Financial Controls – Overview, Required Processes, Examples

Updated Aug 3, 2022.
financial-controls

Having financial controls in place is a key part of running a successful business. Every business, irrespective of its size, needs to develop and enforce effective financial controls to ensure it manages its financial resources properly.

Financial controls go beyond protecting your financial assets, it also ensures that your employees are compliant with mandatory policies and procedures. The absence of financial controls can result in huge damages to your business finances, some of which may include cash flow shortages or employee fraud.

Implementing financial controls helps you prevent and detect financial errors, reduces risks of loss or misappropriation of financial assets, and helps you make strategic spending decisions. In this article, you will learn about financial controls, including required processes for financial controls and their best practices.

Let’s get started.

What are Financial Controls?

Financial controls are known as the study, procedures, or tools used for the management and monitoring of a company or organization's accounts and finances. It is used to ensure the smooth running of financial-related issues.

The analysis made from financial control makes sure business goals are achieved and easy procurement of solutions during emergencies or anomalies.

Financial control involves the processes of planning, organizing, monitoring, and evaluating financial resources to fulfill goals for a business or organization. It can be done individually or through the employment of financial managers or accountants.

Required Processes for Financial Controls

Financial controls processes are steps or methods used in controlling finances. Examples of processes that control finances are:

1. Organization of Records

To have clear evidence of your financial expenses,  you need to have records of these activities. Have a record keeper to input records, receipts, and invoices detail. These records can be kept in a folder and a safe. 

There must be proper tracking and accounting of funds coming in and going out to avoid misappropriation of funds. It applies to important files and documents. 

2. Prediction of Future Occurrences

Having an insight into your organization's goals is important. This gives you a proper financial control policy along with achieving the progress of other plans and goals of the company. It also helps to calculate risks.

3. Proper Training of Workers

Training of staff thoroughly, not only in their specified duties but also in other aspects. It allows the normal flow of work despite any sudden occurrences or emergencies. Frauds are easily detected and the staff is responsible for one another. Also, train your staff to be extra vigilant and to report any suspicious signs or activities.

4. Communication

Another required process for financial control is the proper dispensation of information and regular updates. The regular reminder of duties, procedures, and meetings through emails, loudspeakers, circulars, or other methods of communication.

5. Backups and Safeguarding

Backing up data and information is a very important aspect of financial controls. Using cloud storage services to backup your data protects and safeguards them from getting lost or missing in case of server failure or case of emergency.

Data can be safeguarded by controlling access. It limits the number of people that have access to certain files. These can be done by using password logins, badges, or a two-steps authentication process.

6. Trial Balance

Trial balance is a worksheet where ledger balances are compiled into separate but equal columns, debit and credit columns. 

Trial Balance - Jyoti Enterprises
Source: WallStreetMojo

Use it with the double-entry accounting process to ensure accurate entries and for easy identification of mistakes or problems.

Importance of Financial Controls

1. Prevention and Detection of Fraud

Segregation of duties makes it hard for fraudulent activities to take place. For example, a different staff receives cash, another one inputs it into records and another makes reviews. Also, limiting the number of workers that have access to certain files or money helps to prevent fraud.

2. Security of Assets and Inventories

Proper financial discipline is beneficial to the earnings of the organizations. Available resources are utilized and assets are kept safe and protected.

3. Accurate Accounting and Accountability

The use of the financial control process helps to avoid making errors or mistakes. It ensures account records are balanced and financial statements (balance sheet and income statement) are correctly calculated.

Implementing financial control gives an open record that shows the overall effectiveness of the staff and organization as a whole. This helps to open doors for stakeholders to invest.

4. Reduction in Risk-taking

Financial control helps to mitigate risks and reduce the exposure of an organization to risk. In situations where risks are taken, there is adequate preparation to lessen or manage the effects of taking such risks. 

5. Achievement of Goals and Objectives

In an organization where financial control is in place, it is easy to achieve set goals, effective and reliable operations, improvement in output, and accurate records. There is proper guidance and better control on how to perform both current and future financial activities. 

Examples of Financial Controls

1. Cash Flow Statement

A cash flow statement is a financial statement that shows the amount coming in and out of a business within a period. It shows the sources of funds and how they are spent. The quality of gain, the ability of the business to pay bills is shown in the cash flow statement. 

This type of financial statement indicates when there is a cash flow problem. It however deals with only expenses and transactions made in cash.

Cash Flow Statement Company XYZ - Example
Source: Investopedia

A cash flow statement consists of:

  • Beginning cash-in-hand position
  • Receipts of cash/deposit
  • Cash laid out
  • Ending cash position

2. Profit and Loss Statement

The profit and loss (P & L) statement indicates the relationship between income and expenses during a specific period. It consists of the following:

Sales or Revenue

Sales/revenue is a section of the profit and loss statement that states retail prices of goods or services. The sales or revenue that shows the total amount of income made by the business from selling products or rendering services can be recorded in total or broken down into categories.

Cost of Sales

Cost of sales is also known as the cost of goods sold (COGS). It refers to the total amount used in manufacturing products and services, excluding interest expenses. It is used to make decisions on sales and inventory.

Gross Profit

Gross profit is the profit made after deducting the cost of production of goods and services. This section of the profit and loss statement shows the difference between the number of products or services sold and the cost of manufacturing the products or services.

Operating Expense

Operating expense is a section of the profit and loss statement that measures the expenses a business encounters to keep it running. It is divided into two: variable and fixed expenses.

  • Variable expenses vary with sales level e.g purchases, bonuses, wages paid per hour, etc.
  • Fixed expenses are permanent expenses that do not vary with sales levels e.g rent, interests, electricity bills, etc.

Net Income

Net income includes the gross profit excluding other expenses, goods sold, interests, or taxes. It shows the ability to operate a business at a profit. The net income gives an estimate of how much profit the business is making, letting you know if the business is progressing or not.

3. Balance Sheets

A balance sheet is a financial statement that shows the company's assets, liabilities, and stakeholder equity during a specific period. It is used for business evaluation and shows the financial state of the business.

Assets

Assets refer to the available resources owned by a business or organization. It may be in the form of cash, lands, or properties. There are two main types of assets.

  • Current assets are available resources that belong to a business or organization that are expected to be converted to ash within a year.
  • Non-current assets are those assets that are considered long-term investments which a company does not expect to convert to cash within the accounting year. It is divided into two forms: fixed and intangible assets. Fixed assets like facilities, buildings, fixtures, etc cannot be converted to cash within a short period. Intangible assets are non-monetary assets like patents, software, trademarks, licenses, and copyrights.

Liabilities

Liabilities are debts owed by a company or organization. It can be in the form of loans, mortgages, bonds, accrued expenses, and more.

  • Current liabilities are owed within a short period, examples include salaries, taxes, and insurances
  • Long-term liabilities cannot be paid within a short period, examples include bank loans.

Stakeholder Equity

Stakeholder equity refers to the total amount of capital given to a business or organization in exchange for stock. 

4. Audit Trails

Audit trails are histories of financial records or transactions made within a company. It shows adherence to accounting policies.

Audit Trail - Advantages
Source: WallStreetMojo

Financial Controls Best Practices

There is no one way for creating and implementing financial controls that work. What may work best for one organization may not be suitable for you. However, there are some basic (universal) financial controls best practices you can follow for effective results. 

1. Accountability

All financial issues must be accounted for. Financial management must be direct and not complicated. Accountability makes it easier to run a business or an organization. The purchase, the payment, the invoices, the receipts, records, and more must all be put into the record to show there is no dubious act or anything to hide.

2. Regular Payment of Taxes

Tax payment is mandatory, it is very important to pay taxes when due, except you want the IRS knocking on your door. Regular payment of taxes helps to prevent extra fines for late payment, loss of assets, or charges.

3. Creating Business Accounts

Keep separate accounts for business and personal use. It is risky to use personal bank accounts for business accounts. This is because mismanagement of funds may occur. 

In case of lawsuits, your personal account remains safe and there is a limit to repercussions in case of setbacks and cash flow problems. Using business bank accounts gives the impression of authenticity and shows credibility.

4. Maintain Financial Stability

With financial stability comes confidence. For economic growth, an organization must have a stable financial system that can withstand monetary issues and is capable of managing financial risks. Financial stability allows easy payment of bills and smooth running of the business.

5. Constant Tracking and Reviews

Always have the habit of monitoring your progress and income growth. Every transaction must be documented to assess if your business is improving or not.

Also, review the accounts from time to time to detect errors. Constant tracking and reviews help to make strategic decisions, increase growth, reach targets and achieve financial goals.

6. Making Background Checks on Employees

Proper background checks on employees are necessary and should be included during hiring processes. This helps to get efficient workers leading to productivity in the organization. This move will prevent you from placing your company's finances in the hands of fraudulent individuals or anyone with fraudulent records. 

7. Creating Financial Budgets

The financial budget provides the knowledge of the total income available, the amount spent, and the amount of money that will be needed later. It helps to make decisions and prioritize spending activities.For the survival and easy running of your business, a budget is required for all your expenses. Budgets can be used to receive loans from banks and predict cash flow.

Martin Luenendonk

Editor at FounderJar

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.