Small businesses can be hit harder by fraud than larger organisations. Often, it’s because they lack the internal controls needed to prevent errors and catch fraudulent activity. In this article, we discuss the need for financial controls in small businesses, outline best-practice controls in five different areas, and explain how software can help embed best practice into the business.

What Are Financial Controls and Why Are They Important?

Financial controls are a system of checks and balances designed to find and prevent accounting fraud and errors. There are three types of controls, which can be manual, automated or a combination of both:

  • Preventive – designed into processes with a view to ensuring errors and fraud don’t happen in the first place
  • Detective – created to catch errors that escape preventive controls
  • Corrective – put in place to correct errors picked up by detective controls

Examples of key financial controls include reconciling bank accounts, new vendor approval, or matching purchase orders with invoices and payments. Financial controls are important because without them, businesses can be exposed to errors and fraud, make poor decisions, and produce inaccurate reports. Any of these issues can lead to serious financial and reputational damage.

Five Categories of Financial Control for Small Businesses

There is a wide variety in the type and nature of financial controls. Typically, they fall into five categories. In the table below, we summarise best practice in each area.

Category Purpose Best practice is to…
  1. Cash
 Security and loss prevention
  • Separate business and personal accounts
  • Regularly reconcile against bank statements
  • Use two people to double-count cash deposits
  • Monitor any POS cash drawers
  • Limit access to bank information
  • Limit authorised signatories for payments
  • Require dual signatories for payments over certain amounts
  1. Accounts payable
 Authorising and directing payments
  • Get formal estimates for payments over certain amounts
  • Triple-match invoices with POs and proofs of payment
  • Reconcile company credit card expenses with general ledger expense accounts
  • Require dual approval for new vendors
  • Formalise petty cash transactions, and reimbursement policies for entertainment and travel
  1. Reporting
 Clean, accurate financial reports
  • Compare actual vs. expected results included in forecasts and budgets
  • Segregate duties so different people manage different parts of the transaction lifecycle, from initiating to reconciling
  • Require backup documentation for all transactions
  • Have financial reports regularly examined by an external reviewer
  1. Data security
 Provide appropriate access to systems
  • Ensure logins to financial systems are tailored to individual roles
  • Follow good password hygiene
  • Regularly backup and store data offsite
  1. Human resources
 Fraud prevention
  • Develop formalised procedures for staff onboarding
  • Require approval before new employees join the payroll
  • Regularly review payroll reports for anomalies
  • Encourage a culture of honest and open communication

How Software Can Help With Best Practice Financial Controls

Implementing and running best practice financial controls can tax the resources of small businesses. This is where robust accounting software can make a difference. It can automate some control processes, taking the pressure off small finance teams. And it can help businesses with limited resources to put in place best-practice controls–without the need for extra staff or costly outside help.

Here are five ways that accounting software can help:

  1. Built-in accounting rules and standards can be tailored to include company-specific policies, providing automated, preventive oversight over financial activity for time-pressed managers and business owners
  2. Role-based dashboards help assign specific permissions to different individuals, support the segregation of duties
  3. Automated approval workflows ensure transactions go through predefined chains of approval
  4. Vendor onboarding workflows and checks help prevent fraud
  5. Real-time and drill-down financial reporting helps teams to detect anomalies and errors easily and quickly

Learn more about how NetSuite cloud accounting software can support small businesses with internal financial controls.

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