Internal Controls for Fun & Profit

I confess, the title of today’s post was the best I could come up with to try and make internal controls sound interesting.  Truth is, the mere mention of internal controls makes most accountants’ eyes glaze over.  While they may not be “fun”, they certainly are profitable.  I’ll be writing extensively on the topic in the future, because the lack of effective internal controls will eventually destroy otherwise sound businesses.  It’s a tough task, but I will try to keep the discussions practical and avoid theoretical, technical details.
Internal controls are the backbone of your operations.  They help ensure that things get done the way they are supposed to and help ensure the accuracy of your financial reports.  They include both preventive and detective controls.  Whether you know it or not, you already have some internal controls in your restaurant.  The question is how good are they?

Preventive Controls
Like the name suggests, these controls are designed to prevent errors and unwanted activities.  We lock up alcohol stock to prevent theft.  We require a manager’s authorization for voids and comps, to prevent their inappropriate use.  The kitchen cannot prepare a plate without a food order having been rung-in.  In short, these are the rules and procedures put in place to help ensure that only the right things get done.
All controls have a cost, in terms of time and/or money.  There is a tradeoff between the benefits achieved with the controls and the cost of putting the controls in place.  As a result, most businesses will not have “perfect” preventative internal controls.  Theft and errors will always be a problem, which leads us to the other kind of controls…
Detective Controls
Once we realize that unwanted activities and errors can occur, even with strong preventive controls, we would like to be able to find out whether they have occurred.  Then, we can correct the situations in the future.  We do inventory counts and reconcile the physical quantities with the balances we think we should have on hand, to determine whether there has been theft (or errors in recording transactions).  We reconcile bank and supplier accounts, to detect errors in the recording of transactions.
Many controls will serve a dual purpose.  Installing CCTV cameras to detect theft and other unwanted behaviour will also have a preventative effect, as the employees know there will be a greater chance of being caught.  Rigorous cost control procedures serve the same dual purposes.
Moving Forward
As I mentioned in an earlier post, even though restaurants are “small”, they are quite complex businesses, requiring the same types of controls that much larger companies employ.  Our job is to find a practical, yet effective, system to ensure operations run smoothly and profitably.
I’ll be writing several articles about the key control areas in restaurants.  I’m going to keep them short, so I’ll bring today’s discussion to an end.  But I would like you to think about the controls you have in your operation.  Here are a few questions to get you started.

  1. How do you ensure that all sales are accurately reported and recorded in the accounts?
  2. How do you ensure that all sales receipts are actually received (and recorded)?
  3. How do you safeguard restaurant assets?
  4. How do you ensure profitable transactions?
  5. How do you minimize your expenses?

The list could go on, but the point of this exercise is to get you to realize that you do have internal controls.  Future posts will examine their effectiveness and how you can make practical improvements to increase your profitability.  Today’s post may not have been fun, but I guarantee it will be profitable.

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