Kelcee Blue | Director of Strategic Finance
Managing finances as your business grows is a delicate balance. You need help, but you need trust and consistency as well. As your finance team grows, your risk becomes spread across more potential points of failure.
Still, as the owner or CEO, entering every payment yourself isn’t an efficient use of your time. The solution is to establish a set of basic financial controls that will ensure your cash is always protected so that you can scale the size of your finance team to handle the demand as your business grows.
What is a Financial Control?
A financial control is a policy or process that protects your financial resources. These controls are also designed to ensure the accuracy of financial data.
4 Common Financial Controls
Most businesses, even very small ones, have some type of financial control in place. The task of reconciling financial accounts or establishing policies that create a separation of duties is a common example of financial controls. Let’s take a closer look at how these financial controls work.
Reconciliations
Reconciliation is the process of comparing records from different sources to ensure that they match. Businesses should reconcile certain financial accounts that live in their accounting system (QuickBooks, Netsuite, Sage, etc.) to external sources for validation. This process can be helpful in detecting errors or fraud, ultimately ensuring the accuracy of all financial information based on this data.
The most critical reconciliation for your financials is your general ledger cash account to your bank account balance. Here, you will compare the transactions in your cash account to those in your bank account, adjusting for timing differences to ensure your records match your bank’s records.
Other common reconciliations include:
- Credit Card Expenses: Credit Card Statement & Receipts
- Accounts Receivable: Outstanding Invoices by Customer
- Accounts Payable: Outstanding Bills by Vendor
In most cases, reconciliations should occur on a monthly cycle, matching the timing of statements produced or invoices created. This step helps ensure the accuracy of your financial data in preparation for financial reporting which will eventually be used for modeling and projections.
Separation of Duties
Another basic financial control is the intentional distribution of work so that more than one individual is always involved in a transaction. For example, in accounts payable, you would have one person enter the payment and a second person review or approve the payment before the cash leaves the bank.
This separation of duties creates a necessary system of checks and balances that reduces errors and eliminates the potential for fraud, giving you peace of mind. Another example might be reconciliations. Setting up a workflow where one person enters transactions, another person prepares reconciliations, and a third person reviews reconciliations while matching source documents is another basic financial control.
Expense Policies
Credit card expenses are another area where defined policies and structured processes can clear up a lot of ambiguity. For example, when an employee is traveling for work, will you provide a per diem or will they expense meals on their company card?
If you have a process, do all of your employees know that process? And is the process enforced? Having a well-defined and clearly communicated expense policy and an expense management process for cards and reimbursements helps prevent non-business expenses and discourages frivolous spending.
Accounts Payable Policies
Accounts Payable can be a high risk area for fraud. It is important to have processes in place that ensure you don’t pay the wrong person or the wrong amount. There should be a formalized invoice approval process that occurs prior to any action on issuing payment. It is good practice to implement a verbal confirmation of payment instructions for any new vendor or abnormal invoice/payment request as email is commonly used by fraudsters. Leverage technology to store vendor payment details and restrict access for editing this type of data. You can also leverage technology to customize workflow approvals. For example, you can require that all transactions in excess of $5,000 require approval by a manager and all transactions in excess of $10,000 require approval by a Director.
Other Types of Controls
The buck doesn’t stop with the finance department. There are a few other essential levels of control that are necessary to safeguard your financial data. For example, establishing and enforcing data security protocols is as important as establishing basic financial controls in the first place.
Your data security controls address things like not allowing your employees to share account credentials or using role-based permissions to restrict access to sensitive information.
Depending on the business or industry, there may be additional legal or data security considerations that will also factor into the level of risk you need to manage with your financial controls. For example, healthcare providers are obliged to comply with the Healthcare Information Portability and Protection Act (HIPPA), which will require enhanced security and control measures for patient and financial data.
Bring in a Fractional CFO to Establish Basic Financial Controls for Your Business
A complete overhaul of systems and processes can feel daunting and easy to postpone. But remember, you have worked so hard to build a business – it’s worth the effort to protect it. Even when you’re still small, it’s never too soon to start implementing controls.
Technology can make the process easier, but also, the availability of options can make it more complex. There are many different tools – accounting software, online banking platforms, expense management platforms, and so on.
Setting up software that can automate routine tasks while creating policies and designing workflows so that everything works together harmoniously is a big project. Consider bringing in financial experts who can review your internal processes and make recommendations, oversee the setup, and provide training so that you end up with a system that your business can actually use.
At Embarc Advisors, we provide Fractional CFO services with a team approach to meet you where you are and help you scale with basic financial controls that will protect your business for years to come, turning the daunting task from to-do to done.
Reach out and talk to our team about your needs today.
