Protecting Your Business: Why Internal Controls Matter for Small and Mid-Sized Companies

After spending years in federal and state government operations, I've seen firsthand how robust internal controls and procedures form the backbone of effective operations. While large government agencies have entire departments dedicated to compliance and risk management, small and mid-sized businesses often operate without these critical safeguards, which can lead to their detriment.

Small businesses can't replicate the extensive segregation of duties that government agencies maintain, but that doesn't mean you should operate without controls. Let me walk you through a practical framework for implementing internal controls that actually work for growing organizations.

Why This Matters

In government, we couldn't function without standard operating procedures (SOPs), internal management protocols, and strict policy adherence. These were protective measures that ensure consistency, prevent fraud, and maintain operational integrity. Your business deserves the same protection, scaled appropriately to your size and resources.

Building Your Internal Controls Framework

1. Identify Your Risks

Start by looking at your business through a risk lens. Work with your financial team to assess both external threats (fraud, regulatory violations) and internal inefficiencies. Ask yourself:

• Are you paying thousands annually for software nobody uses anymore?
• Is your tech stack lean and purposeful?
• Where could someone exploit gaps in your processes?

2. Assess Each Risk Area

Once you've identified potential vulnerabilities, evaluate their likelihood and impact. Take your website, for example. Is it ADA compliant? If not, you're exposing your business to potential lawsuits. These assessments should cover everything from customer-facing operations to backend financial processes.

3. Review Existing Controls Annually

What worked last year might not work today. Schedule yearly reviews of your policies and procedures. Consider: How did your business respond during the COVID-19 pandemic? Do you have documented protocols for that response, or are you relying on institutional memory? When key people leave, that memory walks out the door with them.

4. Develop and Implement Protocols

Identify gaps and create new policies to address them. This might include:

• Enhanced cybersecurity protocols
• AI workflow governance and automation safeguards
• Vendor management procedures
• Data privacy controls

5. Monitor and Adjust Continuously

Establish an ongoing monitoring system. Conduct periodic audits and performance reviews. In a previously held role, we held quarterly meetings specifically to verify our systems were functioning as intended. We tracked KPIs and OKRs, and whenever we spotted a deviation that had an impact on the operations, we examined our SOPs. If the deviation wasn't addressed in existing procedures, we updated them immediately if the gap posed risk to our programs.

Special Considerations for Government Contractors

If you contract with state or federal agencies, documentation is very important. You must maintain records of your internal systems, SOPs, and training protocols. Government auditors will review these, and I've witnessed those audits firsthand. Strong documentation practices protect any business, but they're essential for government contractors.

The Segregation of Duties Challenge

Here's where small businesses face their biggest constraint: you simply can't achieve the same level of role separation that larger organizations maintain, but you must do your best.

Never allow the same person to handle both HR and financial forecasting. I recently learned about a Canadian business that made this exact mistake. They hired someone to manage both functions. That individual allegedly created fake employees in the system and funneled millions of dollars over several years through fraudulent payroll. The owner remained completely unaware, believing they were paying legitimate external employees.

This is preventable. Even with limited staff, you can implement checks and balances.

Why SOPs Are Your Business Insurance

Standard operating procedures serve two critical functions:

For the company: They maintain consistency and ensure policies are followed uniformly across the organization.

For employees: They provide clear guidance on everything from onboarding new hires to managing difficult client situations to following purchasing protocols.

As your company grows, these guidelines become even more valuable. They allow employees to adapt quickly to changes without disrupting workflow. They also create institutional knowledge that survives staff turnover.

Documentation and Record-Keeping

Track business decisions, approval chains, and procedural changes meticulously. When I wrote SOPs in government, I always secured signatures from at least two or three people in my chain of command. This created accountability and ensured a uniform approach to our work.

Control Access to Sensitive Information

Not all SOPs should be accessible to everyone. Procedures related to cybersecurity protocols, physical security measures (especially if you have security officers), or proprietary processes should be restricted to authorized personnel only. Make deliberate decisions about what information is shared company-wide versus what requires limited access.

Communication and Training

Rolling out a new policy or SOP isn't complete until people are trained on it. For complex processes, or new program launches, and multi-step projects invest time in thorough training. Recognize that adoption takes time. People need space to internalize changes and ask questions.

These open conversations about procedures prevent errors and enhance work culture dynamics by building accountability across your team.

The Bottom Line

Internal controls aren't about creating red tape. They're about protecting the business you've built, ensuring consistency as you scale, and preventing the kind of catastrophic failures that can destroy organizations. You don't need a government-sized compliance department. You just need thoughtful, documented processes that match your current size and grow with you.

Start small if you need to. Pick one area—financial controls, client onboarding, data security—and build robust procedures there. Then expand. The investment you make in internal controls today will pay dividends in operational efficiency, risk mitigation, and peace of mind tomorrow.