. Only one person should be responsible for handing out the cash.

  1. The total amount of cash plus receipts must remain constant.
  2. All receipts should be marked “PAID” to avoid any confusion.
  3. Document each outlay of cash on a petty cash voucher.
  4. Never hand out cash without replacing it with a receipt or a dated and signed IOU along with the purpose for the expenditure.
  5. Set some clear guidelines around its use. Petty cash should only be available to specific people for specific purposes. Outline these rules in your system.

Accounts Payable Systems

Do you pay your bills when you receive them or when they come due? Paying them immediately builds goodwill between you and your suppliers, but waiting until they come due takes advantage of a few extra days of interest, plus it provides you with short-term cash reserves for emergencies, etc.

  1. If there are discounts for early payment, do you regularly take advantage of this opportunity for savings?

  1. If times were tight and you couldn't pay all of your bills on time, what would you do? Who would you pay first? Who would you pay last?

While this is an unlikely situation, especially if your business is properly organized, unforeseeable emergencies can occur. Take comfort, however, in knowing that an organized, systemized business will weather a much greater storm for a much longer period of time.

  1. When an invoice arrives, who checks to make sure it is accurate and/or legitimate? Invoices can have mistakes and should be checked over before they are paid. Also, con artists occasionally send false bills to businesses hoping that they will be paid unwittingly. By having someone confirm and sign for every invoice, your system can “red flag” any unclear or inaccurate invoices you receive. When you have the opportunity to save even a small amount of money, unless it involves questionable ethics, do it. Wasted money is wasted potential.

Accounts Payable Aging Report

An excellent tool for monitoring your payables is an Accounts Payable Aging Report. It will keep you informed of any invoices coming due or past due. If you use a computerized accounting system, and if you keep it up to date, you likely have access to this report already. If not, you can have your bookkeeper generate one on a monthly basis. Most accounting software will offer Accounts Payable aging reports along with many others.

Inventory Control System

When we talk about inventory here, we're not simply talking about the products and/or services you sell. We're referring to all of the physical assets owned by your business. With this in mind, there are three basic types of inventory you'll need to consider.

  1. Supplies — These are consumable and “small ticket” assets, such as office or cleaning supplies.

  2. Materials — These are raw materials, work in progress, and finished goods.

  3. Fixed Assets — These are major physical assets, such as automobiles and land.

At first it may seem strange to be discussing inventory controls in Finance, but if you think about it, your inventory has a direct effect on your profits, on your cash flow, and on the value of your business in general. If your inventory is excessively large, for example, you are not only tying up cash, you may be spending money on storage space that could be better utilized for production or possibly even sub-let for additional income. On the other hand, if your inventory is too small, you may not be able to fulfill a large order in a timely manner.

The mechanics of inventory control will be discussed in “Operations,” but we'll discuss its impact on your finances here.

For accounting as well as financial management purposes, you need to be aware of what you own and what it is worth. If you don’t already do this, start to record your current inventory of supplies, materials and fixed assets.

Payroll System

Paycheques are typically one of the largest and most critical expenses a business has on a regular basis. Employees expect to be paid accurately and on time, whether you have the money or not. Errors here can easily create tension between employees and management, so the process deserves special attention.

How do/will you track employee hours? Do you use time cards, punch cards, or some other method?

How do/will you verify the accuracy of your employees' hours?

Who calculates the paycheques? If you offer medical, dental, or other benefits these should be calculated as well.

Who prepares the paycheques? This will often be the same person who calculates the paycheques.

Who signs the paycheques? Unless this is you, it shouldn't be the same person who calculates and prepares the paycheques. An alternative to signing paycheques is to directly deposit the money in your employees' bank accounts (ask your financial institution what payroll services they offer). If you do this, be sure to safeguard the process against abuse.

How do/will you verify the accuracy of the paycheques before they are sent to your employees?

Much of this can be outsourced to a payroll company, to your financial institution, to a bookkeeping service or to an accounting service. If you choose to do your own payroll, your accounting software will likely make the calculations for you as well.

Organize any Outgoing Financial Control subsystems not addressed for your business.

In this chapter you should have designed, shared, and made a plan to review your:

  • Organizational Chart (updated).
  • Sales Receipts System.
  • Cash Receipts System.
  • Accounts Receivable System.
  • Credit Management System.
  • Credit Denial Letter.
  • Designed your Collections System.
  • Purchasing System.
  • Purchase Order System.
  • Cash Disbursements System.
  • Petty Cash System.
  • Accounts Payable System.
  • Inventory Control System.
  • Payroll and Benefits System.