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What are Internal Controls? | Internal Controls Benefits

A large majority of executives in companies and organizations believe internal controls are comprised of focusing on financial statement processes and safeguards. In reality, internal controls and properly designed processes protect your business from many risks, including operational, technological and financial. No matter if you are a startup company looking to scale your business, or a well-established company, properly designed processes and adoption of internal controls may add immediate value to your organization. In this article, we address what that process looks like and demonstrate the value to your bottom line.

What are Internal Controls?

Driven by risk and designed to help an organization reach its operational, technological and financial objectives, internal controls:

  • Define and improve operational performance. Clarify the roles and responsibilities of your employees and organization. Create or strengthen controls over the management of growth of your business, as well as identify and reduce wasteful costs.

  • Build or strengthen IT operations, network and infrastructure. Identify the key IT systems, assess software and network providers, and implement software solutions that align with your business needs. Assess your cyber vulnerabilities and implement security governance that protects your business and customers.

  • Ensure the integrity of your financial reporting. Make certain that financial reporting processes account for the completeness, accuracy and timeliness of financial data.

The Benefit of Well-Defined Financial Internal Controls

With business moving so quickly, it is essential that you can produce financial reports that are both reliable as well as up to date. Strong processes and controls ensure a repeatable and efficient financial close so that your risk of errors is reduced, and your financial credibility is maximized. By producing more timely and accurate financial reports, you could find yourself with lower borrowing and financing costs and remaining in compliance with debt agreements. With a strong foundation of processes and controls, you may even discover new funding opportunities for your organization, such as with private equity investors or venture-backed firms.

How Internal Controls Help Combat Disruption

Recent history has shown us the impact of disruptions on your business, whether it’s supply chain disruptions, lack of human capital or economic impacts on your customers’ markers. No matter the reason, all disruptions have an impact to your bottom line. Organizations that have an efficient structure with well-defined roles in place can navigate the global disruptions better than those that have a disorganized structure and confusing hierarchy.

Developing a sufficient network of processes and controls can seem daunting with fears of limiting the agility of your business. Processes and controls, however, should complement the natural flow of your business and better help each sector of your business work in partnership with each other, rather than in silos.

Assessing Internal Controls

There are a few basic steps any company should take when assessing its internal controls:

  • First, assess and document the basic controls that are currently in place. Those basic controls can be physically securing your server in a locked room or physically securing check stock for only employees that are assigned roles of processing checks; operational, such as developing and reviewing your customer pricing lists or your approved vendor lists for purchases; or financial, such as performing bank reconciliations or having a financial close checklist in place.

  • When assessing your existing controls, be aware that there are preventative and detective controls. Detective controls are designed to find problems after they have occurred such as physical inventory counts, bank reconciliations and system and network monitoring. Preventative controls are designed to prevent potential issues prior to an event happening such as exercising policies, standards, processes, and procedures; adopting of encryption, firewalls, and physical security.

  • A proper control structure should first focus on client data and data integrity. In our environments, reliable data is the key to reporting and decision-making. Creating processes and controls that ensure data is monitored and validated is key to your organization’s success. That monitoring and validation can be done through a combination of automated IT controls as well as manual data reconciliations throughout each of your transaction lifecycles.

Scale Your Operations for Success

At the end of the day, internal controls should reduce your operational, technological and financial risks. A well-designed internal control framework can make your system of internal controls nimble and scalable. As your company evolves, new risks may be identified and previously identified risks may no longer be relevant. A thoughtful internal control framework focused on key risks can provide a mechanism to support your company’s strategic direction. It can help generate sustainable value by providing business insights and validating the data used to develop financial reports. It can even help make your company more competitive and attract suitors in the future.

To discuss how to improve your internal controls and business processes, reach out to your Windham Brannon advisor or contact John Eaves.