Practical internal controls for UK startups: a staged framework from seed to Series B

Internal Controls for UK Startups: An Essential Framework

For a UK startup founder, speed is everything. You are the CEO, head of product, and often, the de facto finance lead. The pressure to grow can make formal processes feel like a luxury you cannot afford. Yet, this early-stage flexibility can create blind spots, leading to cash leaks, compliance issues, and significant friction during future fundraising. Establishing a scalable framework for financial controls is not about adding bureaucracy; it is about building a stable platform for growth. This guide provides a clear roadmap for how to set up financial controls for UK startups, evolving from foundational habits at the seed stage to the audit-ready standards required for a Series B. It addresses the common pain points of lean teams, unclear workflows, and investor due diligence.

Part 1: Foundational Habits: Your Pre-Seed and Seed Toolkit

At the earliest stages, your focus is on survival and product-market fit. Your financial controls should reflect this reality: simple, high-impact habits that protect your most critical asset, cash. The goal is to create a foundation of accuracy and security without slowing down your operations. This is the starting point for effective financial risk management for startups.

Protecting Your Cash Flow: The Source of Truth

How do you know your financial data is accurate and your cash is secure? The answer starts with the 'One System' rule. Your cloud accounting software, typically Xero for UK-based companies, should be directly connected to your business bank account, like Starling or Tide. This integration creates a single source of truth for all cash movements.

The most critical habit to build is the monthly reconciliation rhythm. By the fifth working day of each month, your bookkeeper or finance lead must reconcile all bank accounts, credit cards, and payment platforms like Stripe. This simple process is your primary defence against errors and misappropriation. In fact, reconciliations are a top anti-fraud control, according to the ACFE. You can find useful information in Stripe's reconciliation guide for bank reporting.

To further secure your cash, implement dual-authorisation for payments over a practical threshold, for example, £1,000 to £2,000. This means one person initiates a payment in the banking portal, and a second person, usually a founder, must approve it before funds are sent. This provides essential oversight without creating a bottleneck for small, everyday transactions.

Taming Expenses: Plugging the Leaks

How do you give your team spending autonomy without losing control? The key is a clear expense policy for founders built on one simple rule: no receipt, no reimbursement. This is not just good practice; it is a compliance necessity. For UK startups, a proper VAT invoice is required to reclaim 20% VAT, as outlined in HMRC guidance on VAT records. Missing receipts directly translate to lost cash.

Modern expense management tools like Pleo, Soldo, or Spendesk are invaluable here. They provide employees with company cards, capture receipts digitally at the point of sale, and sync transactions directly into Xero. This automates a huge part of your expense management and VAT reclaim process.

The reality for most pre-seed startups is more pragmatic. Start with a simple policy and a shared folder for receipts, but plan to adopt a dedicated tool as soon as the team grows beyond the founders. This introduces an early form of setting up approval processes, ensuring every pound spent is accounted for and compliant.

Part 2: Scaling Your Controls: The Series A Readiness Playbook

As your startup grows and you approach a Series A round, ad-hoc processes begin to break. Investors will expect a higher level of financial maturity. This stage is about formalising the habits you built earlier and introducing controls that support a larger, more decentralised team. This is where you evolve your early-stage finance controls.

Segregation of Duties (SoD) for a Lean Team

How do you segregate financial duties when you only have one finance person? This is a primary source of anxiety for founders, leaving them feeling exposed to startup fraud prevention UK risks. In a lean team, perfect SoD is impossible. Instead, you implement compensating controls. The principle is to separate the creator of a transaction from the reviewer or approver.

A scenario we repeatedly see is in accounts payable. Consider this practical example of segregation of duties in a startup environment:

1. Create: An Operations Manager receives supplier invoices and enters them into Xero as bills pending payment. They are the 'Creator'.
2. Review & Approve: The Operations Manager does not have bank access to pay these bills. Each week, the Founder or Head of Finance reviews the list of outstanding bills in Xero, checks them against contracts or purchase orders, and then approves the payment run from the bank. The Founder is the 'Reviewer' and 'Approver'.

This separation is a powerful compensating control that drastically reduces the risk of fraudulent or erroneous payments.

From Ad-Hoc to Approved: Formalising Your Workflows

How do you ensure spending and hiring decisions are properly authorised as the team grows? You need to formalise your key financial workflows, particularly purchase-to-pay and payroll.

For purchasing, implement a rule to require approval for new supplier invoices over a set threshold, such as £5,000. This can be managed via a simple email chain initially or through more sophisticated procurement software later. Consider lightweight tools and processes in line with procurement controls without a procurement team. The goal is to ensure significant expenditures are vetted before the company is committed.

For payroll, the risks are both financial and compliance-based. Your payroll workflow should require a formal check to ensure new hires are properly documented, salaries match offer letters, and any changes like bonuses or leavers are authorised. Before the final payroll is processed each month, a founder should review the summary report, paying close attention to changes from the previous month and ensuring UK-specific deductions like NI contributions are correctly calculated.

Strategic Controls: Using Data to Drive Decisions

How do you move from just tracking cash to managing the business proactively? The answer lies in using financial data as a strategic tool, not just a historical record. The foundation for this is timely reporting. Your finance function should produce monthly management accounts by the 10th working day of the following month. These accounts must include a profit and loss statement, a balance sheet, and a cash flow statement.

The most important strategic control at this stage is the budget vs. actuals review. Each month, departmental leaders should review their spending against the budget, explaining any significant variances. For a Deeptech startup, for example, meticulously tracking R&D expenditure against the budget is not just about cost control; it is essential for managing runway, forecasting future funding needs, and maximising R&D tax credit claims. This transforms the finance function from a reactive bookkeeper to a strategic partner.

Part 3: Bulletproofing for Due Diligence: The Series B Standard

By Series B, your company is under a microscope. Investors and their diligence teams expect institutional-grade controls and documentation, turning your focus to the UK startup compliance checklist. The ad-hoc processes of your early days are no longer acceptable. This is about building an audit shield and ensuring your internal house is in perfect order.

From Processes to Policies: Your Audit Shield

What documentation will auditors and diligence teams ask for on day one? They will ask for your formal accounting policies. While you have been following processes, you now need to document them. The most critical of these is your revenue recognition policy. For UK startups, revenue recognition policies for UK startups must align with UK GAAP (FRS 102) or IFRS. A vague or incorrectly applied policy is a major red flag. A helpful reference is the guidance on internal controls in audits from ICAEW.

For a B2B SaaS company, this means documenting how you treat revenue from your contracts. For example, a £12,000 annual contract signed upfront cannot be recognised as £12,000 in revenue in month one. The policy must state that revenue is recognised straight-line over the service period, meaning £1,000 per month. Beyond policies, you need a central repository for all key legal agreements, including customer contracts, supplier agreements, and employment contracts. This organisational discipline is crucial for a smooth and efficient due diligence process.

Equity Management: Keeping the Cap Table Clean

How do you manage your cap table to avoid it becoming a diligence problem? A messy cap table, often managed on a spreadsheet in the early days, can derail a funding round. Inaccurate shareholder records, poorly documented option grants, or confusion over vesting schedules create significant legal and financial risk.

From Series A onwards, it is essential to use a dedicated cap table management platform like Carta, Ledgy, or Vestd. These platforms serve as the single source of truth for your company's equity. They manage option grants, track vesting, process exercises, and provide a clear, auditable record for investors. Migrating from a spreadsheet to a platform before a funding round cleans up a major diligence headache and signals to investors that your governance is mature and well-managed.

Practical Takeaways

Building robust financial controls is an evolutionary process, not a one-time event. Start with the basics: secure your cash, track your expenses, and reconcile your accounts religiously. As you scale towards Series A, formalise your approval workflows and introduce segregation of duties through smart, compensating controls. By the time you are preparing for a Series B, your processes should be documented in formal policies, ready for the scrutiny of auditors and investors. These controls are not designed to slow you down. They are the essential framework that enables sustainable, high-speed growth and builds investor confidence.

Frequently Asked Questions

Q: When should a UK startup hire its first dedicated finance person?
A: Most startups hire their first finance lead, often a Finance Manager or Head of Finance, as they prepare for their Series A round. Before this, a combination of a good outsourced bookkeeper and an engaged founder is usually sufficient to manage early-stage finance controls and reporting.

Q: Are these controls still needed if we outsource our bookkeeping?
A: Yes. While an outsourced bookkeeper handles transaction processing and reconciliations, the responsibility for approval and oversight remains with you. Controls like dual-authorisation for payments, expense approvals, and the strategic review of management accounts must be owned internally by the founders.

Q: What is the biggest financial control mistake early-stage founders make?
A: The most common mistake is neglecting monthly bank reconciliations. Founders often assume their bank balance is the same as their accounting records. This oversight can hide errors, missed revenue, or even fraud, leading to poor decision-making based on inaccurate cash flow data. It is a foundational step in any UK startup compliance checklist.