How to Create Internal Controls For Your Startup

Startup entrepreneurs should implement measures for protecting their companies’ management and financial data according to compliance regulations and company laws. Internal controls play a crucial role in your startup’s growth since they ensure accurate financial reporting, thus enabling you to achieve your business objectives.

Even so, many startups don’t think about the significance of internal controls until they start making losses or face non-compliance penalties. Regardless of whether you’re running a business formally or informally, creating internal controls goes a long way in ensuring its success. Here’ how to create internal controls for your startup: 

Establish a Proper Control Environment

The nucleus of every startup is its people and the individual attributes that they bring on board. These include their ethical values, integrity, and competence. Employees are the foundation of the organization, and everything else rests on that.

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When creating internal controls for a startup, establishing a proper control environment is the first thing to do. Here’s what you need to do so: 

• Train employees to understand and use the laid-down internal controls
• Create a process and structure for implementing the controls

Manage System Access and Security

Your company data is one of the most valuable possessions. While scaling your startup, data security should be a primary priority. Your internal controls should outline measures for securing your data resources, which primarily entails managing system access and security. In this regard, employees should only access the data they need to undertake their daily duties and nothing more. 

Risk Assessment

You need to be apprised with and deal with all the risks that your startup faces. This can only be done by establishing mechanisms for identifying, analyzing, and managing risks. While at it, keep in mind that you can only control what you know, thus the need to have an idea about the risks you face. When creating internal controls for a startup, a risk assessment will enable you to: 

• Pinpoint potential problems
• Evaluate goals and objectives
• Determine the severity of risks
• Establishing measures for moderating potential losses

Implement Control Activities

Your internal controls should be guided by procedures and policies established to ensure that necessary directives are carried out.

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By implementing control activities throughout the organization, it will be easier to determine their operational performance. Implementing control activities could entail: 

• Reviewing existing policies and controls to determine whether they adequately address problems
• Identify external controls that you can leverage to offset potential problems
• Monitor the process to identify unnecessary or excessive controls and eliminate or modify them accordingly

Establish a Culture of Record-Keeping

Whether your early-stage business operates out of a garage or a swanky corner office, it’s best to establish a culture of record keeping from the on-set.

Documenting all processes and transactions will come in handy when creating internal controls since you’ll know what you’re controlling and how to do so.

The keener you are in documenting your startup’s processes and internal controls, the better the chances of them being followed. It all starts with formalizing internal controls for new hires.

They should have access to copies of the company’s internal controls since this embeds the control culture into them from the start.

As you roll out your internal controls, enforce the internal regulation that all company processes and transactions must be supported by adequate documentation.

For instance, expense reports should be backed by invoices, receipts, and quotes. When such internal control is successfully implemented, you avoid problems such as financial impropriety. 

Have the Controls Reviewed by a Third-Party

Startup entrepreneurs should consider hiring a third-party to audit their internal controls. An outsider will look at the controls with an objective eye, which can be instrumental in pinpointing inconsistencies and inaccuracies. It also enables the business owners to understand better the policies and procedures they’ve established and their consequences. 

Implement an Approval Process

Every startup should have a semblance of an approval process to ensure accountability. For instance, suppliers’ should first be reviewed and approved by an internal audit team before payments are made.

Significant transactions should undergo additional reviews and approvals performed by individuals who are independent of the process. 

Communicate Information

Typically, internal controls and all the related activities are surrounded by communication systems. Thanks to these systems, it’s possible for your startup’s stakeholders to exchange the information necessary to manage, conduct, and control operations.

Internal controls should outline how communication is made, and likewise, communication systems should be a core component of your internal controls. Your communication system should allow employees to voice their concerns and report any red flags freely. 

Key Takeaways

Creating appropriate internal controls allows you to see your startup from a vantage point. Internal controls protect what’s important to your startup, thus giving you peace of mind. They go a long way in making the startup thrive besides ensuring compliance with regulations such as the Sarbanes-Oxley Act on financial reporting.