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What are financial infrastructure & internal controls?

Financial infrastructure and internal controls are the accounting systems and processes that enable the management and security of an organization’s cash, inventory, payments, invoicing, and other money-related business processes.

Why is it important?

  • Establishing solid financial infrastructure and internal controls:
    • Enables the accurate tracking of cash inflows and outflows
    • Empowers leadership to make decisions rooted in the organization’s true financial position
    • Ensures that bills are paid and invoices are received in a timely manner 
    • Prevents unauthorized transactions and protect the organization’s resources from waste, theft, loss, or misuse
    • Builds fiduciary trust with potential lenders and funders

Best practices   

  • Disentangle personal accounts from business accounts
    • Create dedicated bank accounts for the social enterprise to maintain separation of business transactions from personal transactions.
  • Use appropriate accounting software
    • Implement a software-based accounting system to ensure that transactions are recorded properly and to provide insight into financial matters through quick and easy reports.
      • Popular options for smaller enterprises include QuickBooks and Xero. Larger organizations may opt for platforms like Oracle. 
  • Access appropriate bookkeeping expertise
    • Smaller social enterprises may decide to outsource / contract bookkeeping services (which can be a great option!).
  • Manage accounts receivable and accounts payable
  • Track invoiced revenue via accounts receivable to maintain stable cash flows and ensure that customers pay in a timely manner.
  • Monitor accounts payable to make sure you do not fall behind on any payments and remain in good standing with vendors.
  • Track unrestricted operating revenues and expenses
    • Make sure that staff properly code transactions in your software to maintain an accurate record of revenues and expenses, since this will give insight into the health of the business (e.g., how close a business is to breaking even). Important elements to code include revenue type (e.g., earned vs. contributed), cost type (fixed vs. variable), cost category (e.g., materials, labor, etc.), and the type of product/service associated with it (e.g., product a, product b, etc.)
  • Build security checks and internal controls
    • Separate accounting duties: No one employee should have responsibility for all steps of an accounting transaction (initiating, approving, recording and reconciling a transaction) or the ability to cover up an accounting error.
      • The person who logs checks received should not be the one depositing those checks.
      • Someone who does not process payments should reconcile the bank account monthly.
    • Establish check-writing protocols, expense limits, and credit card limits to ensure that your resources are spent appropriately.
    • Designate high-level employees, such as your Director of Finance or CFO, to approve large purchases, and set a specific limit that triggers this check.
    • Safeguard cash and other physical resources by following banking best practices, such as closing out the till every day, having limits on cash held on site, securing valuables, and having a separate FDIC insured account for reserves.
    • Review this checklist of internal controls for cash management, payroll, fixed assets, financial statements, and more.