By Emily Suess
For most small business owners, the term “internal audit” isn’t exactly inspiring or motivating. We tend to associate audits with an overwhelming fear of accountants and the Internal Revenue Service. We might also think of audits as something only mega-corporations do.
However, internal audits are helpful for small businesses. They can be performed relatively easily without much cost, and the end result is a better understanding of the way your business operates. The more you know about the way your small business functions, the better your chances of implementing positive changes, maximizing efficiency, and improving employee morale.
Defining the Internal Audit
Auditors examine evidence, analyze the collected information, and then report on their findings. When this is done by a company’s own staff, it’s an internal audit; when it’s done by an organization outside the company, it’s an external audit. The results of your internal audit are not intended to be made public. They are strictly for your use in evaluating your business’s strengths and weaknesses.
The ultimate goal of an internal audit is to generate a report and recommend improvements to be implemented and then re-evaluated. Audits are especially beneficial for small business owners who have their sights set on going public at some point down the road.
Types of Audits
Depending on your goals for the audit, there are several different areas you may want to investigate: management, IT infrastructure and security, customer satisfaction, compliance (this is particularly important for businesses in an industry that is highly regulated), finances, and business operations.
If your business is really small or your internal resources are nearly maxed out already, you might consider performing a smaller scale internal self-assessment where you ask employees to answer questions about the business. It’s not as rigorous as a proper audit, but it’s valuable for identifying areas of high risk.
Tips for Performing an Internal Audit
Remember the goal of the audit is to focus on the ways your can improve your business. Be careful not to focus on what’s wrong, and instead ask your employees to identify ways that day-to-day operations can be improved.
Make a plan to implement improvements across the entirety of your business. If you put all your energy into just one area of the business, your company will lack balance and you could do more harm than good. So, if organization and planning are a priority for one department, they should be a priority for the business as a whole. After all, your bookkeeper will struggle with organization if the documentation she receives from co-workers isn’t also organized.
Keep written reports outlining key issues and your plan for moving forward. In subsequent years, this information will be invaluable for helping you determine what works and what doesn’t.
Finally, give your employees encouragement and incentive to talk openly. Any fear of negative consequences for disclosing unpleasant truths will backfire when the entire point of the audit is to acknowledge problems and correct them.
This is a great article. Far too many small businesses do not understand how helpful an internal audit can be. They look at the cost of doing it, but don’t realize how much money they can recover or save in the long run. Accounts payable and payroll are two areas where there can be costly errors. Using computer aided audit tools, every transaction is tested and errors can be found. If too much time hasn’t lapsed, they may be able to seek a refund. Operational improvements save money as well.
I think small businesses have a general lack of information. As you said, they equate it with something scary like an IRS audit. That’s not the point of an internal audit. Internal audit = help.
Here’s a video I made to try to the point across: https://youtu.be/2oxLgTfVwzA
This is a very well-written piece. Informative and insightful.