How to Build Effective Internal Controls for Your SME

Internal controls are the rules, procedures, and checks that prevent your business from losing money through fraud, error, or waste. For Nigerian SMEs, getting these controls right can mean the difference between a business that grows sustainably and one that constantly struggles with unexplained losses.

The good news is that effective internal controls do not require complex systems or expensive technology. They require clear thinking, consistent application, and a willingness to verify rather than assume.

The Foundation: Segregation of Duties

The single most important control in any business is ensuring that no one person handles an entire financial process from start to finish. If the same person raises a purchase order, receives the goods, and approves the payment, there is no independent check on whether the transaction is legitimate.

For SMEs with small teams, full segregation is not always possible. But you can still apply the principle. The business owner or a senior manager should approve all payments above a certain threshold. Someone other than the cashier should reconcile the cash register. And the person who orders inventory should not be the only person who counts it.

Cash Management Controls

Cash is the most vulnerable asset in any Lagos business. Effective cash controls include daily cash counts reconciled against sales records, limited cash float amounts with regular banking of excess, pre-numbered receipt books for all cash transactions, dual authorisation for cash disbursements above a set limit, and surprise cash counts conducted without advance notice.

If your business handles significant cash volumes, consider whether you can reduce cash transactions by encouraging bank transfers, mobile money, or POS payments. Every transaction that goes through the banking system creates an automatic audit trail.

Procurement and Payment Controls

Procurement fraud is one of the most common forms of financial loss in Nigerian businesses. Controls should include a formal purchase order process where orders above a threshold require written authorisation, vendor verification to confirm that suppliers are legitimate businesses offering market-rate prices, and three-way matching where the purchase order, goods received note, and supplier invoice are compared before payment.

Regularly review your vendor list to identify dormant vendors, duplicate vendors, or vendors with addresses matching employee addresses. These are classic red flags for fictitious supplier schemes.

Inventory Controls

For trading and manufacturing businesses, inventory represents both a significant asset and a significant risk. Key controls include regular physical stock counts — monthly for high-value items and quarterly for everything else, comparison of physical counts against system records with investigation of all significant variances, controlled access to stock storage areas, proper goods received and goods issued documentation, and monitoring of wastage and write-off levels.

Financial Reporting Controls

Your management accounts should be reviewed monthly by the business owner or a senior manager who understands the numbers. Look for unexpected variances from budget, unusual expense items, and trends that do not match your understanding of business activity.

Set a policy for journal entries — manual adjustments to the accounts should require authorisation and supporting documentation. Unsupported journal entries are one of the most common tools for financial manipulation.

Making Controls Stick

The biggest challenge with internal controls is not designing them — it is ensuring they are consistently followed. Controls only work when they become part of your daily operations. Every exception, every shortcut, every time someone says "we will catch up with the paperwork later" creates a gap that can be exploited.

Document your key controls in a simple procedures manual. Make sure every staff member who handles money or financial records understands what is expected. And most importantly, monitor compliance — controls that nobody checks are controls that nobody follows.

Start Where the Risk Is Greatest

You do not need to implement every possible control at once. Start by identifying where your business is most exposed. For most Nigerian SMEs, this means cash handling, procurement, and inventory. Get these right first, then extend your controls to other areas as your business grows and your systems mature.

The investment in proper internal controls is modest compared to the losses they prevent. A few hours of planning and a commitment to consistent execution can save your business from the financial surprises that derail so many promising Nigerian enterprises.