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Strengthening Internal Controls in Growing Small & Midsize Businesses: Scaling Without Increasing Risk
Growth signals that your business is on the right track. Revenue climbs, new team members come aboard, and opportunities multiply. Yet, as operations expand, so does complexity—and with it, risk.
Small and midsize businesses often start as owner-led organizations, relying on trust, accessibility, and swift decision-making. This approach serves well in the beginning, and these tenants are important to maintain, but as the business grows, a more structured financial environment becomes essential. Without robust internal controls, expansion can unintentionally introduce vulnerabilities.
So how can businesses scale confidently while managing risk? The solution lies in implementing internal controls that actively enable growth rather than hinder it.
Why Internal Controls Matter More During Growth
During periods of expansion, businesses typically experience:- Increased transaction volume
- New vendors and customers
- Expanded payroll
- More complex reporting requirements
- Greater lender or investor scrutiny
1. Address Division of Duties in Smaller Teams
When there’s only one or two people working in the business, it can be easy to end up having one person handling invoicing, cash receipting, and bank reconciliations. No matter the size of the business, however, separation of duties is key. As your team grows, consider how to separate key financial functions:Separate Preparation and Authorization, Custody, and Recordkeeping Responsibilities
For example, if the accountant is entering an invoice into the general ledger, they should also not be the person that approves the invoice and signs the check.Rotate Review Responsibilities Where Possible
Having more than one check signer ensures continuity of activity and provides different perspectives when reviewing.Implement an Independent Review of Bank Reconciliations and Journal Entries
If headcount is limited, technology and outside advisors can help bridge gaps while maintaining oversight.2. Formalize Approval Workflows
Growth often exposes inconsistencies in how purchasing, expense reimbursements, and vendor payments are approved. Informal or verbal approvals can create confusion and increase risk. To strengthen oversight:- Establish clear spending thresholds tied to authorization levels
- Document approval processes
- Utilize accounting software workflows that require digital approval before payment
3. Improve Financial Reporting Accuracy and Timeliness
As businesses grow, decision-making becomes more data-driven. Owners, lenders, and potential investors rely on accurate, timely financial information. Strengthening reporting controls may include:- Monthly close procedures with defined timelines and responsibilities
- Timely account reconciliations
- Consistent revenue recognition and expense cutoff policies
- Periodic review of financial statements by someone outside of the day-to-day processing.
4. Manage Fraud Risk Proactively
Rapid growth can create blind spots. Increased transaction volume and employee turnover may reduce oversight, while new processes introduce unfamiliar risks. To mitigate fraud risk:- Conduct periodic fraud risk assessments
- Provide fraud training to employees on an annual basis
- Provide clear communication about ethical expectations
- Establish anonymous reporting channels
- Monitor for red flags such as unusual vendor changes or unexplained adjustments
5. Prepare for Lender and Investor Scrutiny
Growth often brings new financing needs. Whether pursuing a line of credit, refinancing debt, or attracting outside investment, financial infrastructure becomes a focal point. Lenders and investors increasingly evaluate:- Strength of internal controls
- Reliability of financial statements
- Documentation of policies and procedures
- Evidence of financial oversight