Why your Small Business Needs Formal Policies

When they first launch their business, few small business owners think about putting together and documenting policies. They focus on marketing and reaching new clients, the services they’ll offer, and what they’ll charge for them. But, once your business has grown and is past the launch stage, you will need guidance for responding to common issues that arise during business.

How will you handle it if an employee abuses the paid time off policy? When do you send past due invoices for collection? Having a formal procedure protects you from lawsuits. It can guide employees when they don’t know what to do, relieving you from the need to answer the same question repeatedly.

If you’ve realized that it’s time to formalize how you’re running your business, here’s some advice to help you with writing policies.

What is a Business Policy?

A policy is a written document that lays out the rules that govern your business. They could be best practices as you define them or, particularly in the case of sexual harassment policies, dictated by law. In general, policies should have several characteristics.

They need to be specific, clear, and simple. Employees cannot follow a rule if they are confused about what they’re supposed to do, and “use your best judgment” leaves too much open to interpretation. Often, you’ll discover what you need to clarify in your policy when a situation arises.Complicated policies lead to uncertainties and differences in application. Keep them simple.

Policies must also be universally applied. Every employee must be subject to them equally, otherwise you could face accusations of favoritism. In extreme situations, failing to apply them equally could lead to a lawsuit. They must also be appropriate to the situation.

Avoid overly harsh punishments for minor infractions. If employees feel that they can’t be tardy occasionally, or risk losing their job for small mistakes, they will likely start looking for employment elsewhere.

Keep all of these principles in mind when it’s time to write policies for each key area of your business.

Human Resources Policies

The amount and type of human resources policies you need will depend upon the size of your business.

Ethics and behavior                            

The way that employees conduct themselves with internal and external stakeholders will impact your reputation, an area of risk. If they reveal a client’s secrets, or are overhead gossiping, you could lose business. Your human resources manual needs a section that addresses ethics and behavior.

This section could include advice on accepting gifts from clients, or attending social events. It should address confidentiality and privacy as it relates to your business. In larger organizations, you may wish to include a process for reporting ethics violations. Many corporations have set up phone lines that employees can call and make an anonymous report.

Employment policies

Employment policies could cover everything from appropriate business attire to expectations of professional behavior. It’s in this section that you’ll address tardies, paid time off, and sick leave.

While it’s an uncomfortable topic, your employment policies will need to spell out grounds for termination. This could include a warning process, or when employees will be put “on notice,” remediation plans, and steps that will be taken prior to termination. If it does become necessary, ensuring that these steps are followed shields you from wrongful termination lawsuits.

A policy differs from a job description, which you could include in a new hire packet and ask your new employee to sign as part of their onboarding.

Sexual harassment

Sexual harassment is often a component of employment policies, as well as grounds for termination. Consult local and state laws when writing this section, and perhaps bring in a lawyer for review.

It is a good idea to include a definition of sexual harassment in your policy, one that matches or is drawn directly from the local law. Again, you’ll need a process to lodge complaints and address them. Make it clear how violations of the sexual harassment policy tie to termination.

Compensation and benefits

If you have both salaried and hourly employees, or directors and non-directors, it might be wise to include sections related to each. Salaries employees may accrue vacation time differently than hourly workers, and your company might have chosen to pay a higher amount of a director’s health insurance costs than they do for a non-director.

Also, cover payroll processing issues such as when hours must be submitted and if employees must notify a supervisor if they are going to go into overtime. Think of the usual questions that new hires ask - when is payday? How will I receive my check? - and speak to them in your manual.

Accounting Policies

While you can create accounting policies and memos that describe how to handle and book specific transactions, such as leases or sales tax, you might want overarching policies to guide a bookkeeper or back office staff. Even in a small organization, your business might benefit from having policies that address two areas important to continued operations; accounts payable and receivable.

Invoice Processing

Invoices may arrive daily in the mail, but that doesn’t mean that you have to process them daily. If you have multiple invoices and only one printer, it could back up the whole office. Do you prefer that your bookkeeper run checks and mail payments every Friday? What about logging them in your accounting software?

A policy is not meant to be a training manual, so there’s no need to include step-by-step instructions. Think of it as providing overarching guidance rather than specific detail.

Accounts Receivable

When do you send late notices to clients? Do you charge late fees, or interest, on the balance due? Following up on past due invoices is a delicate balancing act - you want to get paid, but you don’t want to anger a client. Without clear policies, your A/P clerk could follow up too frequently, or forget to follow up and allow an invoice to languish unpaid.

All policies should direct employees to an individual in your organization that they can talk to if they have questions. While devoting time to creating your business policies may not seem like a high priority, it can prevent future problems.