A little bit of focus on financial controls can bring a whole lot of benefits.

In PwC’s Global Economic Crime and Fraud Survey, just under half (46%) of businesses surveyed experienced some form of fraud or economic crime in the last two years. This shows that a huge portion of businesses still don’t have enough checkpoints and guardrails to stay on top of financial processes – leaving them vulnerable. Financial controls are simple steps that can help with compliance, reduce risk, and even boost overall productivity by making many tasks easier.

Research commissioned by PwC found internal financial controls do indeed work – two-thirds of organisations that experienced fraud discovered their most disruptive incident through financial controls. No matter the size of a business though, now is the time to build good habits and put these essential steps in place.

What are financial controls?

Financial controls are policies and procedures that are put in place to keep financial records in check and protect company assets. Along with preventing or detecting accounting errors, they also help find and deter fraud, such as account skimming, misappropriation of assets, or false expense claims.

Most larger organisations have fairly extensive financial controls due to the size of their teams. Smaller businesses, on the other hand, tend to have less rigor around these processes – it’s not uncommon for one person to handle most financial tasks. Adding controls not only makes their lives easier and the business safer in the long term, but also those of their accounting and bookkeeping partners.

Here are six essential financial controls businesses of all sizes should put in place for smoother and more secure operations:

1. Segregation of duties: Segregating duties means that no single employee has total control over a financial transaction – like processing invoices or approving expense claims. This improves the accuracy of financial data and minimises the risk of fraud.

When setting up a workflow, the more junior employee should book the journal or set up the payment and the more experienced team member authorise or book the transaction.

While these processes should involve a minimum of at least two individuals, companies should plan for when staff are on annual leave with alternate workflows so time-sensitive transactions can still go ahead.

2. Reconciliations: Reconciliations aren’t a once-off – they should be done regularly. This process of matching accounting to source data keeps financial information up to date and can pin-point anomalies that can undermine the integrity of financial records.

Reconciling accounts weekly will make it easier to fix errors, helping to stay on top of banking, payroll records, and fixed asset registers. Retail businesses with a physical shop front should reconcile cash takings against transaction records, while those operating online should remember to reconcile digital transactions.

3. Authorisations and approvals:  Financial controls include setting up who is responsible for what. Limits on who can authorise or approve transactions above a certain amount can keep tighter reins on spending, helping companies to stay on budget and make sure any spending policies are consistently applied throughout the business for both employee expenses and supplier invoices.

Tools like ApprovalMax can streamline these transactions through approval workflows related to managing purchase orders or employee expenses. By automating these, actions can progress easily without having to manually chase or nudge the next approver.

‍4. Control over budgets: While authorisation processes help,  it’s still important to track and monitor company spend across all budgets so that expenses are within planned limits.

If you don’t check budgets before giving approval to pay bills and invoices, it can cause working capital issues.

This makes it harder to pay suppliers on time and increases the likelihood of needing short-term funding, which isn’t always ideal.

Certain tools simplify, or even automate, this process. Where possible, seek out cloud-based options that compare company budgets to live accounting data, inspect and document variances.

5. Compliance checks: New legislation, like Making Tax Digital (MTD), and an increase in fraudulent activity make it more critical than ever for businesses to establish compliance checks in their finance departments.

Thankfully, there are ways to make sure your business is compliant. Businesses should use anti-money laundering (AML) and Know Your Customer (KYC) procedures to check suppliers are legitimate and manage any associated risks.

These usually include obtaining original documentation, such as company registration details and, where relevant, VAT numbers. It’s worthwhile also finding information on company directors to see if they’ve recently managed companies which have gone insolvent.

If offering customers payment terms, run credit checks during the onboarding process and regularly monitor them for adverse financial events, such as County Court Judgements (CCJs).

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6. Audit trails: Maintaining details of who has created and approved transactions keeps finance team members accountable and makes it easier to interrogate large and unusual transactions during an audit.

The good news is many modern ledger software vendors automatically maintain an audit trail, including ApprovalMax. This can be run as a filtered report, listing initial transactions and any changes will be date stamped with specific user details, and is particularly useful at month-end when financial controllers may need to fix entries that weren’t input correctly. Third-party add-ons, such as ApprovalMax, can provide audit trails for processes not covered by ledger software, including accounts payable and accounts receivable workflows, purchase order management, payments, invoicing, and quotations.

Putting financial controls into place

Setting up financial control processes doesn’t have to be complicated or painful. In fact, you often end up saving huge amounts of time in the long run, especially when adding automation to the mix.

Neglecting financial controls and postponing process development is a common tendency. Often, the significance of these measures isn’t fully recognised until a crisis occurs, resulting in substantial expenses and hardships. Many businesses fail to grasp the potential severity of the consequences. It’s crucial to address these controls proactively to safeguard against unforeseen challenges and mitigate potential losses.

Businesses with several layers of robust financial controls in their business will have better a financial health score, smoother operational efficiency, better legal compliance, and higher survival rates.