25 Key Financial Controls for Small Businesses

As if growing businesses didn't have enough challenges: For the past several years, companies with fewer than 100 employees have lost more money each time they were hit by fraud than companies with more than 10,000 employees, according to the Association of Certified Fraud Examiners (ACFE). The reason? For many, a lack of internal controls to monitor for fraud and the inability to override existing controls have left them susceptible.

Sounds like a simple problem to solve — unless you're a small business owner wearing multiple hats, with a constant stream of internal and external tasks competing for your attention. Ditto if you work for a company with limited accounting resources where checks and balances aren't a reality. Even a benign accounting mistake can lead to big financial consequences, from which not all small businesses may recover.

While no number of internal controls can completely eliminate the potential for fraud or errors in accounting, the 25 key financial controls listed below can certainly give small businesses a fighting chance.

What Are Financial Controls?

Financial controls are internal processes put in place to prevent or detect accounting errors. Their main purpose is to keep accounting records accurate and reliable. A robust network of internal controls also acts as a safety net to catch and deter fraudulent activity, such as skimming, misappropriation of assets (like inventory) and payroll theft.

Controls can be manual, automated or, as they are at most companies, a combination of both. Internal controls are a central focus in public companies, which are required by the Sarbanes-Oxley Act to issue an annual Internal Controls report that proves adequate controls exist for their assets and financial records. But at small businesses, financial controls are often overlooked or made more difficult because key control components, such as segregation of duties and layered review procedures, are not easy to implement.

Key Takeaways

• Strong financial controls help prevent and detect accounting errors and fraud.
• Small businesses often have subpar financial controls, leading to higher losses per fraud occurrence than those experienced by large enterprises.
• Relying on the right accounting software can help small businesses overcome control challenges.

Financial Controls for Small Business Explained

Just because a small business has limited resources doesn't mean it's destined to have an inadequate control environment. Technology is especially important to support financial controls. For example, with the right financial software, many preventive controls — designed to keep errors from happening in the first place — can be automated. These controls, or "filters," engage on the front end of activities. For instance, most accounting systems won't accept journal entries(opens in a new tab) with an unbalanced number of debits and credits. Another example: accounts payable systems that require a manager's approval to set up a new vendor prior to the vendor's first payment.

Detective controls — those that identify errors after the fact — can also be automated. These "backstop" controls highlight irregularities for investigation and correction. An example of an automated detective control is an automated dashboard that compares actual to expected results.

Why Are Financial Controls Important for a Small Business?

Make no mistake: Lack of or inadequate internal controls can prove devastating to a small business's financial well-being — and perhaps its ability to remain in business. Lost assets may be hard to replace. Unscrupulous employees can hurt morale and customer relationships. An accounting mistake can lead to poor decision-making.

Internal financial controls can help prevent or reduce the length of time that issues go undetected. This is especially helpful for small business owners and managers who shoulder many responsibilities and are focused on growing the business.

More specifically, financial controls can:

Reduce or eliminate fraud, theft and embezzlement

While no control is ironclad against collusion, they can go a long way in deterring it. Policies and procedures that include regular oversight and multiple reviews can help curb the occurrence of fraud, theft and embezzlement, especially for events perpetrated by unchecked solo actors. These financial controls are particularly important for monitoring customer billing, expense check payments and petty cash.

Protect resources

The more checks and balances there are over assets like cash and inventory, the less opportunity for loss. Controls like security cameras, system logins and periodic reconciliations can protect resources. The ACFE estimates that up to 5% of revenue is "lost" each year due to undetected fraud, most commonly asset misappropriation.

Ensure reporting accuracy

Small business owners make critical business decisions every day, so they need accurate and timely financial data to inform their choices. Financial controls help keep financial reporting clean and reliable. Additionally, external stakeholders, such as lenders and partners, also rely on financial reporting to make decisions that can have a substantial impact on small business's access to capital.

25 Examples of Financial Controls for Small Businesses

Internal controls come in many varieties. They can be manual or automated, consist of policies and procedures, and sometimes simply exemplify good business hygiene. But all of them can make a big difference for small businesses. Financial controls generally fall into five buckets — cash, accounts payable (AP), financial, data security and human resources (HR).

Cash controls pertain to security and loss prevention.

Best practices include:

1. Keeping business and personal accounts separate to avoid commingling transactions.
2. Reconciling accounts regularly, comparing internal cash books with external bank statements.
3. Having two people double-count all cash deposits.
4. Monitoring point-of-sales cash drawers, tracking beginning and ending cash balances and assigned staff.
5. Limiting the number of people who can access online and offline bank information. Small business owners might send all statements directly to themselves.
6. Limiting the number of authorised signers for checks and digital payments, and also requiring disbursements over certain amounts to be dual-signed by the owner.

AP controls focus on ensuring that payments are authorised and made to the right party.

Best practices include:

7. Requiring formal estimates on all purchases over a certain dollar amount.
8. Triple-matching invoices with purchase orders and proofs of payment.
9. Reviewing company credit card statements and reconciling them to general ledger expense accounts.
10. Requiring two levels of approval for new vendor creation.
11. Formalising petty cash transactions, including a double sign-off.
12. Formalising travel and entertainment reimbursement policies.

Financial controls help keep financial reporting clean and accurate.

This type of control is often a procedural step within the accounting department. Best practices include:

13. Comparing actual results to expected results included in budgets or forecasts. Examples include key metrics like sales, expenses, cash and debt balances, as well as inventory movements and travel and entertainment activity. Automated reports with alerts can help small business owners do this on-the-go.
14. Segregating duties whenever possible. The same person should not control the entire "life cycle" of a transaction (initiating, recording, approving and reconciling).
15. Requiring backup documentation for all transactions, especially those involving cash and debt.
16. Establishing an independent management reviewer to look over financial reports on a regular basis. Small business owners often engage an outside CPA to help.

Data security controls provide appropriate access to systems.

Best practices include:

17. Customising login access to financial systems, allowing access only to those modules necessary for an individual's role.
18. Choosing unique passwords, which are regularly updated and not shared.
19. Performing regular system backups and storing data offsite in case forensic evidence is needed.

HR controls document policies and procedures for employees.

Best practices include:

20. Formalising onboarding procedures, including background checks.
21. Requiring approval, typically from the owner, for all new employees added to payroll.
22. Reviewing payroll reports for each period, checking for unusual amounts and unfamiliar names.
23. Requiring all employees to take a block of vacation days, while someone else fills in for them.
24. Creating an environment that fosters honesty and open communication. Fraud is often caught based on insider tips.
25. Clearly defining job responsibilities and periodically rotating them. For example, a small business can accomplish this by swapping the vendor lists assigned to two AP clerks every six months as a way to get a second pair of eyes on cash disbursements.

How Can Financial and Accounting Software Help?

Financial controls provide a critical safety net to minimise the occurrence of accounting errors and reduce the likelihood of fraud. In small businesses, where resources may be limited, leaning into the right technology can help fill resource gaps by preventing and detecting errors in the underlying accounting data, resulting in cleaner financial reporting.

Robust accounting software comes with built-in accounting rules and standards and can incorporate company-specific policies. By ensuring consistent compliance, this preventive control feature provides a level of oversight, assisting busy small business owners and managers. Other features, such as automated, role-based dashboards and financial reporting with drill-down capabilities, help achieve several other control best practices, like performing comparative reviews, maintaining proper documentation, approvals and delegated authorisation levels.

Conclusion

Small businesses may be susceptible to accounting errors and fraud, mostly because of deficient or absent financial controls. Research shows these losses hurt this sector disproportionately. However, small businesses can establish a solid network of financial controls using a mix of good financial hygiene and the 25 financial controls discussed above, supported by the right accounting software. When small business owners are juggling many tasks, financial controls can be a safety net to catch the inevitable dropped ball.

Small Business Financial Controls FAQs

What are the internal controls in a small business?

Financial controls in small businesses are similar to those in midsize and large businesses. They are a system of checks and balances aimed at preventing and detecting accounting errors and fraud. The way in which small businesses execute their internal controls may differ; they may be performed manually, be automated by software or be a combination of both.

What are the 3 types of internal controls?

Two primary types of controls are preventive controls and detective controls. Preventive controls aim to keep errors or fraud from happening on the front end of a process, while detective controls catch errors that make their way into the financial process, that is, after they have happened. A third type of control, corrective controls, includes controls put into place to correct errors that were identified by the detective controls.

What are examples of financial controls?

Financial controls are policies and procedures designed to prevent or detect accounting errors and fraud. Examples of financial controls include account reconciliation, double-counting cash deposits, approving new vendors and rotating staff responsibilities.

What are key financial controls?

Key financial controls help safeguard assets, ensure accurate and authorised payments, deliver clean accounting data and accurate financial reporting, and enhance the security of financial data. Examples include reconciling bank accounts, comparing actual and expected results, and triple-matching purchase orders, invoices and payments.