Entrepreneur Internal Controls
Description of the Business
The business that I am starting is a food truck specializing in pulled pork sandwiches. The primary product is the pulled pork sandwich -- the pork is produced off site -- and it is sold along with a handful of complementary items (drinks, chips) in a food truck, essentially a mobile restaurant. The business will have two trucks to start, in order to cover a wider geographic area. Staffing needs for the business are minimal, since the pork and bread will be purchased from vendors. The staff will include a manager (responsible for HR, marketing, accounting) and three other people to work in the trucks. This equates to two people per truck per shift. The rationale for this plan is that the food truck business is a rapidly-growing segment of the restaurant market. While still a niche business, it has become popular across America and has high growth prospects and low barriers to entry.
The form of business that I have is a corporation. Full incorporation is the most costly and complicated business structure, but it has distinct advantages that cannot be met with other forms. The ideal outputs for this business are to have no personal liability and to have flow-through taxation. Thus, the business will be registered as an LLC. This is a food service business, which has a high liability risk so it is imperative that there is no personal liability for business activities. The LLC structure is not recognized by the IRS, but it does allow for some flow-through taxation to my personal taxes. During the startup phase, this business might suffer losses, and these would be used to offset my personal income from my regular job. If after a couple of years the business is profitable, the LLC could be dropped in favor of corporate taxation.
There are a number of accounts for this company, all of which pertain specifically to items found on the income statement or balance sheet:
2. Based on the form of the business, I do not need to use either generally-accepted accounting principles (GAAP) or international financial reporting standards (IFRS). This company is based on the United States, so IFRS is not relevant, since IFRS is only used internationally (Johnson, 2007). However, GAAP is only required of publicly-traded companies, by the Securities Exchange Commission. It is not required by the IRS, nor is it required for any internal accounting. Some have argued that GAAP does not meet the needs of small, privately-held businesses at all (Zanzig & Flesher, 2005). Thus, I would have a choice about what financial accounting system, if any, I chose to use. For simplicity's sake, I would choose GAAP. By using GAAP, I would be able to establish a financial accounting history that will make it easier to compile these statements later. IN particular, if the company wishes to go public or otherwise raise equity financing, GAAP statements will be helpful. Banks might also ask to see statements, and would be more likely to lend if proper GAAP statements are offered.
IFRS/GAAP convergence is not going to be an issue for this company. The reason for this is that GAAP at this point is optional, so ignoring convergence issues is a legitimate choice. However, GAAP rules have changed in the past in accordance with convergence and will do so again. It is important to have a plan for how the business will record such changes. For stakeholders, the most important thing is that they know how each change affects the company's financials. When the firm adopts a new policy, it needs to announce that policy change to stakeholders. If the change is material, then a chart should be prepared highlighting the treatment under the old method, the new method, and then the difference between the two, so that the stakeholders can reconcile the change for themselves. This would appear as a note in the financial statements.
3. The following are the pro forma income statement and balance sheet for the first year of Pork Truck, LLC.
Pro Forma Income Statement
Internal controls are an important part of any business. One of the most important controls is with respect to inventories, since these are in the hands of the employees and the management is not going to be able to have direct oversight. There will be an inventory log that is used as a control. The log, located on the company intranet, will allow for the inventories to be input when they arrive, and then listed with the truck that they are loaded onto. The leftover inventories at the end of the night will be reconciled against the sales of the truck, and the record of lost product. This type of control is direct and formalized, allowing for management to directly oversee the actual inventory counts, which in turn will ensure that at the end of the period the inventory on the books aligns with the inventory the company actually has.
Another control system is the budget. A flexible budget begins with an expected budget that highlights expected performance under a number of different scenarios. At the end of the period, the expected results are compared with the actual results. This comparison allows management to highlight different areas of concern, and investigate those areas. In addition, such analysis allows for more accurate budgets to be prepared for the next period. The use of a flexible budget in this situation aids the analysis even when the actual figures are far from the expected norms, because high and low end projections are already made.
5. Implementing Controls
As this is a new business, there is no reason why there should be any resistance to controls. There are only a few employees, and none have a significant stake in the business. They will follow the rules that are established at the outset as a condition of employment.
That said, there might be some challenges in implementing the controls. The first control, the inventory log, does not necessarily prohibit minor amounts of fraud such as eating or giving away inventory and then recording it as dropped. If such behavior is a significant concern, further controls might be necessary. The use of the inventory log will be part of the training process to ensure that it is used effectively. Management is going to be responsible for inputting the data into the system, so that the employees cannot fudge the data.
The budget process is going to be challenged by the newness of the business. The initial budget projections are just educated guesses, since there is no past history on which to draw. It is important that management realizes the limitations of budgeting and variance analysis when the company has no history. As the company builds a history, this technique can be refined. Initially, this technique can be used with a high rate of frequency such as weekly or daily in order to refine the system and ensure that the budgets are more accurate.
6. Regulatory Environment
The regulatory environment for a privately-held food service business is mostly concerned with food safety, worker safety and human resources and permitting. A lot of these…
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