Posts Tagged ‘operational challenges’

Minimize Losses and Risks: Three Part Framework For Implementing or Strengthening Internal Controls

February 14, 2014

internal control

Internal control—it’s not the latest trend or likely to be the topic of a social media post.  It may even be one of the least interesting business principles.  Bland and uninspiring as the subject may be, it is the foundation of a well run business.  Inadequate or missing internal controls have real dollar consequences that impact the bottom line. And it’s not limited to only small companies with less manpower and resources.   Large businesses are just as vulnerable.    There are numerous examples of theft of assets due to weak or absent internal controls which can be discussed and analyzed.  But the more likely scenario resulting from deficient internal controls is that where a business is exposed to risk and losses due to errors.   What can you do to strengthen your company’s internal controls to minimize business losses?

I.                     Start With the Basics

Any discussion of internal controls begins with a definition.  We like this one from the Business Dictionary,  “Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and (6) ensure adherence to its policies and plans.”  Management is responsible for maintaining an adequate system of internal control, including communicating the expectations and duties of staff.   Staff and operating personnel are responsible for carrying out the internal control activities set forth by management.  Control activities are the specific policies and procedures management uses to achieve its objectives.  The most important control activities appear below.

1)       Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. Having different individuals perform these functions creates a system of checks and balances.

2)       Proper authorization of transactions and activities helps ensure that all company activities adhere to established guide lines unless responsible managers authorize another course of action.

3)       Adequate documents and records provide evidence that financial statements are accurate. Controls designed to ensure adequate recordkeeping include the creation of invoices and other documents that are easy to use and sufficiently informative; the use of pre-numbered, consecutive documents; and the timely preparation of documents.

4)       Physical control over assets and records helps protect the company’s assets. These control activities may include electronic or mechanical controls (such as a safe, employee ID cards, fences, cash registers, fireproof files, and locks) or computer-related controls dealing with access privileges or established backup and recovery procedures.

5)       Independent checks on performance, which are carried out by employees who did not do the work being checked, help ensure the reliability of accounting information and the efficiency of operations.

In theory these activities make sense and can be reasonably incorporated into the processes and procedures and of a business.  In reality, though, internal controls are often not strong enough to prevent errors, monetary loss, risk exposure, and potentially the integrity of financial data.  So where does the breakdown typically arise?   Number 5 — Independent Checks on Performance.  This control activity is not merely a periodic review of transactions or entries.  It has more far reaching implications which place the burden on management and supervisors to ensure their subordinates are adequately trained for their responsibilities and are performing their duties properly.  An adequate system for independent checks on performance will identify not only errors but also procedural deficiencies or staff incompetence that cause repeated mistakes or expose the company to risk.    Reviewing subordinates’ work product and processes should be done on a routine and non routine basis.  Routine activity should be reviewed when tasks and transactions are completed, as well as on a spot check basis which is not predictable.  Non routine activity encompasses such things as processing unusual transactions, hiring new staff, implementing new systems or upgrades, changing processes and procedures, or addressing new industry regulations/requirements.  Review of non routine activity should be done as situations arise or periodically if no events trigger the need.   The detection of errors and inefficiencies can lead to stronger controls when management and supervisors use the information to identify the need for improved documentation, more efficient processes, proper authorizations, and staff training.

II.                   Preventing Errors and Losses

The following checklist provides a framework for implementing or strengthening internal controls for conducting independent checks on performance.

1)      Transaction Review:  Verify supporting documentation or other information to substantiate transactions, including correspondence and communication prepared by staff, to ensure accuracy and timeliness.

ü  Transactions which are over or outside a pre-determined limit, based on value/amount, volume and dates.

ü  Activity in large customer and vendor accounts, based on value/amount, volume, and dates.

ü  Adjustments, corrections, or write offs which are over or outside a pre-determined limit, based on value/amounts, volume, and dates.

ü  Reconciliations of accounts or balances for reconciling items which are over a pre-determined limit.

ü  Handling and disposition of unusual transactions.

2)      Workflow Review:  Conduct a review of processes and procedures from initiation to completion to identify weaknesses which can create errors or wasted resources.

ü  Duplication of procedures by more than one individual.

ü  Unnecessary steps or document preparation.

ü  Missing or inadequate reviews or document preparation needed to support an audit trail or regulatory compliance.

ü  Record retention for completeness and accuracy.

3)      Systems Review:  Verify that systems are used correctly and functionality is maximized.

ü  Staff knowledge of system functionality, including upgrades, is tested.

ü  Workarounds are used only if approved by management.

ü  Records created outside the system are approved by management as necessary and are verified routinely as part of transaction review.

ü  Reports available through the system are used to facilitate tasks and communicate information.

The time it takes to complete the steps above may be a burden on managers who are already stretched thin.  In the long run, though, the cost savings to a business in terms of reduced errors and risk exposure can be substantial, especially in a highly competitive or regulated industry.

C3 Advisors, LLC

February 14, 2014

C3 Advisors converges the three essential business elements—Process, People and Technology—to help businesses thrive, not just survive, by improving profitability and reducing risk.  Our services help our clients improve process optimization, people integration and technology maximization.

We have specific expertise in post-acute healthcare, technology and service companies.  Please visit our website at and for direct information about how C3 Advisors, LLC can assist your business, please call us at (630) 510-3181 or e-mail us at

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What to Look for When Purchasing Business Software

February 19, 2013



Business management software is a significant investment for any business.  The right solution can help you run your business more efficiently and effectively, reduce staff frustration, and improve customer relationships.  But with the numerous software vendors and systems to choose from, how do you narrow the search and evaluate products?   Here are the areas to investigate in selecting a suitable solution from a reputable vendor.

Reason for Purchase—Before beginning a search for a solution, be sure you know what the software should accomplish.  You will not be able to assess the capability of any software system without a clear understanding of the problems you wish to eliminate or reduce.  Your company may be experiencing one or more of these typical operational challenges:

  • Internal communications are poor.
  • A lack of centralized information is creating a duplication of staff efforts.
  • Too much time is being spent on preparing reports.
  • Manual systems have been created to address processes.
  • Customers cannot be serviced adequately due to the lack of timely information.

Your business may have problems not listed here.  The point is:  know what needs to be fixed.

Industry Knowledge—Make sure the vendor is familiar with your industry.  The vendor should understand the challenges that you face and your particular needs.  Ask if they have customers like you and how the software works for them.  Be sure they are experienced in writing, implementing and supporting software for businesses like yours.

Reputation of the Vendor—Don’t rely on the references provided by the vendor.  Ask for the names of customers who have used the system for a period of time, customers who have recently completed an implementation, and customers who are in the implementation stage.  Find out how long the vendor has been in business and the length of time customers typically stay with the vendor.  Inquire as to the vendor’s financial condition to ensure they have the resources to remain viable on a long term basis.  If the vendor goes out of business, the software will be useless without the services described below.

System Features—System functionality is critical to solving the problems that the software is intended to remedy.  Look at the major inefficiencies that can be solved with the right tools in place.  Consider what is needed now, what features can be added to benefit your business as it continues to grow, and whether it is scalable to accommodate growth.  Make a purchase based on business needs, not features that are nice add-ons but deliver little value.  Customizations are often necessary, but those which are major or numerous are a sign that perhaps you should continue shopping.

Services—Implementation, support and system updates are the services which make the difference in truly realizing the benefits of business management software.   If the system remedies the challenges it is intended to address, but the service from the vendor is inadequate, you’re replacing an old problem with a new one.

  • Implementation-Ask the vendor about typical hurdles they encounter in installations and their recommendations for reducing such problems.  The team assigned to your installation should be experienced in implementations of the software at businesses similar to yours, with a project leader who will be accountable to a timeline for completion.  Remember that the installation costs are separate from the software purchase price and are typically billed at an hourly rate.  The longer the installation drags on, the higher the true cost of the software.
  • Support-In addition to the purchase price of the software, you will purchase an annual support or maintenance package.  This is as important as the functionality of the software itself because system bugs, lack of user knowledge, etc. can seriously impede your business operations if the support function is slow or unresponsive.  Find out how quickly support requests are handled, whether communication is via phone or email, whether support personnel are dedicated to particular customers, hours of the day support services are available, and the process for escalating support problems which remain unresolved.  On-site services are normally not included in software support, but learn what the process is for scheduling such services and the hourly rates charged for the technicians who visit your location.
  • Updates/Upgrades-Equally important as system support is the frequency and adequacy of software updates and upgrades.   Updates and upgrades are necessary to correct system flaws, improve system performance, and address regulatory and other requirements.  They should be made available on a regular schedule with sufficient advance notice to minimize disruptions to your operations.  Ask for the history of upgrades and updates and the date of the last major upgrade for the version you are purchasing.  The vendor should be able to show that minor updates have been made every month or so, and that major upgrades are done approximately once per year.

Guarantee—Despite your efforts in researching the best software and vendor, you may find that the system you purchased does not work as you expected.  Once the software company has installed the software and received payment, it can be very difficult to get a refund.  An additional complication may arise if custom modifications have been included in the purchase.  Carefully review the contract terms for the time period for a full or partial refund.  Remember that the implementation costs are separate from the software purchase and will likely not be refundable, if you decide that you want to return the software.  Carefully negotiate the contract to ensure you have a guarantee of satisfaction with reasonable time frames to make that determination.

Software for your business is a major investment which is costly to purchase and maintain.  Your software vendor will be a long time business partner.  Avoid making mistakes that you will have to live with for years by researching the product and vendor before you buy.