25 Essential Financial Safeguards Every Small Business Must Know
What Are Financial Controls?
Financial controls are mechanisms designed to identify and prevent accounting inaccuracies. They serve as a foundation for trustworthy and precise accounting records. Additionally, these controls play a crucial role in thwarting fraudulent activities, including skimming, unauthorized asset use, and payroll fraud.
These controls can either be manual, automated, or, as in many organizations, a mix of both. For public companies, the spotlight is on internal controls, mandated by the Sarbanes-Oxley Act to release a yearly Internal Controls report. This report confirms the presence of sound controls over their financial statements and assets. However, for small businesses, establishing such controls can be challenging, particularly when key elements like duty segregation and tiered review processes are tough to put in place.
The Importance of Financial Controls for Small Businesses
It’s clear: Absence or insufficiency of internal controls can severely harm a small business’s financial health, potentially threatening its very existence. Replacing lost assets isn’t always easy. Dishonest employees can damage both team spirit and customer trust. An oversight in accounting can result in misguided choices.
Having robust internal financial controls can curtail the duration of unnoticed issues. This is particularly beneficial for small business owners and managers juggling numerous tasks and aiming for business growth.
To be more precise, financial controls can:
Deter Fraudulent Activities While no measure is foolproof against joint scheming, controls can majorly inhibit such acts. Having set guidelines and procedures, coupled with regular oversight and multiple layers of review, can notably lessen instances of fraud, theft, and embezzlement. This is especially critical when overseeing customer billing, validating expense checks, and managing petty cash.
Guard Valuable Assets Incorporating more oversight mechanisms for crucial assets, such as cash and inventory, directly diminishes potential losses. By using measures like surveillance cameras, secured system logins, and routine reconciliations, businesses can shield their resources. In fact, ACFE suggests that nearly 5% of yearly revenue goes unnoticed due to hidden fraudulent activities, predominantly from asset mismanagement.
Uphold Precise Financial Reporting For small business owners, every decision matters. They require dependable and up-to-date financial information to guide their actions. Through financial controls, the reliability of financial reports is maintained. Moreover, external entities, like lenders and collaborators, bank upon these financial statements to make choices that can significantly influence a small business’s ability to secure funds.
25 Examples of Financial Controls for Small Businesses
Internal controls can be diverse in nature. They might be manual, digital, rooted in standard protocols, or just represent best business practices. Regardless of their form, they play a pivotal role for small businesses. Typically, these financial controls can be categorized into five main areas: cash management, accounts payable (AP), broader financial strategies, data protection, and human resources (HR).
Cash controls pertain to security and loss prevention.
1. Maintain distinct business and personal accounts to prevent mixing transactions.
2. Regularly reconcile accounts by matching internal ledgers with bank statements.
3. Ensure that two individuals verify all cash deposits.
4. Supervise point-of-sale cash registers, noting initial and final cash balances as well as the responsible personnel.
5. Restrict access to both online and offline banking details. Ideally, small business owners should receive all statements directly.
6. Limit the number of individuals authorized to sign checks and digital transactions. Consider requiring the owner’s co-signature for disbursements above specific amounts.
AP controls aim to guarantee that payments are approved and directed to the correct recipient.
7. Mandating formal estimates for all purchases exceeding a specific dollar threshold.
8. Ensuring a three-way match of invoices, purchase orders, and payment proofs.
9. Examining company credit card statements and aligning them with general ledger expense accounts.
10. Necessitating dual approval levels for the establishment of new vendors.
11. Institutionalizing petty cash transactions with dual sign-off requirements.
12. Standardizing travel and entertainment reimbursement procedures.
Financial controls ensure the precision and clarity of financial reporting.
Data security controls ensure restricted and suitable access to systems.
HR controls outline the policies and guidelines pertaining to employees.
How Financial Software Can Elevate Your Accounting Practice
Harnessing the power of technology can be a game-changer for small businesses with limited resources. Advanced financial controls can effectively reduce accounting mistakes and diminish the potential for fraud. With the assistance of sophisticated accounting software, businesses are endowed with intrinsic accounting norms and the flexibility to integrate unique company policies.
Such software not only ensures unwavering adherence to accounting standards but also empowers business owners and managers by offering automated dashboards tailored to specific roles. Furthermore, features like comprehensive financial reports with in-depth analysis options support several control best practices. This includes conducting comparative assessments, ensuring proper documentation, and streamlining approvals and authorization processes.
Small businesses, given their vulnerabilities to accounting mishaps and potential fraud due to inadequate financial controls, often bear the brunt of such discrepancies more than larger counterparts. Yet, with the right blend of financial discipline and the 25 aforementioned financial controls, bolstered by suitable accounting software, these enterprises can fortify their defenses. As small business owners grapple with a myriad of responsibilities, robust financial controls serve as a vital safety net, ensuring no financial oversight goes unnoticed.