Creating Value in Your Business through Internal Controls

As a business owner, you’re accustomed to making decisions. Expanding into new markets, how to raise capital, adding or replacing equipment, sourcing vendors, hiring personnel—the list seems endless. Aside from the daily decisions required to run your business, you’ve probably thought about how to exit your business so you can enjoy the rewards earned through your effort.

Whether your ideal retirement involves sunny beaches, travel or more time with family, you want to ensure that you’ve maximized the value of your business and exited the business on your own schedule. Mike Trabert, partner and leader of Marcum’s Value Acceleration/Exit Planning Group and a leader in the Transaction Advisory Services Group, recommends that business owners develop a transition plan based on The Five Stages of Value Maturity, which is detailed in his e-book.

The Five Stages of Value Maturity are:

1. Identify Value: Know what your business is worth
2. Protect Value: De-risk your business to protect its current value
3. Build Value: Act strategically to get the business where it needs to be
4. Harvest Value: Identify exit/succession options
5. Manage Value: Secure your future income, and the lifestyle you desire

The “Protect Value” and “Build Value” stages focus on preparation for the potential transfer of ownership, and your efforts to strengthen the internal controls of your business will reap benefits through both stages.

Protecting Value

In simple terms, protecting value means that you should take steps to minimize risks to your business by safeguarding your assets. In practice, the safeguarding of assets can be accomplished in multiple ways and may be rather complex. I recommend starting with the documentation of existing processes, which provides the basis for the development of standard operating procedures if none currently exist. Once processes are documented, existing controls can be identified and evaluated.

For example, let’s consider your cash receipts process. Do you have separate people log checks received, post receipts to the general ledger, physically deposit checks and reconcile bank account statements to the general ledger? If one person in this process is out of the office, do you have a backup person identified to perform the duties while maintaining appropriate segregation of duties? If you create a process-flow of the cash receipts process from the receipt of the check through the bank reconciliation, you may identify control gaps, such as if one person has responsibility for a major portion of the process. Regardless of the size of your administrative team, you may be able to revise the process and achieve appropriate segregation of duties to ensure that cash is applied to customer accounts and deposited properly.

For another example, let’s consider the intellectual property that affords you a competitive advantage in the marketplace. Does your company have policies and procedures to safeguard against the loss of proprietary information? Did employees sign a non-disclosure agreement and/or a non-compete clause upon hiring or termination? Is access to sensitive information (e.g., customer lists, engineering drawings, product specifications, etc.) limited to personnel on a “need to know” basis? Your HR policies, including any documentation signed by employees, may assist you in recovering losses in the event of litigation.

Through proper policy, process documentation, identification of internal controls and implementation of standardized processes, you can effectively minimize the risk of asset misappropriation.

Building Value

In addition to protecting you from losses due to human error or fraudulent activities, an effective internal control environment may also help you build the value of your business.

Documented business processes will make your business more attractive to potential buyers, thus increasing its value. This shouldn’t come as a surprise—it’s much like a restored classic car is worth more than a “project.” But let’s take it one step further and consider the addition of an effective internal control environment. Your potential buyer is likely to place a premium on the peace of mind in knowing your business processes are documented and designed to prevent or detect inappropriate behavior, whether accidental or malicious. To complete the car analogy, consider this as a warranty included with the restored classic car.

Taking Action

Whether you plan to exit your business a year or a decade from now, taking the effort to document your business processes and implementing internal controls will help you protect and build the value of your business. To discuss how Marcum can help you achieve your business objectives, or for any other internal control questions, please contact Randal Slifer at 440.459.5768 or email Randal.