Time to update your accounting and finance controls?

As your business grows, your operational complexity and financial risks do too.

Prioritizing internal controls and procedures as you scale can help your company avoid serious corporate finance problems—ranging from manual errors and reporting inaccuracies to fraud, compliance fines, and even legal proceedings.

In this post, we’ll 1) Explore what financial controls are and delve into their business value, 2) Explain how updating your controls as you scale improves financial performance, and 3) Share some warning signs that tell you it’s time to update your controls.

If you’re ready to optimize this crucial aspect of your business, let’s get going.

What are finance and accounting controls?

Your company’s financial controls are the practices and procedures you adopt to help you ensure reporting accuracy and efficiency. By ensuring trustworthy data, they help you reach your financial goals more quickly, but also in a more organized and effective way.

A common example of a financial control would be an invoice approval chain for payables. The same goes for account reconciliations, manager approvals for new vendors, and similar processes that promote accuracy and minimize mistakes.

As your company scales and the demands on your finance team multiply, controls enable you to:

• Eliminate costly accounting errors and prevent fraud.
• Remain compliant with all applicable laws and regulations.
• Maximize process efficiency, helping you do more with less.
• Build and keep stakeholder confidence.

By implementing robust controls, your organization can ensure the accuracy of its financial statements and provide a foundation of trust for stakeholders. 

The value of financial controls

Financial controls safeguard your business operations in numerous ways. Accounting and finance are at the heart of every organization, and you can’t scale optimally if your controls aren’t up to the task.

Your control environment helps you strengthen your financial position by:

            •           Promoting effective cash flow management: Effectively managing your resources is crucial for maintaining profitability. Inefficient controls can lead to delays or errors in processing transactions critical to your operations.

            •           Facilitating financial course correction: In a finance department with minimal or broken controls, it’s often hard to pick up on mistakes immediately. Inaccuracies in reporting and financial documents can quickly grow from minor inconveniences to major organizational risks when they negatively influence decision-making.

            •           Preventing employee fraud or fund misappropriation: Internal controls can help your business guard against embezzlement and other forms of fraud. This is especially important for smaller companies, which may have a harder time recovering from financial losses.

When guarding against theft and malfeasance, you also need to protect your company against external threats. As you evolve your control environment and finance operating model, be sure to give attention to cybersecurity as well.

Now that you know what finance and accounting controls are and why they matter, let’s answer the next important question.

Why should your controls evolve as you scale?

As your company grows, it’s crucial for your controls to evolve alongside it.

You need to adapt your policies, practices, and procedures to match your changing business needs, enabling you to better manage the increased financial complexity and risk that accompany:

            •           Growing transaction volumes

            •           Expanded network of vendors

            •           Ongoing financial planning and analysis

            •           Regulatory reporting

The day-to-day challenges facing a growing business can evolve rapidly. Let’s look at why your controls absolutely must keep up.

Compliance and legal risks can develop if you’re not careful

By maintaining strong financial controls, you can mitigate legal risks and avoid compliance issues.

Take your revenue cutoff, for example. When doing your financial reporting for a certain period, you need to have a cutoff date to make sure you don’t include revenue which should be recognized beyond that timeframe.

If you don’t have reliable controls in place and your reporting figures are inaccurate, that could present a serious problem with both strategic decision-making and personal liability.

From a financial advisor to a forensic accountant, everyone in financial occupations is expected to have systems in place to minimize risks. Your department should be no different.

If you’re a public company or have IPO aspirations, you are likely aware of the Sarbanes-Oxley Act and similar legislation enacted in other countries. These laws make finance leaders at public companies legally accountable for the accuracy of an organization’s financial reports and compliance with legal and regulatory obligations.

Stakeholders and investors demand solid financial controls

Stakeholder confidence hinges on strong financial controls that showcase responsible financial management.

From improving your managerial accounting to supplying other departments with strategic data, your controls can ensure the creation of accurate financial records for stakeholder use.

After all, a steady supply of accurate financial information is essential for any modern company, regardless of its market.

Robust controls are also demanded by investors. Reliable financial reporting is crucial to securing capital and enhancing financial transparency and credibility.

Effective controls help ensure the efficient flow of money through companies, protecting monetary resources by standardized policies and internal practices. For investors and stakeholders alike, that’s extremely important.

Your company’s needs change with time

As your company scales, the effective management of money becomes more essential than ever for meeting your business goals.

However, it also grows more challenging. As you expand, you’ll naturally find it much more difficult to:

            •           Reliably track financial transactions

            •           Reconcile your accounts quickly and accurately

            •           Avoid costly manual errors and maintain process efficiency

It’s very important to take a realistic–and ongoing–look at your control environment. Is it sufficiently aligned with your current growth stage?

What are some signs that it might be time for a change?

4 warning signs to update your financial controls

For financial managers and finance professionals, knowing when controls have become insufficient can be tricky.

You’ve got your head down, embedded in daily workflows and quantitative analysis. That can make it hard to tell when your accounting practices have come to a crossroads and change is required.

Below are four “red flags” that signal it’s time to ask yourself a critical question: Is your financial control environment sufficient?

1. You’re drowning in manual entries

Recording financial data through manual entries can be a time-consuming and error-prone task. If you’re not careful to catch mistakes, the accuracy of your financial reports will start to decline.

Outdated accounting software can make it difficult to handle large volumes of financial data efficiently. As your business grows, it becomes essential to update your tech stack and accounting controls to manage your increased volume of transactions.

It’s also important to consider the opportunity cost of manual data entry.

Every minute that your finance team wastes on data entry is taking away from profit-oriented strategic tasks. Over time, this erodes your ability to create and achieve lofty financial goals.

2. Transaction approvals are becoming a burden

Spending large amounts of time and effort approving transactions is a sure sign of improper financial controls.

Approvals are a core aspect of financial accounting, but policies and procedures must be right-sized for the business needs. Otherwise, they can grow unwieldy and drain excessive time and resources.

In addition, payment controls centered on manual workflows put supplier relations in jeopardy. All it takes is one late or incorrect payment to give a vendor a bad impression of you.

3. Reconciliations are slowing everything down

Account reconciliations are crucial for making sure your General Ledger is in order. By ensuring the accuracy of your financial reporting, they underpin several business processes and related strategic insights.

However, as with manual entries and transaction approvals, reconciliations can start to eat a significant chunk of your finance department’s collective time.

When that begins to happen, it’s evidence of inadequate internal controls. Remember, financial controls are meant to promote accuracy and operational efficiency. One without the other isn’t enough.

If reconciliations rob you of the time you need for more profit-oriented tasks, it’s time for an immediate change.

4. Entry correction has you running on a hamster wheel

An abundance of time spent on corrections is a strong indicator that you should overhaul your controls.

It shows that things are slipping through the cracks in your company’s accounting department. You don’t have sufficient processes in place to prevent mistakes, so you’re wasting valuable time correcting them instead.

In the context of our red flag list, correcting entries should be seen as especially problematic. Transaction approvals and reconciliations are standard procedures that indicate some level of financial control is in place, they just may not be set-up as efficiently as possible.

With corrections, you’re taking valuable time away from profit-oriented tasks only to end up right back where you started, or even worse, several steps back, as additional approvals and reconciliation may need to be redone.

Error corrections mean there are delays in getting accurate financial information to key stakeholders for strategic insights and decision-making, which creates additional risk for the business.

Are your controls ready for the next financial challenge?

Your financial controls lay the foundation for accurate and optimized accounting workflows. However, it can be difficult to realize when your control environment is out of step with your company’s growth stage.

And once you’ve had that epiphany, what should your next steps be?

Control Insights for Sage Intacct can point you in the right direction. Developed by PwC and Sage, this innovative solution gives Sage Intacct users detailed visibility into their control environment. Finance leaders can leverage an operating model health check and assess their controls against 26 key control indicators, with an interactive dashboard showing which areas need immediate help.

Control Insights for Sage Intacct enables CFOs to proactively manage their control environment, solving problems before they even occur instead of putting out financial fires.

Learn more about how this solution helps with creating and tracking critical controls, here.