Written by Helen Dow
Part III: Evaluating and Strengthening Processes
Rules of the Road
This is the third and final installment to the series Keys to Great Financial Management. Part I was Identifying Key Financial Drivers. Part II was Establishing a Financial Management Roadmap. Each of these sections can stand on their own, but I encourage you to read them to gain a comprehensive perspective.
The third part covers the rules of the road- internal controls and execution broken down into three sections: Separation of Duties, Key Controls, and Transparency. While I do not want to over simplify a complex situation, my hope is this will help with the evaluation to strengthen your internal processes.
Separation of Duties
The first is what we hear so much of … separation of duties. You may not have had this explained to you this way before, but it is about separating the role of authorization, execution, and reconciliation.
It is often separated by person, but not always. Think of the role of the person or the function of the action. For instance, the board may authorize a budget, or a CEO authorizes a contract, or a manager authorizes a purchase.
Authorization is the approval to initiate a purchase, spend, contract or simply the rules around transacting (for example, the rules and protocols around issuing credit to a customer).
Execution is the action(s) that is required to complete that authorization. Often, we think of payments … it could be a credit application, or submission of payroll.
The third area of separation is that of reconciliation. This is validation that the execution was within authorization, such as bank reconciliation, or an account reconciliation. It can be financial statements and variance reporting. It could also be confirming that a payment was properly approved or if a spend was within budget.
In a perfect world these three would always be separate, but the reality is that for a number of reasons, this isn’t always feasible. Often it is because of the size of the organization. But it could also be due to the system or internal process.
If two are combined, you can see at the intersection of the Venn diagram, that there should be a review function added. For instance, if a manager has a credit card and is purchasing something, they are authorizing and executing payment. There should be a review by their manager. The CEO should have the CFO review their expense reports. Another common overlap is when an accounting manager is submitting payments and reconciling the bank account and preparing financials, there needs to be review steps inserted.
Key Controls
With any financial process there are key controls. Think of key controls a little different than separation of duties in that they are points where failure can happen. They enhance controls. For instance, opening the mail should be designated to a person independent of transactions or validating and controlling vendor changes should be done by someone outside of accounts payable.
Transparency
Lastly, I’ll mention transparency. This can be a challenge based on confidentiality and smaller organizations. Know and have cross training for all major job functions. Share everything you can and have shared goals.
Your Team
Just as with the pit crew, we are all aware of the importance of the team. Each has their part and when working together their abilities are limitless.
The team is watching many data points that roll up into a number on a report. With the right systems and streamlined processes, the organization can work together to create the least friction. For the team and your organization’s benefit, invest in supporting efficient and transparent processes.
Conclusion
In this series, we covered (1) identifying the drivers and the importance of dashboards, (2) establishing and being disciplined when monitoring financial measures, and (3) setting up the controls and systems to allow your team to operate efficiently and effectively. My hope is that you were able to find value, something new or even be reminded of the best structure to ensure great financial management. I welcome any discussions or questions and feel free to contact me.
//
Helen Dow is a Director of Warren Whitney with more than 30 years of experience helping companies improve their financial performance and enhance all finance and accounting functions. She works with clients on overseeing financial analysis, improving operational efficiencies, and system implementation. Helen generally serves Warren Whitney’s clients in the role of Fractional CFO/Controller. To learn how Helen or our other consultants can support your business, contact Stephanie Ford at sford@warrenwhitney.com or 804.282.9566.
Making Potential Happen.
Data Directions Inc.