Startup Internal Controls: Meet Investor & Audit Standards

For many founders, the term ‘internal controls’ sounds like corporate jargon designed to slow things down. In reality, implementing simple, stage-appropriate controls builds the financial guardrails that protect cash, prevent costly errors, and allow a startup to scale securely. Adopting a ‘crawl, walk, run’ framework is a practical way to match your controls to your company's growth stage, ensuring they enable progress rather than hinder it.

Without these guardrails, startups risk fraud, chaotic financial reporting, and a painful cleanup when investors start asking tough questions. For example, one SaaS startup delayed its Series A close by three weeks after due diligence uncovered thousands in un-receipted expenses from a shared credit card. The resulting forensic accounting project was a costly distraction that eroded investor trust right before closing.

Strong controls signal to investors that you are a responsible steward of their capital, which can make due diligence smoother and build the confidence needed for the next round. While specific regulations differ for US-based startups and UK startups, the foundational concepts of accountability and risk management are universal. This guide walks through what to implement and when.

Crawl Stage (Pre-Seed/Seed): Foundational Cash and Process Controls

When the team is small, implementing controls can feel impractical. The focus should be on protecting your most vulnerable asset, cash, and establishing basic habits of accountability. The goal is not a perfect system, but a ‘good enough’ one that prevents major errors and establishes financial discipline early.

Your first priority is securing bank accounts. This starts with enforcing mandatory two-factor authentication (2FA) for all users and severely limiting who has payment initiation privileges. No single person should be able to unilaterally add new users and send funds. These initial steps are the essence of early-stage cash controls for pre-seed startups.

A core accounting principle presents a challenge for small teams.

Segregation of Duties (SoD): The principle of dividing critical financial tasks among different people to reduce the risk of error and fraud.

Ideally, the person who approves a payment is not the same person who initiates it, nor the one recording it in QuickBooks or Xero. When your team is too small for true SoD, the solution lies in 'compensating controls'. A detailed guide on segregation of duties for small finance teams offers realistic workarounds. For instance, if one person prepares a payment run, the compensating control is having a founder review the batch report against invoices before giving final approval.

As the team grows, you must move away from verbal approvals and shared credit cards. Start by establishing a lightweight approval workflow, which can begin with a simple email template or a dedicated Slack channel. This creates a basic audit trail and is the foundation for a system of procurement without a procurement team.

For employee expenses, create a simple hierarchy. A clear policy document should outline valid business expenses and who approves them. An expense approval matrix for growing startups helps formalize this by defining spending limits. For a 15-person team, this might mean a manager approves expenses under $200, while a founder approves anything over that amount.

Finally, track who has access to which financial tools. A simple spreadsheet listing each system (bank, accounting software, Stripe), the employees with access, and their permission level is sufficient. This access control matrix is crucial for offboarding employees securely and demonstrating control to investors.

Walk Stage (Series A): Systematizing Controls for Growth

As a startup enters its growth stage, manual processes and spreadsheet-based controls begin to break. Transaction volume increases, the team expands, and founders can no longer oversee every expense. This is the 'walk' phase, where you transition from ad-hoc checks to scalable, technology-driven systems. The goal is to embed controls directly into your workflows, making them automated and consistent.

This is where finance technology becomes critical. Spend management platforms automate the controls you struggled to implement manually. A guide on setting up Brex controls or a walkthrough for implementing Pleo for expense controls shows how to issue cards with preset limits and automated approvals. For UK-based startups, a guide to configuring Revolut Business controls can achieve the same result.

These tools eliminate shared company cards and manual expense reports, providing real-time visibility. For instance, you can issue a virtual card to a marketing contractor with a $1,000 monthly limit, restricted to 'Digital Advertising' merchants, ensuring funds are used only for approved ad spend.

Chasing down receipts is a common control gap. Modern expense platforms allow employees to capture receipts via a mobile app, which then uses OCR to match the receipt to the transaction. Implementing automated credit card receipt management closes a significant compliance gap and frees up hours each month.

With growth comes increased fraud exposure. A weak vendor setup process can lead to payments being sent to fraudulent bank accounts. Your vendor onboarding fraud prevention guide should include verifying company details and confirming bank accounts via a secondary channel. Similarly, implementing strong wire transfer controls to prevent fraud is non-negotiable. This involves a separation of duties where one person initiates the payment and a senior person approves it, often called the 'four-eyes' principle. This entire area falls under treasury controls and payment security.

Your individual controls are validated through the month-end close process. A reliable and timely close is the ultimate check that your systems are working correctly. Formalizing this with a month-end control checklist ensures reconciliations are performed consistently and discrepancies are resolved promptly, creating a system-generated audit trail essential for accountability.

Run Stage (Series B and Beyond): Advanced Controls for Audit Readiness

By Series B, investor and board expectations have shifted. This is the 'run' stage, where you must formalize, document, and strengthen your control environment. The focus moves from preventing basic errors to demonstrating institutional-grade financial governance and preparing for an external audit.

The first step is to replace informal tribal knowledge with documented policies. You need to create and get board approval for key financial policies covering areas such as:

• Travel and Expense (T&E)
• Procurement and vendor management
• Capitalization of assets

This formalization is a core component of audit preparation. Being ready for an audit means having a well-documented system that an external auditor can review and test. As noted by top-tier auditors, strong internal controls can reduce audit scope, saving both cost and management time.

As your business model solidifies, your controls must be tailored to its specific risks. For an e-commerce company, effective e-commerce inventory controls are critical to prevent shrinkage. A typical control involves cycle counting high-value items and comparing the physical count against records in Shopify and your accounting system to flag discrepancies.

For a professional services firm, robust professional services project controls are essential to prevent revenue leakage. This often involves a weekly project review where managers compare billable hours tracked against the project budget, allowing them to spot over-servicing before it erodes profitability.

Other business models have unique requirements. R&D-heavy companies must implement stringent controls around grant spending and correctly capitalize R&D expenses, a process with significant tax implications under rules like the IRS guidance on Section 174 capitalization. For SaaS companies, key controls revolve around revenue recognition, ensuring that revenue is recorded in the correct period according to standards like ASC 606 or IFRS 15.

Conclusion: Build Controls to Build Trust

The journey from a two-person startup to an audit-ready enterprise is one of escalating complexity, and your approach to internal controls must evolve in lockstep. This progression from protecting cash, to systematizing with technology, and finally to formalizing the entire control environment is a strategic imperative.

Each control you implement is a building block of trust with your employees, board, and investors. It proves that their capital is being managed in a secure and disciplined manner. The most important thing is to start. This week, review who has administrative access to your primary bank account and accounting system, and downgrade anyone who does not strictly need that level of permission.

Internal controls are not a one-time project but an evolving practice. By cultivating this discipline early, you are not just preventing problems. You are building a more durable, valuable, and trustworthy company.

Frequently Asked Questions

Q: When is the absolute latest to implement basic financial controls?
A: The latest is before your first external capital raise. Best practice is to start from day one, even with simple controls like requiring two approvers for payments. Retroactively cleaning up poor financial records is significantly more expensive and time-consuming than building good habits early.

Q: Do internal controls make a startup less agile?
A: Not if they are stage-appropriate. Early-stage controls should be lightweight and focused on high-risk areas like cash management. The goal is not bureaucracy, but clear guardrails that empower your team to operate safely, which enables faster, more confident decision-making as you scale.