Developing a framework for controls

Updated: Aug 5 2005, 05:30am hrs
The usefulness and robustness of your plan will be tested when you implement it. Your business plan may be wonderfully written, but may fail in implementation. Many times, failure of a business is due to the lack of a proper implementation strategy rather than due to failure of an idea or technology that you have.

Rigidity vs flexibility

An organisation is a complex mix of people, systems and processes. In some enterprises, rules and regulations may be so structured that individuals have little scope for discretion. In contrast, there are firms in which systems allow employees a lot of leeway in taking decisions. Flexibility and rigidity have their own advantages and disadvantages. You need to decide the areas in which you would like to have rigidity and where you would like to have flexibility.

Let us take a simple example and compare the cheque signing process in two organisations. In the first firm, all cheques need to be signed by two persons; cheques below Rs 10,000 can be signed by the manager and CFO, cheques between Rs 10,000 and Rs 25,000 are to be signed by the CFO and a director, and cheques above Rs 25,000 are to be signed by a director and the MD. In the second firm, cheques do not require two persons to sign. There are two authorised signatories, one the manager and one the founder of the business. The manager is not authorised to sign cheques exceeding Rs 10,000.

It is easy to compare these two firms and take a view that the first company has better controls in place for cheque signing. However, before passing judgment, one needs to understand the requirement of the organisation. One would need to consider business parameters, such as the number of employees, nature of business, kinds of payments expected to be made etc.

Putting a system in place

When you are setting control systems in place, it would help if you first list out the tasks to be undertaken while running the enterprise. You will need to buy, sell, pay salaries and carry out some tasks as a routine part of your business. You need to plan and decide on the systems you want to have in place to carry out these tasks. Of course, there are some tasks which come up all of a sudden and may not be planned for. You will, therefore, also need to have a plan for handling one-off events, emergencies and other unplanned or unusual events.

There are some persons who do not have a plan in place, either because they are a small company or because they have a hands-on style of operation where they like to get involved in every aspect of the business. Even if you are a one-person business, it would be useful to give some thought to the manner in which you will carry out tasks, both routine and non-routine. This will help you in many ways.

Having a structure in place for the regular jobs will help you carry out these on auto pilot, without too much of time or energy spent in deciding the process you need to follow. While setting systems in place, you need to keep an eye on the requirements of your business. Initially, you may decide to purchase a standard accounting package with no thought given to the special needs of the business, such as, perhaps, reporting to the investors on some parameters on a regular basis.

If this is not built in, then the finance manager may have to spend extra time just to prepare statements for these investors every month, instead of getting this at the press of a button from the system.

Lack of attention to scalability of your processes can also lead to problems at a later date. A system which serves you now, with limited persons, may be totally unsuitable for a bigger organisation. You need to periodically take a relook at your existing controls and systems and overhaul or update them as you consider appropriate.

For example, you may have in place a system that mandates that every purchase made, from stationery to raw material to fixed assets, must be approved by you. When you are a small, 10-person enterprise, this may be possible. But if you grow to a 100 persons business, it may be difficult for you to approve every purchase. To the extent possible, spend time in creating a system which can serve the needs of your company in the long term or at least the medium term.

Many of us in India do not pay sufficient attention to risk management and back-up plans. These are a critical part of any successful business which is looking towards long-term growth and sustainability. This is also becoming increasingly important as we are moving towards a global environment.

An organisation which has a good operational plan in place can go much further than one which does not. It is, indeed, difficult for a small business to spend time and effort in the initial stages in planning and setting systems in place. You must, however, remember that this time is well spent and can save you a lot of headache and can actually give you an edge over your competition in the long run. Many times we focus on the immediate problem and lose sight of the long-term requirement of the business.

Coming up next:

Thinking long term, implementing short term: How you can develop robust internal control systems and management information systems (MIS).

The author is Principal, SRW Advisors