Financial controls – 16 best practices for business owners

KEY ARTICLE TAKEAWAYS

Learn about financial controls 

Learn why financial controls are important to overall company value 

Understand best practices for an owner implementing good financial controls 

Learn how financial controls can prevent fraud 

What are financial controls?

Financial controls are processes and procedures a company implements to reduce the potential for fraud and increase the accuracy of its financial reporting.

When properly implemented, financial controls will make it difficult for an employee or other person to defraud the company. We run through 16 financial controls best practices below.

Why do financial controls impact a company’s valuation?

Having solid financial controls in place presents a picture to investors or buyers that you have a disciplined, organized, and well-run finance team and organization. Sort of like when you are buying a house – if the house is a mess, your view of it will be much less favorable than if it were clean, neat, and organized. Think of financial controls like cleaning up your house.

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A buyer who has more confidence in the financial systems, reporting, and records of a target company will typically perceive less risk in the company. Less perceived risk from a buyer or investor means they will value the company’s cash flows higher than if they perceived there to be more risk in the company. 

As a result, having solid financial controls will help increase the value of a business, and will significantly reduce the potential for fraud. We have unfortunately seen companies lose hundreds of thousands of dollars to unscrupulous controllers or other employees whom the owner thought they could trust. By making it difficult to commit fraud, you can help remove any potential temptation that an employee might otherwise have. 

What are best practices you can implement in your financial controls?

Here is a list of 16 financial controls best practices that are easy to implement. The key to implementing these best practices is to use them regularly – it is not sufficient to set them up, but only use them sporadically. While these are not the most fun aspects of owning or running a company, they are important and can prevent serious financial damage to an organization. 

1.

Run background checks before hiring

For all employees, run a background check on them that includes not only criminal history, but also a credit score. Job candidates with a criminal history or with a poor credit score merit additional scrutiny, and should never be placed in a financial role.

2.

Don’t mingle personal and business expenses

While it can be attractive for business owners to save taxes by running personal expenses through the business, resist this temptation. First, it exposes you to potential tax penalties or worse. Second, it sends the wrong signal to your employees. Third, it reflects a lack of financial discipline in the organization that will make buyers more skeptical.

3.

Perform a monthly review of your bank statements and credit card statements

Have these statements sent to your home address or personal e-mail account, and ask questions regularly about the statement to your controller. Simply paying attention and making sure your controller and other financial personnel know you are looking at these statements can prevent problems down the road.

4.

Perform monthly bank reconciliations and review them

Have your controller perform bank reconciliations and review them personally.

5.

Use a sweep account to manage larger amounts of cash and limit access to this account

Having an operating account to run your company’s expenses through is appropriate, and access to this account can be convenient for your financial personnel. However, implement a policy with your bank to sweep excess cash amounts above a certain limit to an account only you or a very limited number of people have access to.

6.

Use a lockbox for receiving checks instead of the general company address

Having checks sent to a lockbox prevents the potential for an employee to intercept checks in the mail that they could divert away from the company.

7.

Conduct regular reviews of inventory

A lack of inventory controls increases the potential for lost or stolen inventory. Review how inventory is purchased and sold, as well as conduct periodic inventory audits to reduce the potential for lost or stolen inventory.

8.

Get fraud insurance

Even under the best controls, companies can still be at risk for financial fraud. By obtaining fraud insurance you can not only better manage your financial risk, but your insurance provider can likely help you with additional best practices as well as periodic audits of your controls.

9.

Review all outgoing payments and checks

Review all vendor invoices. If your business is manageable enough to be able to personally review all vendor invoices and outgoing payments, this will help you spot any fictitious vendors. If your business is larger, segregate the duties such that the person reviewing vendor invoices is not the person writing the purchase orders or paying the invoices.

10.

Sign checks yourself

Never sign blank checks for future use.

11.

Approve all write-offs

If there is an account receivable that is deemed uncollectible, never allow your controller to write-off these amounts by themselves. Approve all write-offs personally.

12.

Review customer and vendor list

On a periodic (and random) basis, review your customer and vendor list and note any discrepancies or check into customers or vendors of which you have not heard.

13.

Perform periodic (and random) reviews of your financials

Run through each of your financial reports, ask questions of your accounting staff, and let them know you are reviewing financials regularly.

14.

Review payroll amounts

Make sure that the payroll amounts are accurate and reflect the stated salary or hourly wages each employee is due to be paid.

15.

Require vacations

Require each person on your finance team to take at least 2 weeks of vacation. This can highlight potential financial controls issues or fraud if they are not there to manage incoming checks, invoices, etc.

16.

Have more than one person managing financials

Ideally, if your company size allows it, have more than one person managing your finances and books and records. Segregating their duties makes it more difficult for one of them to commit fraud, and having multiple people reviewing your financials increases the accuracy and reliability of your financial statements.

Each of these best practices are relatively easy to implement, and can save you untold headaches and cost down the road. In addition, having strong financial controls sends a clear signal to investors and buyers that your company’s records are in order and you have a “clean house.”

If you’d like to learn more about how your financial controls might impact your company’s valuation or marketability, click on the button in the red banner above to take our CoPilot Assessment. CoPilot will help you identify if your company has financial controls gaps, in addition to other risks. CoPilot identifies over 90 different types of potential risks your company could have that will make your business less valuable in the eyes of an investor. Get the test ahead of time and build value today with CoPilot.

AUTHORED BY:

Chris Younger  |  Managing Director  |  Class VI Securities, LLC  |  Class VI Family Office, LLC

Chris co-founded Class VI in 2005 with a mission to Enable the Entrepreneurial Spirit. Sharing a passion for what entrepreneurs mean to our community, Chris and his business partner David Tolson felt they could do a better job for business owners and have had a great time helping clients ever since.

Prior to Class VI, Chris spent more than 20 years gaining experience in executive management, marketing, sales, law, and mergers and acquisitions.

The views expressed represent the opinion of Class VI Partners. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.  While Class VI Partners believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Class VI Partners view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Testimonial may not be representative of the experience of other customers. Testimonials are no guarantee of future performance or success. Testimonials are NOT paid testimonials.
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