Do you need them? Should they be documented? How do you start developing them? How detailed should they be?
Yes you do need them and Yes you should move toward documentation! Everyone has them. That’s right, I said everyone has them. You see, your policies and procedures are simply the methods you use day by day within your business to meet goals and objectives and to comply with guidelines and requirements as applicable.
Everyone has policies and procedures in some form or another. They may or may not be very good policies or procedures and they may or may not be documented, but they do exist.
Unfortunately, most small businesses do not have policies documented, or documented adequately, nor do they know where or how to start!
Policies and procedures are a roadmap of what you do and how you do it in your company. They will help others in your firm and those looking in your firm to understand how you operate. They will help your firm to be consistent in it’s’ operations and provide confidence to auditors, bankers, contracting officers, prime contractors, and customers in general.
Policies are generally developed on a summary level and can be similar across companies. Procedures are more detailed and represent how a Specific Firm implements their policies.
A Policy for a very small firm will most likely be different then for larger firms. For example, a General Policy for Internal Control of company funds might state:
· “All checks issued by the company should be signed by at least two authorized officials, each of whom is independent of the control of the other person.”
On the other hand, due to the size of a small firm, a more Specific Policy might state
· “All checks issued by the Company will be signed only by the authorized official listed (Mr. Paul Gunn Sr., President/CEO). The company will move toward additional authorized officials as staff resources allow. An annual review of company financial information will be performed by an independent CPA to ensure company meets applicable generally accepted accounting principles and other regulations.”
The difficulty most small firms have is getting started. Formulating basic policies and documenting them in an easy to follow and consistent format can be daunting. A great deal of frustration, time and expense can be involved.
In addition, it is important to utilize a trained and experienced accountant to review any accounting, cost, and financial policies developed to ensure compliance with GAAP and any applicable government FAR or related requirements.
So where do you start? Here are 3 strategic options:
· Option 1- Call on your accountant or CPA, internal or external, to develop and document your policies and procedures from their knowledge base or from scratch. This could be expensive and time consuming depending on the resource chosen.
· Option 2- Utilizing own knowledge, experience, or information gleaned and provided from our workshop and related materials (Live or on DVD), contract cost policies can be developed on a manual basis from scratch. Prior attendees, with some accounting or cost background have done this with some success.
· Option 3- Use a Template that can be revised to meet your company’s specific needs. This is an option that many choose. This provides a Timely, Comprehensive, and Cost Effective set of prepared and documented Policies.
Remember, whatever option you choose, once you have done all you can on your policies, “Do have your Accountant and/or CPA review your document prior to finalizing”.
I encourage everyone to begin working on documented Policies as soon as possible. Now! Why? Because when you least expect it, you will be called on to produce them, and usually it is with little time. Just a simple auditor request: “Please provide your documented accounting, cost and financial policies that outline how your firm operates.” Please be prepared.
How detailed should they be?
I want you to know that government auditors are instructed to use judgment when expecting and/or requesting extensive detailed policies from small businesses. So as you start the process, keep the quote below in mind:
According to DCAA Audit Guidance under DCAAM (7640.1) January 2010, Section 5-111 b.
b. “Smaller entities with active management involvement may not need extensive descriptions of accounting procedures, sophisticated accounting records, or written policies. Communications may be less formal and easier to achieve in a small or midsized company than in a larger enterprise due to the smaller organization’s size and fewer levels as well as management’s greater visibility and availability. However, when small or midsized entities are involved in complex transactions or are subject to the same legal and regulatory requirements as larger entities, more formal means of ensuring that internal control objectives are achieved may be necessary.”
It is also stated under a. of the same section “Non-major contractors may use less formal means to ensure that internal control objectives are achieved.”
However, do not rest your laurels on this guidance to auditors. It is extremely important to have Documented Policies. It will save you time, frustration, and money. It may also be the difference in contract award or withholding of payments upon award. And since auditors are engaging in more scrutiny of all contractors/subcontractors, I encourage all contractors/subcontractors to get this process started.
Summary: Documented Accounting, Cost, and Financial Policies are an important part of your success. Every small firm should account for the cost of developing, documenting, and complying with their company policies. You should include anticipated cost in your G&A (General and Administrative) indirect cost pool. This will allow you to recoup the cost in your pricing. The most cost effective option to this end is to obtain a Policy Template, adjust it to meet your specific company structure, and have your accountant/CPA review to ensure it meets GAAP, FAR, and related guidelines.
Whatever option above you choose, it’s time to stop thinking about it and just do it! To see an outline of typical policy categories to be considered, visit this link Policy Manual Outline
Paul Sr.