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25 Essential Financial Safeguards Every Small Business Must Know

25 Essential Financial Safeguards Every Small Business Must Know

Growing businesses already face a myriad of challenges, and recent data adds another concern: According to the Association of Certified Fraud Examiners (ACFE), in the past few years, small enterprises with less than 100 employees have suffered greater financial losses due to fraud compared to large corporations with over 10,000 employees. The primary culprits? Many smaller companies lack adequate internal controls against fraud and often cannot override existing measures, leaving them vulnerable.

It may seem straightforward to rectify, but for a small business owner juggling numerous responsibilities and a never-ending list of tasks, it’s not so simple. The same goes for businesses with limited accounting manpower where proper financial oversight might be absent. Even an unintentional accounting error can result in substantial financial setbacks, from which some small businesses might not bounce back.

Although no set of controls can wholly prevent fraud or accounting mistakes, the 25 essential financial controls highlighted below can bolster small businesses’ defenses.

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.

Recommended Practices:

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.

This kind of control is typically a procedural step within the accounting sector. The following are recommended practices:

13. Contrast actual outcomes with the anticipated results from budgets or forecasts. This can involve key metrics such as sales, expenses, cash flow, debt balances, inventory changes, and travel and entertainment activity. Automated reporting with notifications can assist small business owners in monitoring these metrics on-the-fly.

14. Aim for role segregation wherever feasible. It’s inadvisable for a single individual to oversee the entire transaction process—from initiation and recording to approval and reconciliation.

15. Insist on supporting documentation for every transaction, with particular emphasis on cash and debt operations.

16. Appoint an independent managerial reviewer to periodically scrutinize financial statements. It’s common for small business proprietors to bring in external CPAs for assistance.

Data security controls ensure restricted and suitable access to systems.

Best practices encompass:

17. Tailoring login permissions for financial systems, granting access solely based on an individual’s job responsibilities.

18. Using distinctive passwords that are frequently changed and kept confidential.

19. Conducting routine system backups and saving data in an offsite location for potential forensic evaluation.

HR controls outline the policies and guidelines pertaining to employees.

20. Instituting structured hiring processes, inclusive of background verifications.

21. Mandating owner approval for the inclusion of all new staff in the payroll system.

22. Periodically scrutinizing payroll reports, ensuring vigilance for irregular sums and unknown names.

23. Mandating consecutive vacation days for all staff, allowing others to take over their roles during that time.

24. Cultivating a work atmosphere that promotes transparency and open dialogue. Insider tips are often pivotal in detecting fraud.

25. Precisely delineating job roles and rotating them periodically. For instance, a small enterprise might rotate vendor lists between two AP clerks every half-year, ensuring fresh scrutiny on cash outflows.

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.

Summary

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.

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