ARCHIVES
Small businesses thrive on trust and teamwork, but even the best-run businesses need systems in place to stay secure. Without the right safeguards, your finances could be at risk from fraud, errors, or mismanagement. That’s exactly why internal controls are so important. They help you spot risks early, keep your operations running efficiently, and protect what you’ve worked so hard to build. Not sure where to start? This guide will walk you through why internal controls matter and how you can put them into action.
What Are Internal Controls, and Why Do You Need Them?
Internal controls are systems, policies, or practices that keep your business finances accountable. They help you use money efficiently, prevent errors, and reduce risks like fraud or mismanagement.
Small businesses often face extra challenges here. With smaller teams and fewer formal processes, it’s easy to rely on trust alone. But even the most trustworthy team members can make mistakes or act dishonestly. Without clear safeguards in place, you could be leaving your business open to unnecessary risks and penalties.
Here’s a surprising stat: 42% of fraud cases in small businesses stem from a lack of internal controls, compared to just 25% in larger organizations. The good news? Internal controls are proactive tools that help protect all the hard work you’ve put into your business.
Why Are Small Businesses More Vulnerable?
Small businesses don’t usually have the same resources or oversight as bigger companies. This can create gaps in managing finances, making it easier for things to fall through the cracks. Here are a few common challenges small businesses face:
- Fraudulent Expense Claims: Without clear procedures, someone could get reimbursed for personal expenses.
- Unauthorized Spending: Without monitoring company credit cards, funds could be spent on non-business items.
- Mismanaged Funds: When one person handles both finances and payments, errors or misuse can go unnoticed.
These issues are more common than you might think, but here’s the bright side: strong internal controls can help prevent all of them.
How Strong Internal Controls Benefit You
Strong internal controls do more than prevent problems—they make running your business easier and set you up for success. Here’s how they can help:
Keep Fraud in Check
Fraud isn’t something anyone likes to think about, but ignoring the risks can leave your business wide open. Simple steps like splitting up responsibilities (so the person writing checks isn’t the one reconciling accounts) or getting approvals for big transactions can make a huge difference.
Stay Compliant
Nobody wants a surprise call from the tax office. But poor bookkeeping can lead to just that, especially when income and payroll numbers don’t add up. Mistakes like these can trigger penalties and extra stress you don’t need. Solid internal controls help you stay on top of the details, so you’re always in the clear with tax and regulatory requirements.
Cut Down on Errors
Mistakes in your books don’t just cost you money; they eat up valuable time, too. Did you know accounting errors and clunky manual reporting rack up billions of dollars in hidden costs for U.S. businesses every year? By tightening up processes and using tools (like QuickBooks) that track your finances automatically, you can ditch the chaos and keep things running smoothly.
Build Trust All Around
Strong internal controls show your team, customers, and investors that you’re serious about handling money responsibly. When your processes are clear and reliable, it builds confidence and respect, making people feel good about working with your business.
How to Start Using Internal Controls
Internal controls can be as simple as requiring a signature for petty cash or as advanced as using automated bookkeeping systems. You don’t need to tackle it all at once. Even small steps, combined, can provide strong protection for your business.
Here’s how to get started:
Evaluate Your Current Setup
Take a moment to review how your money is managed. Do employees have access to cash without proper oversight? Are invoices approved inconsistently? Weak spots, like unchecked spending on office supplies or poor expense tracking, can show where simple changes—like adding approval steps—are needed.
Use Checks and Balances
Don’t let one person handle too many financial tasks. For example, if the same person records payments and reconciles bank statements, mistakes or misuse might slip by. Instead, have one person record transactions and another check them. This simple separation adds extra security.
Write Clear Policies
Simple rules can go a long way. For example, you could require two approvals before finalizing a big purchase. You might also set up an easy step-by-step process for submitting expense reimbursements. Even having a clear policy for petty cash, like logging the exact amounts taken and returned, can help reduce confusion and mistakes.
Use Technology
Accounting software like QuickBooks or Xero makes managing finances easier. They can automatically sort your expenses, catch duplicate entries, and create accurate reports. These tools save time and help you avoid manual errors, which is especially useful as your business grows.
Perform Regular Check-ins
Systems that worked when you were starting out might not cut it as you expand. Make it a habit to review your processes regularly. For instance, are you reconciling accounts monthly or just occasionally? Regular check-ins can help you spot problems early, like unbalanced books or outdated vendor contracts.
Teach Your Team
Make sure everyone understands why internal controls matter. Train staff to check receipts when reimbursing expenses or explain why they shouldn’t share passwords for accounting software. When your team is informed and accountable, the whole system runs more smoothly.
Whether you start small or implement comprehensive systems, what matters is getting the ball rolling. Every step you take brings more clarity, protection, and trust to your business.
Why a CPA Is a Game-Changer for Internal Controls
Putting basic controls in place is a great start, but working with a CPA helps bring things to the next level. Here’s how they can help:
- Identify Risks You Might Miss: Experienced CPAs can examine your finances with an expert eye, spotting vulnerabilities that often go unnoticed.
- Customized to Your Business: A CPA works with you to design controls that align with your specific needs—not generic, one-size-fits-all fixes.
- Ongoing Adjustments: As your business grows, a CPA can help update and improve your controls so they stay effective.
At SME CPAs, we go beyond just improving internal controls. Our auditing services provide a detailed review of your financials to find risks, streamline processes, and ensure compliance. Whether you need help strengthening controls or a more thorough audit, we’re here to support your success every step of the way. Plus, with QuickBooks ProAdvisors on our team, we can help you get set up, train your staff, and help you leverage QuickBooks to keep your finances in check.
Protect Your Business with SME CPAs
Building strong internal controls is one of the best moves you can make for your business. It’s not as complicated as it sounds, and with support from experts, it’s even easier to get it right.
Want to learn more? Get in touch with us today to hear about our audit and internal controls services. Your business deserves a foundation that’s built to last. Start protecting what you’ve created, so you can focus on planning for your bright future!