Startups face a multitude of challenges as they seek to transform their innovative ideas into profitable businesses. Among these challenges, setting up effective financial controls often gets overlooked in the whirlwind of activities.
However, establishing robust financial controls is fundamental to the sustainability and growth of any startup. It ensures financial integrity, reduces risks, and aids in decision-making.
In this article, we will walk through the necessary steps to set up effective financial controls at a startup and how automation and technology can help.
What are financial controls, and why are they important?
Financial controls are the procedures, policies, and means by which an organization monitors and manages its revenues, costs, budgets, cash flow, and other financial aspects. They are implemented to ensure the accuracy and reliability of financial reporting, to comply with laws and regulations, to prevent fraud and misappropriation of assets, and to safeguard the organization’s resources.
Setting up the right financial controls is crucial to a business, as inaccurate financial reporting can lead to incorrect analyses and impact decision-making, potentially leading to poor strategic choices and losses. Ted Baker, the high street fashion retailer, had to close several stores and restructure itself after a £58m accounting error in January 2020. Several businesses incur heavy losses or even have to shut down upon such financial and accounting errors.
The Importance of financial controls for Startups
While financial controls are important for businesses of all sizes, they are especially critical for startups. Startups are characterized by rapid growth, limited resources, and a lack of established processes. This can create an environment conducive to financial mismanagement or irregularities if not properly controlled.
On the other hand, implementing financial controls early on can help startups to:
- Monitor and manage cash flow: Startups often operate on tight budgets and need to carefully monitor their cash flow to ensure they have enough to cover operating expenses and achieve their goals.
- Prevent fraud and errors: Strong financial controls reduce the risk of errors that could lead to financial loss and reputational damage. In the process, they help prevent fraud and ensure regulatory compliance.
- Make informed decisions: Financial controls provide accurate and timely financial information and analysis, which could be crucial for making strategic business decisions.
- Attract investors: Investors are more likely to believe in startups that have robust financial controls, as it gives them confidence in the financial stability and management of the business. This can also help startups improve their reputation, attract multiple parties and investors, and improve valuations and business outcomes.
In the fast-paced, dynamic environment of a startup, establishing robust financial controls may not seem like an immediate priority. The focus is often on product development, market capture, and rapid growth. However, without a solid financial control framework in place, startups could find themselves facing significant risks, including financial mismanagement, regulatory non-compliance, and potential fraud.
Implementing financial controls early on in a startup’s life cycle can prevent these issues, providing a strong foundation for sustainable growth and success. Here’s how it can be done.
Setting up Financial Controls at a startup
Establishing financial controls in a startup involves a comprehensive approach that spans across various facets of the business. Implementing these controls is a strategic process that involves analyzing existing policies, updating data and management practices, considering all potential operational scenarios, and making informed forecasts and projections.
Here are some specific steps to help you get started:
Review existing financial data
When setting up financial controls, the first step involves a thorough evaluation of your existing financial data. This includes your financial budgets, reports, profit & loss statements, balance sheets, and more. These documents provide a holistic view of your business’s performance and operations.
Identify anomalies or overlaps in data
Within your existing financial systems, try to identify any overlaps or anomalies within the data. Overlaps could indicate redundant tasks or resources. Anomalies might suggest errors or issues that need to be addressed.
Detecting these not only helps you understand your current financial status but also pinpoints any loopholes in your management framework that need to be addressed.
Keeping your financial data updated is crucial to effective financial control. This extends beyond just your financial documents to include your management practices and policies related to existing financial controls. Regular updates ensure that you’re working with the most accurate information, which is essential for making informed decisions and identifying areas of improvement.
Analyze all possible operational scenarios
Before deciding on a specific financial control strategy, you should thoroughly evaluate all possible operational scenarios. This involves considering different perspectives, such as profitability, expenditures, safety, and scale of production or volume.
By doing this, you can gain a well-rounded understanding of how your financial control policy might perform under different circumstances, and you can tailor it to cover all operational aspects of your organization.
Forecasting and making projections
As you implement your financial control policy, it’s important to look ahead and consider your future goals and objectives. Forecasting and making projections can help you create a financial control policy that aligns with these objectives.
This forward-looking approach doesn’t just help in policy creation, it can also serve as a catalyst for achieving your goals. By understanding where you want your startup to go, you can set up financial controls that support your journey there.
Implementing financial controls in your startup is no small task. It requires careful planning, regular monitoring, and ongoing adjustments. But with these steps, you can create a solid foundation for financial control that supports your startup’s growth and success.
Designing and Implementing Standardized Procedures
Once the business goals and priorities are outlined, standardized procedures provide a roadmap for employees to follow when carrying out financial tasks. These procedures should cover everything from how to process invoices to how to handle expense reimbursements, who are the approval authorities, how budgeting happens, and how every financial decision is made. These should then be clearly documented and communicated to all relevant staff.
Setting up regular financial audits
Regular financial audits are essential for ensuring that the financial controls in place are working as intended. Audits can help identify any gaps or weaknesses in the controls and provide recommendations for improvement. Audits involve comparing various documentation to tally that records of invoices, expenses, dates, approvers, and more are in order. Identifying discrepancies at this stage can help prevent regulatory action and ensure compliance.
Implementing financial control software
The financial control software can automate many financial control processes, making them more efficient and reducing the risk of human error. Nanonets, for instance, offer features like automated invoice processing, data extraction, and data validation that can streamline your financial operations and improve your financial control.
But before we talk about how to use such tools, let’s cover the common pitfalls startups face when trying to set up financial controls.
Overcoming the common challenges in setting up financial controls
In the journey toward establishing strong financial controls, startups can face a myriad of obstacles. Some of these include a lack of financial expertise, limited resources, and resistance to change. Let’s delve into these challenges and explore potential solutions, including the role a tool like Nanonets can play in this process.
Lack of financial expertise: Often, startups are initiated by entrepreneurs who have a great business idea but may lack the financial acumen to effectively manage the fiscal aspect of the operation. This lack of expertise can be a significant hurdle in establishing sound financial controls.
To overcome this, startups can consider outsourcing their financial management to a trusted third party or hiring a financial advisor. With time, as the startup grows, it can bring this function in-house. Furthermore, using user-friendly automation tools like Nanonets can simplify complex financial processes, helping entrepreneurs manage financial controls more easily and effectively.
Limited resources: Startups usually operate on tight budgets and may not have the resources to invest in expensive financial control systems or hire experienced financial personnel. But founders and entrepreneurs can leverage cost-effective, AI-powered tools like Nanonets, which provide comprehensive financial control solutions without the hefty price tag. This makes it possible for startups to automate and streamline their financial processes on a limited budget.
Resistance to change: Like any organization, startups can face resistance when implementing new systems or processes, especially something as crucial and potentially disruptive as financial controls.
But clear communication about the benefits and necessity of financial controls can help mitigate this resistance. It’s important to involve all key stakeholders involved in the process, ensuring they understand the reasons behind the changes and the advantages these bring. Introducing a user-friendly and intuitive tool like Nanonets can also make the transition easier, as it minimizes disruption to existing workflows while ensuring better financial control.
How automation can help set up financial controls at a startup
Financial controls gain considerable robustness with automation. Startups, given their need for efficiency and lean operations, can reap significant benefits from automating their financial controls.
Automation not only streamlines processes but also reduces human error, ensuring accuracy and consistency. Here’s an overview of how automation, facilitated by tools like Nanonets, can be a game-changer:
- Accurate data extraction and validation: Automation can be deployed to extract data from various financial documents and cross-check it against your accounting system. This ensures that your financial data is always accurate and updated. A tool like Nanonets enhances this process with its capabilities to validate data effectively.
- Seamless document processing: With automation, the cumbersome task of processing invoices, expense records, and other documents can be made efficient. AI-powered tools like Nanonets can extract data from invoices, cross-verify them with purchase orders, and feed the information directly into your accounting system. This not only saves time and reduces manual efforts but also minimizes human error.
- Integration with existing systems: One of the key aspects of introducing any new process or tool in a startup is its compatibility with the existing systems. Automation tools like Nanonets can integrate effortlessly with your current accounting systems, ensuring smooth implementation and usage, thereby making the transition to automated financial controls a lot more convenient and efficient.
Implementing strong financial controls is a daunting yet crucial step for the success of any startup. Following the steps outlined in this article can help make the process more manageable. By implementing these controls and leveraging automation like Nanonets, startups can ensure their financial integrity, make more informed decisions, and increase their chances of success. It’s about laying a solid foundation for your financial operations, one that will support your startup as it grows and evolves.