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The 2022 Association of Certified Fraud Examiners (“ACFE”) Report to the Nations shows that small businesses (those with fewer than 100 employees) experienced the highest median loss from fraud—over $150,000. The schemes that impacted small businesses more than large companies were incidents of “skimming and check and payment tampering.” There were many cases of financial fraud involving billing, payroll, expense reimbursements, and cash larceny.

Nearly half of the fraud incidents were, according to the ACFE report, due to a lack of internal controls and the override of existing controls. That is why small businesses must implement and enforce financial controls in their companies.

What Are Financial Controls?

Financial controls are internal processes designed to identify and prevent fraudulent actions at your company. Businesses implement financial controls (manually or using software) to ensure that accounting mistakes are not incorporated into their financials. Think of financial controls as a safety net for your small business, thwarting embezzlement, theft, and fraud. Unfortunately, many small businesses don’t have the knowledge, time, or trained personnel to implement proper financial controls.

There are no guarantees that you can eliminate fraud in your company, but having these financial controls in place should help mitigate your risk exposure.

1. Keep Business And Personal Finances Separate

Never co-mingle your business and personal finances. This is a common mistake many startup business owners make. This also means not using your personal credit card for business transactions. If you don’t qualify for a business credit card, you can use a personal card, but make sure you only charge business expenses to it. If you loan money to your business or take a loan from your company, document it appropriately with a promissory note specifying repayment terms.

2. Review All Outgoing Payments

Compare payments to invoices. Watch for duplicate invoices, new vendors, or multiple invoices from the same vendor in a short time period. Embezzling employees often use these tactics to pay themselves.

3. Set Up Inventory Control Systems

Inventory is often damaged, stolen, or lost. Inspect and count incoming inventory to make sure your orders are filled accurately. Designate a trusted employee to sign for incoming inventory and release outgoing inventory. Regularly conduct an internal inventory of your products or materials.

4. Limit Access To Your Financial Systems

With the exception of perhaps a few employees, like your CFO or controller, your financial team only needs access to some of your financial data. Give employees log-in access only to the areas pertinent to their roles.

5. Secure Business Credit Before You Need It

You never know when you’ll need to access cash. Whether you experience a sudden cash-flow crunch or discover an opportunity that requires a cash outlay, do you have financial resources you can tap, such as a business line of credit? The best time to apply for a business line of credit is before you need it.

6. Conduct Independent Reviews Of Your Finances

Have an independent reviewer regularly examine your financial reports. Your accountant or CPA is ideal for this job.

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