KEY FINANCIAL CONTROLS TO IMPLEMENT

 

In this day and age of dynamic, unpredictable, business climate, you need sound financial control which is important for both stability, adherence and profitability. Financial controls are rules and regulations issued by the management and followed by the organization to manage its finance and make sure that it is not misused intentionally or unintentionally and makes sure that the transaction is conducted in accordance with the laid down procedures and the best interest of the organization; that it does not conflict with the organization’s objectives and interests and keep away various risk that are loop holes or the short coming that could cause damage or loss to the company. In this article, we’ll examine the key financial controls that all businesses should have in place if they want to maximize their flow of funds, whether it’s managing the company’s cash flow or reducing financial exposure.

1- Cash Flow Management Controls

The key to financial stability is the level of cash flow. Good cash flow management means a firm has sufficient money to pay its bills, for investment and for the unexpected. Steps to introduce stringent cash flow controls:

• Cash Flow Forecasting: Consistent updating of a cash flow forecast will enable businesses to forecast where there might be shortfalls and surpluses. By studying historical inflows and outflows, companies can estimate future cash needs and act accordingly.
• Create a Reserve Fund: There are moments when you get caught off-guard by unforeseen financial hiccups, such as late payments and the likes. Reserving a percentage of earnings each month as operating capital is the key to business survival.
• Bank Reconciliations: Monthly bank reconciliations are useful to detect errors, check for fraud, and verify that transactions have been recorded properly. Regular reconciliations help cash-in-the-bank and cash-on-the-books agree each month and help to raise any anomalies quickly.

The effect of applying these cash flow controls is that a business can then better manage its liquidity, mitigate risk to the business, and bolster the base of its financial well-being.

2- Costs and Authorization workflow

Spend control also important avoid the profit-bleeding forbidden budget lines. 2) If you’ve got well-structured approval processes and expense policies, you can better manage expenses effectively.

• Define Your Budgets: Create budgets for departments and categories to help manage overspending. It's each department's responsibility to live within their budget, and variances should be reviewed monthly to manage and correct for spending.
• Approval workflow: Approval hierarchies keep an eye on expenses - as they should. Large expenditure Purchase Requisition can usually get the OK of the large expenditure from the manager, but for a large transaction, senior manager approvals are also necessary. This procedure not only restricts expenditure, but it also provides transparency.
• Cost Reporting: Regular reports of spending can point out trends, identify abnormal spending, and track proper expense allocations. Automation of expense tracking, classification and reporting for improved visibility with tools like expense management software.

Optimized spending with savings redirected to revenue generating activities. Efficient Expense Management enables the organization to maximize the value of its expenditure and reinvest the savings in revenue positive activities.

3- Revenue Recognition Controls

Revenue recognition is a key element of financial reporting on which the timing of income recognition hinges. Poor management in this area can result in overstatement or understatement of profit which can enrage stakeholders and certainly can influence the financial position of the company.

• Compliance with the Accepted Accounting Standards: Adhering to accounting standards such as the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) is essential for coherence and transparency. These rules offer a framework for the proper recognition of revenue, so that what's on a financial statement reflects a company's real performance.
• Create a Review Mechanism: Reconciling revenue recognition transactions on a regular basis is essential to meeting accounting standards. An accounting advisor should review any complex contracts or multi-part projects, to ensure revenue is allocated correctly over the life of the contract, etc.
• Automated Billing Invoices & Receipts: With automated billing, you can limit revenue recognition mistakes and standardize what is being recognized by having everything categorized by old rules. Invoicing quickly also helps with cash flow because it minimizes the time between the fulfillment of an order and when payment is received.

Strong revenue recognition controls help companies keep their financials in order and maintain confidence from stakeholders.

4- Payroll Controls

Payroll is often the biggest expenditure for most organizations and managing payroll is key for cost control and compliance. Payroll controls are put in place to make sure that employees are paid the right amount, tax forms get filled out, and chances of payroll fraud are reduced.

• Segregation of duties: To provide a check against fraud, payroll duties should be dispersed among several employees. There should be one person who oversees making up the payroll, another one in charge of distributing it, and a third one in charge of the payroll records.
• Ongoing Payroll Audits: Audits help to verify that employees are paid in accordance with company policy and labor laws. Periodic verification of discrepancies, for example, if there are duplicate or “ghost” employees, can reduce the error rate and fraud regarding payroll.
• Automated Payroll Systems: Automated payroll software can simplify the process, diminish errors, and make sure you adhere to tax laws. It also has the potential to reduce inaccuracies in payroll and time saved by admin.

If you own your own business, payroll controls protect the company’s financial health, and your employees’ paychecks.

5- Stock and Asset Management Controls

Proper inventory and asset management ensures that the physical assets are safeguarded from abuse, waste and obsolescence. A well-managed asset and by extension, capital is an efficient and productive one that costs less than it performs.

• Inventory Monitoring and Reconciliation: Real time inventory monitoring systems enable organizations with the ability to keep track of the number of items that they have in inventory, ensure the right inventory movement and reduce the possibility of theft. Frequent physical stock taking and reconciliation with stock records assist in detecting errors.
• Tagging and depreciation of Assets: Tagging assets with individual identifiers facilitate monitoring and keep up to date. Tracking asset depreciation ensures that the value of the asset will be properly accounted for on the balance sheet as well as allowing for replacement or upgrades to be budgeted.
• Inventory Auditing: Implement Routine inventory audits verify that what’s owned is accurately recorded. Discrepancies indicate problems in supply chain management, or the possibility of theft.

With good inventory and asset management controls, the of the resources, can reduce wastage and guard against loss.

6- Fraud Prevention Controls

Control to prevent fraud is a must to secure your business economic losses, theft and difficulty to face with third parties. Fraud could take various forms - from theft by employees to scams by outsiders - and there should be mechanisms to detect and address such risks.

• Segregation of Duties: This ensures that one person does not have control over multiple aspects of a business process which is the common of fraud. For example, the person who approves invoices for payment shouldn’t be the same person who disburses cash or reconciles bank statements.
• Employee Training and Awareness: Personal responsibility and fraud prevention training for employees to identify attempts of fraud, including phishing emails and false invoices. Training the workforce imbues confidence to acknowledge and report illicit behavior and helps with the development of a fraud-averse culture.
• Whistleblower Policy: A positive whistleblower policy ensures that employees can report fraud without the fear of retaliation, encouraging early detection and prevention of fraud.

The extent that organizations apply prevention measures can prevent them from suffering loss and maintaining their reputation.

7- Financial Reporting Controls

Regulatory compliance and stakeholder confidence financial reporting must be accurate to ensure compliance with regulations and to inspire trust among stakeholders. Strong controls over financial reporting are how you make sure that all financial data posted to GL is accurate and complete and timely.

• Account Reconciliation: Periodic account reconciliations (bank statements, accounts receivable, payable, and so on) secure the integrity of data. Differences should also be researched to avoid any future mistakes.
• Internal Audit Procedures: Routine internal audits offer an independent review of financial practices, pointing out ways to be more efficient and compliant. Internal audits also identify errors and irregularities at an earlier stage.
• Review and Clearance by Management: Ratings to be released should be reviewed by Management. This is an accuracy check, compliance check and it's consistent with making sound choices.

There are strict legal requirements about financial report controls and good practices in recording all transfers http://www.ebrd.com/download/policies/enviro/18079808ebrdchemicals.pdf Financial reporting controls are not good only to ensure compliance with all legal requirements.

8- Data Security and IT Controls

It is imperative in this digital era to protect financial information. The financial data for transactions and customer information is of a confidential nature and needs to be secured against unauthorized access.

• Access Controls: Restricting access to financial systems according to roles and responsibilities avoids unauthorized access to sensitive data. A well-structured password policy and multifactor authentication is the best way to secure financial systems.
• Encrypting Data: Encrypting financial data at rest and in motion prevents it from being intercepted by the wrong hands. It is very useful to encrypt any financial data saved on servers, in databases, or sent across network connections.
• Backups and Disaster Recovery Plans: Frequent backups of financial data and a disaster recovery plan guarantee the business remains operational in the event of a breach or system errors.

With the right data security controls in place, companies can keep their financial data safe and preserve trust in the customers.

By integrating these critical financial controls via a full financial flow approach, any business can be firmly set on the path of financial clarity, credibility and strength. By optimizing cash flow, tightening expenses and revenue recognition, protecting payroll, keeping track of inventory, preventing fraud, and maintaining strong financial reporting and IT security, businesses are not only preventing financial letdown they are supporting growth and continued success.