Introduction
In order for a company or organisation to protect their assets and ensure the profitability of its financial records, it is important that all of the protocol and methods are kept up to standard on all internal controls. For any company that desires confidence in customers and shareholders, it is necessary to review the requirements of internal controls every couple of months to ensure that the company is reaching their full potential and if not, what they can do to improve. Recent accounting data from a wholesaling business known as Super-Saver, has necessitated the need for strong internal control variations. As of late, the owner of the business, Peter Parker has given customers the option to pay by credit. So far, he has been pleased with them repaying their debts inside 60 days, however this has taken a turn for the worse and needs reviewing and modifications. Additionally, inventories must be assessed to implement further productive methods for stocktakes and purchases, as well as calculating how many perishable and non-perishable goods should be ordered.
Benefits of Internal Controls
Internal controls are used in businesses to reduce the chance of fraud, theft, alarming errors and unanticipated losses. These controls allow people to identify issues before they get out of hand and can reduce the likelihood of failure. One of many benefits of internal control include being able to prevent fraud. To ensure a business safeguards cash movement, the separation of duties (SOD) is necessary in order to protect assets and revenue by ensuring there are at least three individuals involved in every transaction so no one has the opportunity to take advantage of the company. The reason why three individuals are necessary is because without proper monitoring, two employees can still collude to commit fraud against the business (Aucoin, 2015).
Limitations
Regardless of the many benefits of internal controls, there are limitations that will accompany them. Whilst the future return of internal controls will outweigh the negative, the initial outlay may affect the business cash flow by having to undergo expenses. The procedure of reviewing and changing internal controls can be time consuming in the short-term, but worth the time in the long run.
Accounts receivable
To gain a competitive advantage in the market, some businesses begin to offer credit to their customers. This often allows customers to increase the amount of their spending without using all of their available cash in one transaction (Business Queensland, 2018). Depending on the nature of the business, owners may only choose to offer credit to existing customers if they have a trading history with the company. Having said that, a new terms of trade contract should be written explicitly detailing the payment terms and credit limits for the organisation. Unfortunately, the owner had a large amount of trust in his existing clients and listened to them vouch for the people they thought would be loyal customers to Super-Saver. For the past 6 months, all credit has been repaid within 60 days which has given existing customers a perfect credit history, however, new customers are failing to keep up with their financial commitments. I suggest that each new customer that requests to have a credit facility should submit a credit application with a signature agreeing to the terms and conditions and the approval to conduct a credit check. Once this has been submitted, either a current staff member or an external credit agency will be required to run credit checks on these customers to ensure they are consistent, and also to verify their payment terms if they are a 7 day, 14 day or monthly account holder. If the debtor fails to repay the company, a debt collection process will begin, commencing with a curtesy phone call informing the debtor their payments are over-due. Secondly, if they cannot be reached the first time or no action has been taken, a reminder in any written form e.g. email or letter will be sent. If a debt collector is unable to reach a customer after a phone call and written reminder, legal action will take place. Quickly escalating, a legal letter will be issued to prove a final warning before recommending litigation which will also include the possible consequences of non-payment and additional costs will be added to the current debt (Adam, 2017).
Furthermore, you as the owner should know better than to rely on your customers to tell you who you should and should not trust. Clearly, the existing customers were wrong in saying the people they had vouched for were reliable and consistent as they have been failing to repay their debts in the provided period of time. This is another internal control which should be fixed to assist them with positive cash flow. A business like this must be proactive and ensure that personal research is done to examine customers credit rating.
Inventories
Being able to supply customers with what they need and when they need it is gives a strong advantage to a business. Maintaining the control of your inventory can be challenging as they are the most common items which tend to get lost or stolen. Internal controls are essential procedures for managing inventory and accounting for revenue and expenses (Reader C, 2018). As the company’s best sellers are bottled and canned drinks, raw cooking ingredients and confectionary, it is crucial that these items are stocked at full capacity to supply consumer demand. Rather than having a recurring standing order which delivers the same amount of stock every week/fortnight/month, the usual supplier is called when stock is required, and requests the stock needed. A perpetual inventory system is a method of accounting for inventory that records the sale or purchase immediately through the use of computerised systems. Superior to the periodic inventory system, the perpetual system allows for immediate tracking of sales and inventory levels for individual items, which helps to prevent stock outs (Investopedia, 2018). In addition to the advanced technology, a physical count should be undertaken to ensure certitude. Any anomalies should be investigated.
Briefly, you mentioned that the current income is down compared to past records; although purchases are the same, the number of items in stock is the issue. Clearly there is an issue and is most likely connected to theft and shop lifting which needs to be addressed and settled immediately. Whether it be internal or external stealing, stock is missing and cash flow is at risk. Although bags are often checked on the departure of customers, it is recommended that a permanent security guard or casual employee is hired to check all bags when exiting the warehouse to ensure no stock is stolen. Additionally, I would suggest that the business should invest in security cameras to ensure that not only visiting customers but also employees are doing right by the business. Moreover, once the stock has been delivered, either the owner or one of his employees will unpack the goods, reload the shelves and store the remainder in a storeroom; these are the current stock control methods. This is where the separation of duties comes in to action. Firstly, there needs to be someone who will ensure the correct amount of stock ordered is in the boxes and then unpacked. A second person should then come and stock the shelves to ensure no internal theft has occurred.
Conclusion
As a company who strives to set the benchmark for other businesses, having effective internal controls will give you the advantage you need to succeed. In order to reduce fraud and theft, prevent unanticipated costs and avoid errors from becoming problematic in a business, internal controls will assist in these categories. The recommendations I have provided throughout the report will allow Super-Saver to become more efficient and get the most out of the money, time and hard work put into the company. Hopefully these recommendations have given you, Peter Parker further insight into the potential future of the business.