Segregation of duties for small finance teams: building smart, practical guardrails without extra headcount

Understanding the Core Principles of Financial Guardrails

When you’re running a lean startup, the finance function often falls to one or two dedicated people, or even a founder juggling multiple roles. The same person who enters a vendor bill might also be the one to approve it, pay it, and reconcile the bank account. While efficient on the surface, this concentration of duties creates unseen risks. A simple duplicate payment can go unnoticed for months, and the potential for fraud, though uncomfortable to consider, is real. Establishing segregation of duties is not about adding corporate bureaucracy. It’s about building smart, practical guardrails to protect your cash and prepare your startup for its next stage of growth, whether that's raising a priced round or satisfying a new, major customer.

At its heart, segregation of duties (SoD) is a system of checks and balances designed to ensure that no single individual has end-to-end control over a financial transaction. For early-stage companies, this is less about rigid compliance and more about establishing smart guardrails for operational efficiency and risk reduction. The primary goal is to mitigate common and costly errors, like paying the wrong vendor or processing a duplicate invoice, rather than just preventing complex fraud.

A simple and effective way to think about this is the 'CAR' Framework, which separates the three key components of any transaction: Custody, Authorization, and Recording.

• Custody: This refers to having access to the company's assets. In a startup, this means having the ability to make payments from the company bank account, use a corporate credit card, or sign checks.
• Authorization: This is the power to approve transactions. It includes approving a new vendor for payment, authorizing a purchase order, or approving an employee's expense report.
• Recording: This is the bookkeeping function, the act of entering transactions into your accounting system, like QuickBooks or Xero, and reconciling accounts.

The principle is simple: the person with Custody of assets should not also be the one who Authorizes transactions or Records them. When these duties are separated, you create a natural and necessary review process that protects the company. The reality for most pre-seed to Series B startups is more pragmatic. You begin implementing these controls when clear triggers appear, making SoD a critical part of your startup accounting best practices. Key triggers include transaction volume exceeding 50 vendor payments per month or when the first non-founder employee is issued a corporate credit card.

How to Separate Finance Tasks in a Small Startup Team

Founders often struggle with how to separate finance tasks in a small startup team without adding headcount or investing in expensive control software. The key is to use your existing team and tools creatively to create effective separation. Here are practical playbooks for implementing bookkeeping checks and balances based on your team’s size.

The 'Team of One' Playbook (e.g., a Controller or Finance Manager)

When you are the only dedicated finance person, creating separation seems impossible. The answer lies in leveraging a non-finance team member, almost always a founder or the CEO, to serve as the critical authorization step. This structure provides meaningful financial oversight for founders without requiring them to get involved in day-to-day bookkeeping.

A scenario we repeatedly see is structuring the accounts payable process this way:

1. Recording: The sole Controller receives a vendor invoice and enters it into your payment system, such as Bill.com or a bank portal. They code it to the correct expense account in QuickBooks (for US companies) or Xero (common in the UK) and attach the invoice as documentation. The payment system should follow a documented procurement flow.
2. Authorization: The Controller prepares a weekly payment run. Instead of paying it directly, they send a summary report to the CEO for review and approval. This can be an automated workflow within a tool like Bill.com or a simple email with a list of payments and amounts. The CEO’s approval is the vital compensating control. Use an expense approval matrix to make rights and limits explicit.
3. Custody: Once the CEO approves, the Controller can execute the payment run from the system. The system itself provides a layer of custody control through its audit logs, which should be reviewed regularly as part of your month-end close.
4. Reconciliation: The Controller performs the monthly bank reconciliation. To add another layer of oversight, the CEO should have read-only access to the company’s bank accounts to periodically review activity. You can define these permissions in an access control matrix.

This model effectively separates the 'Recording' (entering the bill) and 'Authorization' (CEO approval) functions, creating a powerful check and balance with minimal operational friction.

The Two-Person Finance Team Playbook (e.g., Controller + Staff Accountant)

With two finance team members, you can implement more robust small business internal controls. The goal is to divide the 'CAR' responsibilities between the Controller and the Staff Accountant across key processes, improving your financial hygiene and demonstrating maturity to investors.

For Vendor Payments

• Recording (Staff Accountant): The Staff Accountant is responsible for receiving invoices, creating new vendor profiles, and entering bills into the accounting or payment system. For example, in a tool like Bill.com, they would be assigned a 'Clerk' role, which allows them to enter data but not approve or initiate payments.
• Authorization (Controller): The Controller reviews the bills entered by the Staff Accountant, checks them against contracts or purchase orders, and provides the first level of approval. In Bill.com or Ramp, they would have an 'Approver' role. For payments above a certain threshold (e.g., $10,000), the CEO may serve as a required second approver.
• Custody (Controller/System): After approval, the Controller initiates the payment run. The system logs their action, creating a clear audit trail.
• Reconciliation (Staff Accountant): To close the loop, the Staff Accountant can perform the initial bank reconciliation, which the Controller then reviews and finalizes. This ensures the person who approved the payment isn't the only one reconciling it. Practical templates for these activities can be found in our month-end control checklist.

For Corporate Cards (using a tool like Ramp or Brex)

• Policy & Authorization (Controller): The Controller sets the spending policies, limits, and approval chains within the platform.
• Transaction & Recording (Staff Accountant): The Staff Accountant's role is to ensure all card transactions are coded correctly and have receipts attached, following up with employees as needed.
• Review & Oversight (Controller): The Controller reviews the monthly card activity for compliance with policy before the statement closes and ensures the data syncs correctly to the general ledger under US GAAP or FRS 102 standards. For platform-specific controls, see our Brex Controls Setup guide.

When You Can't Perfectly Segregate: Smart 'Compensating Controls'

Even with the best intentions, perfect segregation isn't always possible when managing finance with limited staff. A team member might go on vacation, or a task might be too specialized for a junior employee. When perfect segregation is not possible, you can rely on 'compensating controls'. These are secondary checks designed to mitigate risk when primary SoD controls are absent.

What founders find actually works is implementing one or two of these simple but powerful controls:

• Detailed Management Review: This is the most common and effective compensating control. A founder or CEO should perform a regular, documented review of key financial reports. This could be a weekly review of the bank account transaction list or a monthly review of the detailed general ledger. The goal is to spot unusual transactions, unexpected vendors, or strange amounts.
• Budget-to-Actual Analysis: At the end of each month, the finance lead should prepare a variance report comparing actual spending to the budget. This report should be reviewed with the leadership team. Significant variances trigger questions and require explanations, providing a high-level check on financial activity.
• System Audit Trails: Modern tools like QuickBooks, Xero, Bill.com, and Ramp have immutable audit logs. These logs show who created a transaction, who approved it, and when it was paid. Knowing that this trail exists can be a deterrent and is invaluable for investigating any discrepancies. This is a practical control that investors and auditors respect. Guidance on these topics for smaller entities is available from the AICPA; see their resource on identifying and testing controls at smaller entities.

Getting Ready for Due Diligence: Documenting Your Controls

As your startup grows, external parties will start asking about your financial processes, which is a key step in preventing fraud in startups. Formal SoD processes are expected during financial due diligence, typically 3-6 months before a priced round (Seed or Series A). The requirement can also be triggered when a lender or major customer mandates a financial audit. The question you need to answer is: how do you prove to an investor or auditor that you have controls in place?

The solution is a 'Financial Controls Memo'. This is not a complex, 50-page document. It's a straightforward memo or spreadsheet that outlines your key financial processes, the associated risks, and the controls you have implemented to mitigate them. Investors are looking for thoughtfulness and a clear process, not a Fortune 500-level control environment.

Here is an example of what an entry in your memo might look like for the vendor payments process:

Process Area: Vendor Payments

Key Risk: Fraudulent or duplicate payments could be made, resulting in cash loss.

Control Activity:
1. The Staff Accountant enters invoices into Bill.com (Recording).
2. The Controller reviews supporting documentation and approves payment batches under $10,000 (Authorization).
3. The CEO must approve all payment batches exceeding $10,000 (Secondary Authorization).
4. The Controller reconciles all bank accounts monthly (Review).

Creating this simple documentation before you’re asked for it shows maturity and foresight, building confidence with investors and partners that you are responsibly managing the business. For more on vendor onboarding controls and reconciliations, see our related guides.

Key Actions for Founders

Implementing segregation of duties in a small finance team is about being pragmatic, not perfect. It's a foundational element of building a scalable finance function that protects your assets and prepares you for future growth. The focus should be on creating bookkeeping checks and balances that are effective for your current stage.

1. Use the CAR Framework: For your most critical processes (cash out, payroll, expense reports), identify who has Custody, Authorization, and Recording responsibilities and look for ways to separate them.
2. Make the Founder the Control: In a one-person finance team, the founder's review and approval is your most important control. Do not skip this step.
3. Leverage Your Tech Stack: Use the built-in roles and approval workflows in tools like Bill.com, Ramp, Brex, QuickBooks, and Xero to enforce your policies automatically.
4. Document Your Processes: A simple Financial Controls Memo is your best tool for demonstrating your control environment to investors, auditors, and board members.
5. Embrace 'Good Enough': When perfect segregation is not possible, use smart compensating controls like founder reviews and budget analysis. This demonstrates thoughtfulness and is a perfectly acceptable approach for a growing startup.

Visit our Internal Controls hub for broader guidance and related guides.

Frequently Asked Questions

Q: At what stage is segregation of duties absolutely necessary for a startup?
A: SoD becomes critical when clear triggers appear. These typically include processing over 50 vendor payments per month, hiring your first dedicated finance employee, or issuing the first corporate credit card to a non-founder. It is essential to have documented controls in place before seeking a Series A or undergoing a financial audit.

Q: What is the most common mistake startups make with internal controls?
A: The most common mistake is waiting too long to implement basic controls. Many founders prioritize growth exclusively, underestimating the risk of financial error or fraud. Retroactively fixing poor bookkeeping or investigating discrepancies is far more costly and time-consuming than establishing simple, preventative guardrails from the start.

Q: How do we manage SoD when a key finance team member is on vacation?
A: This is where compensating controls are crucial. If a single person must handle multiple steps of a process temporarily, ensure a founder or senior leader performs a detailed review of all transactions processed during that period. This documented review serves as a temporary substitute for the standard segregation of duties.