As a franchise owner, establishing and maintaining strong internal controls is key to mitigating financial and operational risk and maintaining profitably.
There are several ways to establish strong internal controls within a franchise, with most being fairly easy to implement. Paper checks are one great example.
For most franchises, the employee in charge of accounts payable can easily write themselves a check. And if that same employee is also responsible for reconciling monthly bank statements, the theft may never be discovered…or discovered only after it’s too late. Eliminating paper checks from your accounting process is an easy way to avoid this threat altogether.
To help franchise owners take stock of their internal controls, we’ll highlight two key areas — inventory and deposit reconciliation — and explore ways to strengthen your franchise’s financial oversight.
Here are our recommended best practices for establishing strong internal controls in these two areas of your franchise:
The Importance of Tracking Inventory
The type of franchise you own will determine how much inventory you hold and the amount of attention that needs to be paid to it. If you’re in the business of selling tangible goods — a quick-serve restaurant, for example — the resources you need to keep tabs on your level of inventory will be relatively high. If you’re not taking weekly (or, at a minimum, monthly) inventory, you should start immediately.
When it comes to risk management, taking inventory is crucial for three main reasons:
1) Minimizing waste and over/under ordering: Knowing exactly how much of your products you have on hand, and tracking how quickly those products are consumed, makes your ordering process vastly more efficient. And if your inventory consists of items with a limited shelf-life, taking inventory also helps to minimize loss due to spoilage.
2) Providing an early warning sign of potential theft: You don’t want the products that are coming through the door from deliveries flowing out that same door due to theft or loss. Knowing how much you have on hand — and should have on hand — at any given time helps you spot irregularities sooner and put a stop to theft.
3) Allowing for a more accurate profit and loss statement: Inventory on hand contributes to your cost of goods sold calculation because it measures the cost of all products sold in any given month. If you’re not keeping up with your inventory, the costs of goods sold and/or your gross profit figure will be skewed.
Best Practices for Inventory
If we could sum up our approach to inventory in one phrase, it would be “trust, but verify.” This means not blindly entrusting the task of inventory management to one single person without a system for cross-checking their work.
A simple way to accomplish this is to alternate the individuals in charge of doing the month-end inventory. If you operate multiple locations, send that person to a different location to do the inventory there, have someone else perform inventory at the original location, and then bring them back.
It’s smart to do this periodically, but not predictably. The changes should happen without notice. This will help ensure that there’s accuracy and honesty in those month-end counts. Employees in charge of inventory can pad the inventory account to hide shrinkage or theft but they must keep doing this or risk being exposed.
By occasionally rotating or reassigning new people to do inventory without prior notice, you can help bring any issues or discrepancies to light quickly.
How to Avoid Issues with Deposit Reconciliation
Depending on the type of franchise you own, cash may still represent up to 25 percent of your payment transactions. If that describes you, staying on top of cash sales versus money actually hitting your bank account is critical.
Several times per week (if not daily), you should be reconciling cash sales with expected deposits. If there are discrepancies, shortages or missed deposits, the faster you can spot it and investigate, the quicker you can resolve the problem.
Minimize Cash Deposit Shortages
Thanks to equipment like Smart Safes, you no longer have to hold cash until it can be dropped off at the bank or picked up by an armored car. Here’s how they work and why they might be a good idea.
When you insert bills, a Smart Safe counts it, which is a big timesaver. But the real benefit is that Smart Safes are linked to your bank account. So not only does depositing bills in the safe eliminate the risk of robbery for you and any employee in charge of delivering bags of money to the bank, but it also gives you faster access to cash deposits from an operational perspective.
Banks will often provide provisional credit for the cash you deposit since they can track what’s been put in the safe. And, as previously mentioned, it also saves you time because the cash won’t have to be counted and verified by the bank.
The Importance of Reconciling Cashless Deposits
Particularly during times of change or transition — new ownership or changing banks, for example — when it can take time before payment processors properly route cashless sales to the correct party, keeping a close eye on cashless deposits is crucial.
Errors here not only put you at risk for not catching discrepancies but could also subject you to third-party processors resorting to backup withholding on failed payment attempts (as required by the IRS).
At the end of the year, third-party and credit card processors are required to issue a Form 1099-K to businesses showing sales reconciliation by month and any federal withholding. If you’re not reconciling cashless deposits routinely, you may not detect significant shortages between expectations and what’s hitting the bank until you receive your 1099-K. By then, you’re no longer able to address problems or issues in real-time.
RKL Virtual Management Solutions can help you assess your inventory and deposit reconciliation controls and make any necessary enhancements to your franchise’s financial oversight. Reach out to your advisor or use the form below to contact us today to see how we can help.