Without the proper systems in place to monitor and manage finances, small businesses that are susceptible to fraud and accounting errors can quickly find themselves in hot water. The right arsenal of internal financial controls will help you support scalability and implement guardrails as financial data multiplies. From maintaining compliance to empowering your managers to make more informed decisions, our checklist can help you protect your business before it outgrows its current processes.

What are Financial Controls?

A financial control refers to a process or procedure that’s implemented to assist a company in achieving its financial objectives, ensure compliance with applicable laws and regulations and prevent fraud. As the number of financial transactions and the employees handling them increase, so does the risk of financial mismanagement. By establishing a solid framework of internal controls over financial reporting and other accounting tasks, you can improve the accuracy of your financial statements and guarantee that transactions are recorded accurately, completely and promptly.

Why Internal Controls for Accounting Matter at Small Businesses

As a small business evolves and expands, its finance and accounting processes naturally become more intricate. This can be a double-edged sword for owners: while complexity is a hallmark of success, it can also increase the likelihood of financial blunders like inaccurate reporting, fraud and noncompliance. 
Having effective controls comes in handy especially if you’re communicating with investors or lenders or adopting Generally Accepted Accounting Principles (GAAP). In these instances, it’s important to prove that you’re adhering to revenue recognition and other standards, as well as conducting ethical practices overall. But most importantly, having accurate financial statements means your decision making is backed by reliable data.

5 Internal Controls for Small Businesses: A Checklist

Internal financial controls come in a variety of forms—including manual or automated—and consist of policies, procedures and even everyday hygiene habits. Despite the different types available, these basic internal controls for accounting can have a significant impact on a company’s financial stability and success. 

Here are a few simple controls small businesses can implement before they need to hire full-time compliance expertise. 

  1. Create standard operating procedures (SOPs): Documenting your financial processes and procedures (e.g., invoicing and billing, travel expensing, payroll processing, etc.) helps ensure accuracy, consistency and continuity as employees leave or join the team. By having clear guidelines and defined roles in place, small businesses can help minimize risks and speed up accounting tasks and training.
  2. Set up accounts payable and receivable approvals: Establishing a system for approving and reviewing accounts payable and receivable transactions can help detect and prevent fraudulent activity. By requiring approval from multiple parties, small businesses can help ensure that all transactions and all vendors are legitimate and authorized.
  3. Conduct regular account reconciliations: Regularly reconciling accounts can help detect errors and ensure that financial statements are accurate. This involves comparing accounting records with bank statements, credit card statements and other financial documents to ensure that all transactions have been recorded correctly. Small businesses will benefit from monthly or weekly reconciliations to identify discrepancies and manage cash flow.
  4. Segregate certain accounting duties: Separating financial duties among different employees can help prevent fraud and errors. For example, the employee who deposits or signs the checks should not be responsible for recording and reconciling transactions in the accounting system.
  5. Implement IT security controls: Implementing IT security controls can help protect financial data from cyber threats. This includes using strong passwords, limiting access to cloud financial systems and regularly backing up data.
Checklist Internal Controls Small Business

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At What Point Does a Small Business Need Stronger Financial Oversight?

In the early stages of operating a small business, it’s common for the owner to handle many of the finances on their own. However, as the business grows and management requires deeper insights and reporting, there comes a point where the owner needs to outsource to an expert, such as a financial controller. You may need stronger internal financial controls and oversight when: 

  • You generate $25M or more in annual revenue and meet certain IRS reporting requirements and/or you’re adopting GAAP accounting for your reporting.
  • You have a team of dedicated AR/AP and payroll professionals to oversee. 
  • Your business expands geographically into areas with their own unique regulations and standards. 
  • You have higher-level forecasting and budgeting needs that require prompt reporting and strategic support. 

The Role of the Controller

A financial controller helps small businesses manage risks and take their finances to the next level by overseeing reporting and providing expert advice on financial planning, tax compliance and cost-cutting strategies. They can also monitor cash flow, accounting information systems and new accounting hires to ensure the business is operating efficiently and effectively. 

Depending on a company’s bandwidth, not all owners are ready or able to afford hiring a full-time financial controller. However, financial controller services or a fractional professional can help your business implement these initial financial controls as you grow or transition to full-time expertise. 

As you look toward the next stage beyond bookkeeping, consider partnering with a freelance financial controller to get your initial financial controls up and running. This will save you from spending time and money on a full-time controller before the situation truly calls for it. At Paro, our fractional financial controllers can help you set up and implement the right checks and balances to protect your business and ensure its success.