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Strengthening Safeguards: How Separation of Duties Enhances Financial Integrity

Updated: May 6

Every small business has periods of financial struggle. Sometimes it isn’t clear why. When this happens, it is good to have tools in your tool belt to make sense of things. In this series, we are giving you twelve specific controls you can incorporate into your business to provide greater financial transparency, protection, and insight.

To get a pdf document with a complete list of all the helpful controls we suggest in this series, click the blue button below!

The fifth control in our series is “Separation of Duties.” When compared to the first four controls, separation of duties is yet another highly effective control you can implement. This is the first control, though, that involves other individuals and, because of that, comes at an additional cost.

Separation of Duties

Separation of duties is the practice of assigning responsibility to different individuals for receipt or distribution of money, goods or services as well as recording these transactions into your accounting system. If this definition is not clear, let me illustrate what separation of duties is NOT!

In most small businesses it is common for just one person to receive, open and distribute the mail, prepare, and deliver deposits for checks received and record these deposits into the books along with any bills received. One person. No oversight. No accountability. Can you see where things could go sideways?

To be fair, many in these circumstances behave well, but the opportunity for misappropriation is certainly palpable and sadly some simply cannot resist the open temptation. Separation of duties reduces this risk significantly through accountability, keeping honest people honest.

Blog Series by UCentric Solutions on Business Financial Protection Controls

Let’s focus on just one primary process in your business. Below we list specific steps within this process and how to apply separation of duties to each step. We will then discuss the common issues that come up and how to address them. Let’s get started!

Cash Receipts Process

Below are the normal steps in receiving cash into a business. There are certainly nuances specific to every business, but this should serve as a good starting point. I took the liberty of naming the different individuals responsible for the steps below, as Bob, Steve, and Carla.

  1. Get Mail – Bob. One person is sufficient for this step. It should NOT be the bookkeeper (Carla, in this example), if possible.

  2. Open Mail – Bob and Steve. Try to use two people. Two people are less likely to misappropriate funds, so it is good practice to have them both see ALL the mail. Do not split it between the two. Again, leave your bookkeeper (Carla) out of this process, if possible.

  3. Aggregate payments (checks and supporting documents) – Bob or Steve. Now it is time for Bob or Steve to pull the information together and preferably scan it all. I would recommend Steve, personally, remember, whoever you pick for this step will also manage the next.

  4. Create deposit slip – Bob or Steve. Again, it does not matter which one, provided it is NOT Carla. For simplicity’s sake, I would use the same person from the last step, Steve. Steve would add the checks up, stamp them and prepare the deposit slip. Don’t forget to scan it, too! Steve would then provide the scanned documents and hard copies of remittance advices and other received documents to Carla (step 6).

  5. Take deposit to the bank – Bob or Steve. Whoever does NOT handle step 4, would take the deposit to the bank. For me, this would be Bob. Bob would return the bank deposit slip to Carla so she can complete the next step.

  6. Enter deposits into the accounting system – Carla. At this point, Carla should have all the information she needs (hard copy and scanned alike) to receive payments into the accounting system and file the documentation according to your procedures. Later, Carla can confirm the amount deposited matches the information she received from Bob.

So, what are the two most common issues raised from small business owners to these process steps? And more importantly, how can they be addressed?

“That may work elsewhere, but I don’t have enough employees to do it this way.”

This is the number one pushback we hear! Many small businesses do not have the staffing. Often, they have just one employee; their bookkeeper. So, what do you do? The answer is you do the best you can. By applying creativity, separation of duties can be managed.

  • Personally take responsibility for retrieving and opening the mail.

  • Perhaps, you can’t do this first thing in the morning but have time after hours. Slow the process down a day.

  • Consider hiring a retired person for a few hours a week to fill in the gap.

  • Consider incorporating your spouse or parent for this. Can they help fill in?

  • Apply some alternative scheduling between the three options above.

  • If you have two employees (including your bookkeeper), you can still run the process above.

“This process is too complicated.”

Ok. Maybe. But the idea here is to protect your business, and by necessity it requires some measure of complexity. Having said that, by applying a few of the options above, the process CAN be simplified. The reality is the complexity in any process is minimalized as it becomes normalized in action. In other words, the sooner you get started the simpler it becomes.

As you look at your business, you will want to incorporate separation of duties to other key areas, such as: Purchasing, Accounts Payable, Payroll, Inventory Management, etc. By documenting these processes and assigning responsibilities (and oversight), you not only reduce the risk of loss, but you will also find ways to improve your business along the way and increase operational transparency with your staff. All these key components are critical for growing your business.

Click the blue button below if you would like a complete list of our Financial Protection Toolkit tips!

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