Key Financial Controls for Small Businesses
Small business owners have a wide variety of responsibilities with numerous internal and external tasks competing for their attention. This can make it particularly difficult to implement a strong system of checks and balances to monitor for errors or fraud. In fact, according to the Association of Certified Fraud Examiners, businesses with fewer than 100 employees lose more money each time they are hit by a fraud than those with more than 10,000 employees.
Whereas internal controls can never completely eliminate the potential for fraud or errors in a business, the following key financial controls can create an environment where these risks are kept to a minimum.
What Are Financial Controls?
Financial controls are internal procedures designed to prevent or detect accounting errors. Their primary goal is to ensure the accuracy and reliability of financial records. A strong system of internal controls also serves as a safeguard against fraudulent activities.
At small businesses, financial controls are often forgotten or not possible because key control components, such as segregation of duties and review procedures, are not easy to implement within smaller teams. However limited resources don’t mean a small business is unable to have strong financial controls. Technology such as accounts software is a must for any small business since they incorporate many preventative controls, such as requiring balanced debit and credit entries for account journals, or management approval in setting up new vendors prior to the first payment.
The Importance of Financial Controls for a Small Business
Internal financial controls play a crucial role in detecting issues early or preventing them altogether. This is especially beneficial for small business owners and managers who juggle multiple responsibilities while focusing on business growth.
More specifically, financial controls can:
Reduce the risk of fraud, theft and embezzlement
Protect resources
Ensure reporting accuracy
Examples of Financial Controls for Small Businesses
Financial controls generally fall into five categories — cash, accounts payable, financial, data security and human resources.
Cash controls
Keeping separate business and personal accounts to avoid personal transactions going through the business.
Regular reconciling of internal cash books with external bank statements.
Having two people double-count all cash deposits.
Monitoring point-of-sales cash drawers, tracking beginning and ending cash balances and assigned staff.
Limiting the number of people who can access online and offline bank information.
Limiting the number of authorized signers for checks and digital payments, and also requiring disbursements over certain amounts to be dual-signed.
Accounts Payable controls
Requiring formal estimates on all purchases over a certain amount.
Matching invoices with purchase orders and payment.
Reconciling company credit card statements to general ledger expense accounts.
Requiring two levels of approval for new vendor creation.
Formalizing petty cash transactions, including a double sign-off.
Formalizing travel and entertainment reimbursement policies.
Financial controls
Comparing actual results to expected results included in budgets or forecasts.
Segregating duties whenever possible. The same person should not control the entire cycle of a transaction (initiating, recording, approving and reconciling).
Requiring backup documentation for all transactions.
Establishing an independent management reviewer to look over financial reports on a regular basis (such as an external accounting firm).
Data security controls
Requiring login access to financial systems, allowing access only to those modules necessary for an individual's role.
Regularly updating unique passwords which are not shared.
Performing regular system backups and storing data offsite in case forensic evidence is needed.
Human Resources controls
Formalizing onboarding procedures, including background checks.
Requiring approval, typically from the owner, for all new employees added to payroll.
Reviewing payroll reports for each period, checking for unusual amounts and unfamiliar names.
Requiring all employees to take a block of vacation days, while someone else fills in for them.
Clearly defining job responsibilities and periodically rotating them. For example, a small business can accomplish this by swapping the vendor lists assigned to two accounts payable clerks every six months as a way to get a second pair of eyes on cash disbursements.
Conclusion
Implementing strong financial controls is essential for small businesses to safeguard their assets, detect errors, and reduce the risk of fraud. While smaller businesses may face unique challenges in establishing these controls due to limited resources or personnel, leveraging technology and creating streamlined procedures can help mitigate these risks. By focusing on the key areas outlined above, small businesses can establish an effective system of checks and balances that protects their financial health and promotes long-term success.