Learn why internal controls are one of the most important, yet often overlooked, business considerations in the startup world.
Startups have many things to consider as they begin: headcount, location (or lack thereof), business strategy, cash flow and more. One area that can often be an afterthought is internal controls for financial statements. However, internal controls should be a key consideration as startups develop their company.
Why Are Internal Controls Important for Startups?
Incorporating internal controls into the daily functions of a startup can provide numerous benefits, such as:
- Accuracy and Reliability – Internal controls over financials increase the accuracy and reliability of reporting, giving both readers and preparers confidence. This, in turn, can boost stakeholder confidence in the company, potentially bringing in more cash flow and improving the company’s financial well-being.
- Compliance and Regulatory Requirements – Internal controls create guidelines for employees that help the company meet compliance requirements. By aligning internal controls with applicable laws and regulations, the company can ensure compliance.
- Efficiency – Internal controls establish guidelines for processes and procedures, showing employees what to do and what not to do. These guidelines help employees complete their jobs more efficiently, saving the company time and money, and allowing them to focus on their true mission and goals.
- Reducing Risk – Establishing internal controls reduces the risk of error, fraud and mismanagement of assets.
- Investor Confidence – Incorporating internal controls can provide a higher level of confidence for investors, which can lead to additional funding.
The Importance of Internal Controls in the Finance Function
Here are some internal controls that a startup should consider implementing into their financial processes:
- Access Controls: Limiting access to employees who need it to perform their job functions can reduce the financial reporting risk of a startup. This includes both physical and digital access.
- Accounting Software: Incorporating quality accounting software into a company’s financial controls increases the reliability of the data stored within the software and the accuracy of the financials it generates.
- Authorization Procedures: Establishing clear authorization for financial procedures reduces the risk of inappropriate recording and management of financial information. Regular review of these procedures is also necessary.
- Documentation and Recordkeeping and Reconciliations: Documenting the financial processes and procedures for a company allows a startup to thoroughly explain how their controls are put into practice. Then, maintaining this documentation will allow for an easier audit/review process. Examples of documentation a company should maintain are evidence of review of financial reporting, reconciliations and account receivable and payable support. Reconciliations are especially important to ensure accounts are regularly reconciled, discrepancies are identified, and that financial information is trustworthy.
- Monitoring: Reviewing and analyzing financial procedures, and adjusting them as necessary, keeps processes current and accurate. This can also help identify additional risks that may have emerged in the past year. As a best practice, this process is typically completed on an annual basis.
- Segregation of Duties: It’s best practice to limit an employee’s ability to perform functions that cross over three main areas of a financial process: authorization, recording and custody. Establishing internal controls that prevent this overlap helps maintain a strong, reliable and accurate financial environment.
If you have any questions about how internal controls can benefit your startup, please contact our team at [email protected].
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