What are financial controls?

Financial controls are the set of policies, processes, and technologies implemented to safeguard company assets, ensure accurate financial reporting, and maintain regulatory compliance while supporting sustainable growth. 

Controls create the financial infrastructure that enables businesses to scale responsibly, providing leadership with reliable data for strategic decision-making while preventing fraud and inefficiency. Effective financial controls evolve as companies grow, and balance oversight with flexibility and agility.

Financial controls should not be confused with general accounting practices. While financial controls are protective mechanisms focused on governance, risk management, and compliance, accounting practices are processes for recording a company’s financial information. One can view accounting practices as the structured methodology for recording financial data, and controls as the governance framework for ensuring that accounting practices are followed properly.

Organizations can implement controls that tackle issues from different angles: 

• Preventive controls, such as role-based access to financial systems, stop errors and fraud from happening in the first place. 
• Detective controls, such as automated alerts for suspicious spending patterns, identify irregularities as transactions occur. 
• Corrective controls, such as recovery processes for lost financial data, occur after issues are detected, remedying problems and strengthening the overall financial system.

The importance of financial controls for scaling businesses

Businesses often develop their financial controls frameworks as they scale. Early stage businesses tend to focus primarily on cash management and runway, with leadership intimately involved in control processes. As businesses grow, they begin to implement scalable controls such as formal approval hierarchies, departmental budgeting, and dedicated accounting systems to protect against increased fraud risk. 

Over time, these evolve to sophisticated financial planning systems with a dedicated FP&A team, formal documentation of the controls framework, and internal financial audits.  

In addition to internal considerations, businesses at different growth stages face different external financial complexities, and controls must evolve to meet these changing needs. 

While startups may focus primarily on basic tax compliance, growth-stage companies are required to navigate industry-specific regulations such as PCI DSS for payment processing and GDPR for customer data management. 

Once public, companies must comply with comprehensive frameworks like SOX. So by the time proactive companies reach pre-IPO stage, they often begin implementing SOX-like controls in preparation for public company requirements. Growing companies preparing to raise funding are expected to provide GAAP-compliant financial statements and demonstrable control environments to potential investors. 

With the right financial controls framework in place, businesses can protect against fraud and reduce financial mismanagement systematically as they scale. Failure to implement effective financial controls can have significant consequences. 

According to the Association of Certified Fraud Examiners, nearly 33% of fraud can be directly attributed to a lack of internal controls. Furthermore, 86% of fraud cases were related to asset misappropriation and went undetected for 14 months, on average.

4 Essential financial controls 

Though financial controls may vary slightly based on business stage and industry-specific regulations, there are several essential financial controls that every scaling business should have in place.

1. Cash management controls

Cash management controls, including processes such as bank reconciliations, forecasting, and payment authorization, help safeguard company cash assets. 

Bank reconciliations are the systematic process of comparing internal cash records to bank statements to identify discrepancies. Bank reconciliations become increasingly critical for preventing cash leakage and detecting potential fraud as transaction volumes grow.

Cash flow forecasting encompasses the practice of projecting future cash positions with the goal of anticipating liquidity needs. Forecasting is essential for scaling businesses, as it helps ensure sufficient runway during rapid growth phases.

Payment authorization protocols are structured approval workflows that govern who can authorize payments of different sizes. Payment authorization protects scaling businesses from unauthorized disbursements, and are often implemented as a company develops the finance team.

2. Revenue recognition controls

Revenue recognition controls help finance teams ensure that revenue is accurately recorded and supports relevant regulatory standards, like ASC 606. Revenue controls often include billing verification, contract compliance monitoring, and revenue documentation. 

Billing accuracy verification is the process of ensuring invoices match contracted terms, pricing, and service delivery. Billing verification prevents revenue leakage, which becomes more likely as customer volume increases. 

Contract compliance monitoring is the verification that services being delivered to customers align with contractual obligations. Contract monitoring is critical for maintaining customer trust and preventing costly revenue clawbacks. 

Revenue timing and documentation controls govern when and how revenue is recognized in financial statements. They’re essential for scaling businesses as they make it easier to maintain reliable financial reporting for investors and avoid restatements. 

3. Expense management controls

Expense management controls, such as approval hierarchies, vendor management processes, and expense verifications, help businesses monitor expenses as scale. 

Approval hierarchies are frameworks that tier authorization procedures based on expenditure size. They ensure the appropriate oversight for large expenses without creating bottlenecks that hinder scaling businesses. 

Vendor management systems are centralized processes for vendor onboarding, evaluation, and payment management. These processes are critical for maintaining leverage with suppliers, and help prevent redundant or fraudulent vendor relationships. 

Expense verification processes validate the business purpose and policy compliance of expenditures at scale. Expense verification becomes increasingly important as companies grow and founder oversight of spending becomes impractical. 

4. Financial reporting controls

Financial reporting controls ensure the accuracy, completeness, and reliability of financial statements. 

Month-end close procedures, a core component of financial reporting controls, ensure complete and accurate period-end financial statements. Having reliable financial statements is critical for businesses, as leaders rely on them for timely decision-making. 

Data integrity checks are a combination of manual and automated processes designed to identify anomalies in financial data. Many growing businesses additionally implement reconciliation protocols that align subsidiary ledgers with the general ledger. 

Though ensuring financial accuracy and preventing fraud requires a broad selection of controls, over-controlling can certainly stifle speed and innovation. To scale successfully, businesses must develop a financial controls framework that balances protective measures with the agility required for growth.