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Best Practices to Fix Your Internal Controls

A Dashboard showing pertinent metrics for a successful internal business control - Scrubbed

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Best Practices to Fix Your Internal Controls

A Dashboard showing pertinent metrics for a successful internal business control - Scrubbed

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As the founder or leader of a private company, you aren’t required by regulations to have formal internal controls in place. But that doesn’t mean your business doesn’t need them!

A proper internal control system is essential to running a viable, profitable business, whether you’re a public or private entity. Internal controls are the policies and procedures that help you manage and mitigate the financial and operational risks that can hinder your goals. Internal controls also ensure your financial data is accurate, reliable, and timely—so you can make informed decisions that optimize opportunities and build value.

So while you aren’t obligated by regulators to have internal controls, if you intend to operate a thriving business then developing, implementing, and monitoring these controls is a must.

Why Private Companies Need Internal Controls

As a privately held company, you stand to gain a great deal by instituting internal controls—and conversely, you run the risk of losing a lot by not having them. Well-developed internal controls can help your business:

  • Manage and mitigate financial risk as well as operational risk (for instance, failing to meet service level requirements per a customer contract)
  • Ensure the integrity, completeness, and accuracy of the financial statements you use as key decision-making tools
  • Operate more efficiently, in part by avoiding costly, time-consuming errors
  • Improve consistency across the business, especially during times of high turnover
  • Safeguard confidential, sensitive, or proprietary data
  • Reduce your operating costs over the long term
  • Jump-start your leadership team’s control consciousness, which will prove essential as the company grows
  • Comply with other regulations (unrelated to internal controls), such as those imposed by the IRS or other regulatory bodies
 
Internal controls are also vital for satisfying investor requirements—both during the rigorous due diligence phase and ongoing. When potential investors evaluate your business, solid internal controls will give them confidence in your organization and the reliability of your financial statements. Once investors are on board, they’ll want to see evidence that you’re implementing these controls properly and consistently, providing them with the tools they need to monitor your company’s performance.

Best Practices for Private Company Internal Controls

If you’re ready to develop and institute the internal controls that can help you manage and mitigate risk, these 11 best practices can help you get started.

To reduce your risks, you need to identify them first. Sounds simple enough, but many private companies don’t make risk assessment a priority. A top-down risk assessment anchors your understanding of risk from a high-level perspective, enabling you to allocate resources toward designing and implementing controls that focus on what matters most to your business. Since your risks will change over time, it’s best to revisit and update the assessment regularly.

Which risks have the greatest potential impact on your business? Those should be your highest priorities when it comes to mitigation. In some cases, you may find that manual processes are creating risks that could be reduced or managed by moving to automated systems.  

There are various frameworks for establishing internal controls, and it’s important to choose one that best represents your operational, financial reporting, and compliance objectives. The COSO (Committee of Sponsoring Toggle #11. Organizations) framework is commonly used since it provides useful guidance on how to establish internal controls throughout an organization.