Financial controls are important predictive procedures in a business especially when a company is in the growth stage. When a company is expanding it frequently ignores risk assessment protocols and financial controls which might result in losses due to inaccurate financial information.
During the growth stage, there is a wide range of expenses and if a company fails to implement controls at the beginning it might suffer financial risks which leads to financial losses or even bankruptcies. In this article, we are going to discuss the importance of financial controls in a business and best practices for implementing financial controls.
What are Financial Controls?
Financial controls are methods used to monitor, maintain and control the usage of financial resources of an organisation. Every organisation contains explicit policies, procedures and controls which define the usage of resources and funds available with the organisation.
Financial controls represent a core practice at every organisation in any sector, as managing finance and implementing controls is important to prevent losses or bankruptcy.
Financial Controls Key Takeaways
- Financial controls help enable an organisation to maintain accurate financial records and prevent losses due to frauds or unethical practices.
- Financial controls must be based on the company’s existing policies and future objectives.
- Financial controls must be implemented in the beginning to address any financial risks that might occur in the future.
- There are various tools which can monitor the implementation of financial controls and maintain accuracy and reliability.
- Financial Controls take into account medium- and long term objectives and business plans.
Also, check Financial Management Objectives and Importance
Importance of Financial Controls in Businesses
Financial controls help businesses manage their existing financial resources and ensure that the information present is accurate and complete. Financial controls can prevent any unauthorised malicious activity or fraud attempt within an organisation.
Financial controls are a set of limits or controls implemented in the financial activity of an organization that is used in monitoring financial information and activities to ensure the reliability and integrity of information related to company finances. In this article, we will discuss the importance of financial controls and best practices for implementing financial controls in organisations.
- Define the level of accessibility to every employee in the organization. No one must have complete access or controls.
- Manage reports and verify it regularly to prevent any missing data or false data.
- Establish a wide system of controls covering various factors. Do not leave any missing factor that might create discrepancies in the results.
- Financial controls ensure the reliability and financial compliance of all finance data of your organisation.
- Effective financial controls ensure effective cash flow maintenance of an organisation. It helps in productive operations especially when all inflows and outflows of overall cash are monitored and planned.
- Financial controls also ensure operational efficiency and resource management.
- Every department within the organisation maintains overall operational efficiency. It increases productivity and maintains a positive relationship with good profitability taken into account without any discrepancies.
- Financial controls remove any chances of fraudulent activities in an organisation such as online theft, fraud, unauthorised access, etc.
Also check, What is Financial Services and its importance?
Types of Financial Controls
There are three major types of financial controls that plays a major role in protecting an organisation from unauthorised access or fraud attempts.
- Detective Controls
- Preventive Controls
- Corrective Controls
1. Detective Controls
Detective control is a method of financial control where the main objective is to find any attempt of error or fraud. It maintains a regular monitor and implements various methods to detect issues in the workflow within the organisation.
For example variance analysis, internal audits, and reconciliations are some of the methods of implementing detective controls.
2. Preventive Controls
Preventive controls are measures taken in advance to prevent any fraud or errors within daily operations in an organisation. These measures implement policies and regulations to keep things on the right track.
For example, segregation of duties, approval processes, and access controls are some methods of implementing detective controls.
3. Corrective Controls
Corrective Controls are measures taken to fix any unidentified issues and faults in financial operations. These controls focus on resolving issues and problems and implement logical solutions to prevent future risks.
For example, error correction, policy updates, training and education can help prevent future errors and correct damages caused
Best Practices of Financial Controls
There are various steps a business can implement to ensure effective workflow and operations. Check a few tips below.
- Segregation of Duties: All major financial tasks such as payment authorisation, processing, and transaction records are performed by assigned individuals to reduce the risk of any fraud or errors.
- Access Control: It is important to limit the access of controls in financial systems to prevent sensitive information within an organisation.
- Regular Reconciliations: Regular reconciliation of bank statements, inventory and other financial records must match the available records and account balance.
- Documentation and Record Keeping: All financial transactions and cash flow must be documented and recorded with proper approval is important to ensure transparency and reliability.
- Internal audits: It is important to conduct regular audits to review the methods implemented ensuring compliance with the policies and identifying potential risks.
- Monitoring and Reporting: Establish continuous monitoring to track financial performance, detect anomalies and ensure that the financial objective of organisations is well aligned with the operation workflow.
- Budgeting and Forecasting: Develop a well defined budget and financial forecast to manage revenues for a specific period of time effectively.
Financial Controls Examples
There are various financial controls implemented in businesses to maintain efficiency of all operations and workflow in organisations.
- All the roles are divided in an organisation and this segregation of duties is important to prevent a person who authorises payment from recording transactions.
- Regular training sessions for the employees to update them with the latest laws and regulations which they must comply with while working in organisation.
- Establish a direct chain of communication among all level employees such as managers, financial managers, accounting staff, etc to prevent any blockage of important information within the organisation.
- Backups and files of all financial data and information must be maintained.
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Financial Controls FAQs
What are financial controls?
Financial controls are methods or procedures used to ensure transparency and compliance of financial operations within an organisation.
What is the importance of financial controls?
Financial controls and regulations implement clear guidelines and methods to take every financial activity in account. It help safeguard assets, ensure accurate compliance of transactions, record keeping, and accurate financial reporting.
What are best practices for Financial Controls?
There are many methods of implementing financial controls within an organisation. Check a few methods below.
Segregation of duties
Access Control
Regular Reconciliation of financial records
Documentation and Record Keeping
Accurate Financial reporting
Internal audits
Budgeting and forecasting
