Every small business needs internal financial controls to help ensure its money is properly managed. Without them, your business risks employee fraud, cash flow shortages, or even bankruptcy.
Here are 17 financial controls every small business should have in place.
- Keep business and personal finances separate. Never co-mingle business and personal finances. If you do make a loan to your business or take a loan from your business, document it appropriately with a promissory note specifying repayment terms.
- Conduct background checks before hiring. This is especially important for employees whose job duties involve finances, such as bookkeeping, accounting, payroll, or handling cash.
- Create monthly cash flow projections. If your actual cash flow falls short of projections, investigate to find out why.
- Review your business’s monthly bank statements in detail. Have bank statements sent directly to your personal email or home address.
- Review all credit and debit card statements for accuracy. Using payment cards for business expenses can simplify accounting and tax preparation. However, the more employees have company credit cards, the greater the chance of fraud. Require employees to document all business expenses with detailed receipts.
- Set up inventory control systems. Inventory is often damaged, stolen, or lost. Inspect and count incoming inventory to make sure orders were filled accurately. Designate who can sign for incoming inventory or release outgoing inventory. Conduct regular inventory of products or materials.
- Monitor point-of-sale transactions. Count cash in the cash drawer at the beginning and end of each business day. Use point-of-sale software that requires employees to log in—tracking who is on the register at any given time reduces the risk of theft.
- Don't put one person in charge of petty cash. Require a second employee to authorize all petty cash transactions. Record all transactions, and balance the petty cash once a week.
- Review all outgoing payments. Compare payments to invoices. Watch for duplicate invoices, new vendors, or multiple invoices from the same vendor in a short time. Embezzling employees often use these tactics to pay themselves.
- Require vendors to submit detailed invoices. Avoid vague language on invoices.
- Sign checks yourself. Require all outgoing checks and payments to be signed or authorized by the business owner.
- Review payroll before it goes out. Watch for any variations in the amount. Use direct deposit to reduce your risk of payroll fraud.
- Delegate financial duties to multiple employees. If one person is in charge of all your business financials, such as bookkeeping, payments, and payroll, it's easy for them to steal from your business.
- Check up on employees involved with your business finances. Require these employees to take annual vacations and have someone else handle their duties. Embezzlement is often discovered this way.
- Monitor your use of debt. Your accountant can help you set a maximum debt-to-equity ratio and a minimum debt-to-cash flow ratio. Stay within these bounds to keep your business from becoming overleveraged.
- Plan ahead for business financing. If you have a sudden cash-flow crunch, or find an opportunity that requires a cash outlay, will you be prepared to handle it? Always have a couple of potential capital sources at the ready.
- Don't be predictable. Put the element of surprise on your side when watching for employee misconduct. Perform your financial reviews and audits at random times.