The Finance Function Under Pressure
A growing online retailer has a small finance team of four people. The finance manager, Tom, has noticed several symptoms: monthly management accounts are consistently two weeks late; the sales ledger clerk is manually re-keying orders from the sales system into the accounting software; there is no documented authorisation process for supplier payments, and one supplier was recently paid twice; and bank reconciliations are done only quarterly. The business processes around 3,000 orders a month and is about to double in size after winning a major contract. Tom has a budget of £25,000 to improve systems and processes before the expansion.
1. Identify the weaknesses in the accounting system and explain the risks each creates for the business.
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Several control and system weaknesses are evident:
Manual re-keying of orders: This is a data-integrity risk. Re-keying introduces transcription errors, duplicates, and delays, and it consumes clerk time that could be spent on control work. As volume doubles to 6,000 orders a month, the error rate will scale with it.
No documented authorisation for supplier payments: This is a serious internal control failure. It enabled the duplicate payment and creates fraud and error risk. Segregation of duties appears absent - the same person may be able to raise and pay an invoice.
Quarterly bank reconciliations: Too infrequent. Errors and fraud can go undetected for up to three months. Monthly (or more frequent) reconciliation is the norm for a business of this transaction volume.
Late management accounts: Two weeks late means decisions are made on stale data, undermining the finance function's purpose of informing management.
The common thread is that the system is manual and undocumented, so it will not scale. The judgement is that controls must be formalised and automated before volume doubles.
2. Recommend how Tom should prioritise the £25,000 budget, justifying your choices in terms of risk and cost-effectiveness.
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Prioritise by risk severity and scalability:
First (highest risk, low cost): Document and implement a supplier payment authorisation process with segregation of duties - dual authorisation above a threshold. This is largely a policy and procedure change, costing little, and addresses the most serious control failure (duplicate payment, fraud risk).
Second (scalability, moderate cost): Integrate the sales system with the accounting software, or at minimum introduce a controlled import routine, to eliminate manual re-keying. This is the change that most directly prevents the problem from worsening as volume doubles.
Third (timeliness, low cost): Move bank reconciliations to monthly and set a timetable for management accounts (e.g. within five working days of month-end). This is a process discipline change.
Fourth (if budget allows): Consider software or training investment with the remaining funds.
The judgement is to spend first on controls that are cheap and address serious risk, and to reserve budget for the integration that prevents the expansion from overwhelming the team.