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Defense wins championships Internal Controls for Growing Businesses

It is a common refrain in sports that, “Offense sells tickets, defense wins championships.”  This analogy can be applied in the business world as well.  As companies grow they have more to protect and the need for defense, in the form of internal controls, intensifies. 

Young, entrepreneurial companies often begin with nearly all of their attention and resources focused on “scoring points” through product development and design, service delivery, and marketing and selling efforts.   They can afford to take on more risk because they don’t have as much to lose, plus these companies are rewarded for their aggressive offensive strategies. 

At some point, however, the equation starts to change.  New customers are added and employees are hired.  An acquisition or new round of financing is successfully completed.  Competitive and regulatory pressures begin to intensify.  As these businesses begin to mature, their growth must be smartly controlled and risks must be carefully managed.  There is simply more to protect.  In other words, they must start to also play a little defense in their quest for a championship. 

Do you have a defensive coordinator to help you successfully manage the growing complexity and elevated risks to your organization?  The defensive coordinator’s mission is to implement, assess, and monitor fundamental control concepts with the primary objective of helping the organization successfully achieve its objectives. 

As with all game plans it requires constant focus, the ability to strategically adjust for changes in conditions, and maximizing the strengths of your personnel.  For some companies, the role of defensive coordinator is played by an Internal Audit team, Compliance Officer, or is part of a Controller’s responsibility.  External specialists with deep experience and knowledge in risk management and internal controls are also a viable option.  The key, as the remainder of this article explores, is to embed and commit to a mindset of sound governance practices as a fundamental element of the organization and position it to be an enabler of continued growth and success.

Fundamentals

Coaches and business leaders alike will agree that mastering the fundamentals is critical to long-term success. They provide the foundation to sustain a high-level of performance.  A common trait of the most successful companies - regardless of size or industry - is a commitment to strong fundamentals in its operations, decision-making, and financial practices. 

As an organization grows, it inevitably becomes more complex and widespread.  It requires more effort to effectively communicate up, down, and across the organization.  Strong corporate governance is a fundamental element of minimizing waste and inefficiency and avoiding misalignment. 

Developing strong fundamentals takes time and effort, attention to detail, and discipline.  Lack of such discipline is a self-inflicted mistake that can have damaging consequences.  For example, allowing months to pass without reconciling bank accounts, allowing a purchasing clerk unrestricted authority, or failing to periodically validate the credit-worthiness of your largest customers signifies a deficiency in fundamentals. 

Other ways to manage risk and improve organizational control are to institute cross-training on critical job functions and regularly analyze and understand key metrics and performance indicators that enable senior executives to effectively monitor the business results.  It may sound simple enough but these are exactly the types of fundamental risk mitigation and control procedures that are often found lacking when otherwise strong companies are struggling to survive. 

Value Proposition

It is a common misperception that adding in layers of internal controls and risk management will rob the organization of its entrepreneurial spirit.  If done correctly the opposite is true.  These companies become more balanced and confident in their ability to communicate about risk and therefore manage it to their advantage. 

Think about the impact a great defense can have for a championship team.  In football, it can provide the offense with a distinct field position advantage and lead to easier scores.  Basketball defenses can disrupt their opponents’ rhythm and lead to uncontested shots on the other end of the floor.  In baseball a solid defense gives its pitcher the confidence to throw strikes and avoid the big inning.  When a team knows it can count on its defense, then its offensive strategy can incorporate risks with a higher probability of success rather than gambling and hoping for a miracle.  Companies with a well-defined and communicated governance structure can remain very ambitious about its future results.

A balanced and practical approach to internal control will create significant value for the overall organization.  It provides a platform for growth above and beyond the capabilities of a similar organization without such a commitment to the fundamentals of a strong system of controls. 

About the blogger

Jason Sammons is a Senior Manager in Frazier & Deeter’s Process, Risk & Governance practice.  He can be reached at Jason.Sammons@frazierdeeter.com

 

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