As your business grows, so does the complexity of its financial operations. You’re managing more vendors, processing more invoices, and handling more transactions. This scaling activity naturally increases the risk of costly mistakes, human error, and even fraud.
This is where payment controls become essential. They aren’t just for large corporations; they help to safeguard payments you make and protect your cash. This guide explains what payment controls are, why they’re critical for businesses of all sizes, and how you can implement internal controls effectively to protect your bottom line.
What are payment controls?
Payment controls are the policies, procedures, and systems you put in place to manage your outgoing payment process. More specifically, these are the accounts payable (AP) controls that govern how money leaves your business. For any AP department—even if it’s just you—these controls are the rulebook designed to safeguard your cash.
More than a collection of accounting best practices, they are a core component of your company’s internal controls, designed specifically to ensure that all outgoing payments are legitimate, accurate, and properly approved.
Why are payment controls important?
Implementing strong payment controls might feel like red tape, but its purpose is strategic. Proper payment controls help you:
Prevent fraud
Payment controls are your best defense against internal and external fraud, from fake invoices to unauthorized transactions. Fraudulent or unauthorized payments can result from an employee setting up a fake vendor, a hacker sending a phishing email with a “new” bank account, or an invoice for services that were never received. More than half of occupational fraud is due to a lack of internal controls, or the right people don’t have the authority to override controls being manipulated for malicious gain.
Payments fraud can cause direct and often unrecoverable financial loss, damage your reputation, and compromise your financial data. By using payment controls, you can help prevent unauthorized payments. All payment transactions are verified, better protecting your cash and your business’s financial integrity.
Reduce human error
Even the most careful person makes mistakes. Payment controls are designed to catch common data entry errors before they impact your numbers.
Duplicate payments (or double payments) are a common human error where the same approved invoice is paid twice. This often happens when an invoice is submitted through different channels, such as mail and email, or entered into the AP system multiple times.
Other manual data entry errors include typing in the wrong dollar amount, transposing digits in an account number, or crediting the wrong vendor from the invoice data. This can lead to late, over, under, or missed payments or paying the wrong entity entirely. These errors skew your financial reporting and complicate reconciliation.
Strong payment controls can prevent double payments and ensure that you pay your bills on time, avoiding late payment fees and building strong vendor relationships.
Improve operational efficiency
Well-organized payment controls streamline your accounting processes and ensure your payment data is accurate, which leads to more reliable financial statements, reputable analytics, and better business decisions. Trusting every payment obligation is legitimate and accurate also allows you to forecast your cash flow with confidence.
Ensure regulatory compliance
As your business grows, your financial reporting will face increasing scrutiny from investors, leaders, and regulators. Proper controls ensure you’re meeting financial regulations. For instance, scaling businesses must prepare for potential audits and, if they plan to go public, eventually adhere to rigorous standards, like the Sarbanes-Oxley Act (SOX). It mandates strong internal financial controls to protect against fraud.
Types of payment controls
Most payment controls fall into three types—obligation to pay, data entry, and payment entry—which all help confirm that you are paying a valid bill.
Obligation to pay
This control ensures you actually owe the money before you pay. Before you consider an invoice payment, you must match it with other key documents through what’s called a three-way match. Here are the key documents:
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Invoice. The vendor’s bill requesting payment.
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Purchase order (PO). The purchase order document you sent to the vendor approving the purchase.
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Goods receipt note. Also called a packing slip, the proof that you received the items or services.
The items, quantities, and prices on these three key documents must match before you pay. This control prevents you from paying for items you never ordered or never received and ensures you only pay what you are obligated to.
Although the three-way match is traditionally a manual process, modern accounts payable systems automate this check using data from electronic invoicing. This data speeds up verification and virtually eliminates human error.
Data entry
Once your obligation to pay is confirmed, the payment details must be entered into your accounting system correctly. Manual data entry is prone to error, while automated systems use optical character recognition (OCR) to scan invoice data and reduce human error.
Data entry controls are critical in preventing payment errors. These controls are the built-in safeguards and policies designed to ensure the payment information (like the amount, vendor name, and account details) transferred into your system is accurate and legitimate. When selecting software, a business owner should specifically look for features that go beyond basic flagging:
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Advanced duplicate detection. The system shouldn’t just flag the same invoice number; it should flag an invoice with the same dollar amount, vendor, and date—even if the invoice number was manually changed by a fraudster.
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Vendor master file control. The software should lock down vendor banking details once entered. Only a person with high-level administrator permissions should be able to edit the vendor’s bank account or routing number, forcing a segregation of duties at the point of data change.
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Real-time data validation. Automated systems using OCR should immediately validate data accuracy and flag anomalies, such as an invoice amount that is significantly higher than historical averages for that specific vendor.
Payment entry
Payment entry is the final checkpoint. This type of payment control governs who has the authority to approve the actual payment and send the cash via electronic fund transfer or other electronic payment systems. Here are the key principles of payment entry controls:
Separation of roles
The principle of segregation of duties ensures the critical steps in the payment life cycle—such as approving a vendor, entering the invoice, and authorizing the final payment—are handled by different people for the same transaction.
Payment limits
People in different roles should have set limits on the amounts they can approve. A manager might be able to approve payments up to $1,000, while anything higher requires approval from a senior member of the finance team or even the business owner.
Verification
Implement strong vendor verification protocols, especially before changing existing bank details. If a vendor requests a change to their payment details, do not accept the change based on an email. Call the vendor back using a known, pre-existing phone number to verbally confirm the change with a trusted contact. You can also employ an automated AP system that uses specialized security software to verify the banking details against the vendor name (not just the account number) before the first payment is executed.
How to successfully implement payment controls
- Enforce segregation of duties
- Automate with an AP system or accounting software
- Standardize your invoice processing workflow
- Set clear payment limits and authorization rules
- Reconcile and review regularly
Here are the most effective ways to implement internal controls for your accounts payable process.
1. Enforce segregation of duties
Segregation of duties is the foundation of AP internal controls. If you’re a solo operation, this can be tricky, but you can still segregate tasks. For example, you handle invoice entry, but your external accountant reviews and authorizes payments. As you grow into a team, you can better separate the roles of purchasing, receiving, and paying.
With a larger company, the goal is to prevent a single person from controlling the payment from beginning to end. Here are the key duties that must be separated:
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The person who manages the vendor master file with the responsibility of inputting or changing bank details must not be the same person who authorizes payments. This prevents fraud through fake vendor accounts.
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The person involved in invoice approval, or verifying the three-way match and approving the amount, must not be the person responsible for payment reconciliation. This prevents a person from covering up errors or fraudulent payments they approved.
2. Automate with an AP system or accounting software
Rather than using manual processes, modern accounting software and AP system solutions offer automation. They create an automated workflow that routes invoices for approval, checks for double payments, and creates clear records for an audit.
Modern AP systems—like those offered by Bill.com and Coupa—go beyond the basic functions of your core accounting software. They are specialized extensions that integrate artificial intelligence and OCR to automate high-risk tasks. This specialization is key: It centralizes all invoice intake (mail, email, portal) into a single system, immediately preventing the human error of inputting the same invoice multiple times from different channels. These systems also offer duplicate invoice detection at a security level that’s impossible to maintain manually.
Well-organized payment controls and digital systems also drastically improve your readiness for a financial audit. Audits are not just compliance exercises; they are an essential tool for validating the health of your financial controls. Auditors examine your AP records to confirm that every payment made has valid supporting documentation. They also ensure your documented internal policies—like the segregation of duties—are being followed. By using an automated AP system, you create an unbreakable, time-stamped audit trail for every transaction, showing who approved what and when.
3. Standardize your invoice processing workflow
As a core preventative control, every invoice should follow the same payment path every time. Consistency makes it easier to spot payment anomalies. Here’s how to document the process:
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Where are the invoices sent?
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Who performs the three-way match?
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Who approves the invoice?
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Who schedules the payment?
4. Set clear payment limits and authorization rules
This implementation step ensures your policies are formalized and enforced across the entire business. Although the principle of setting limits is part of your payment entry controls, successful implementation requires formally documenting two things:
Authorization matrix
Create and circulate a clear authorization matrix that formally documents which specific roles can approve payment transactions and up to what specific amount. This ensures every significant outgoing payment receives a senior-level review, adding a layer of oversight.
Hard limits at the bank/card level
You can set up preemptive hard limits directly with your financial institutions to enforce controls externally, regardless of internal system settings. This could include setting daily or monthly spending limits on corporate credit or debit cards.
You could also establish ACH block limits or rules within your banking portal. Set it to cap the size of any single electronic payment and automatically reject transactions that exceed the approved threshold.
5. Reconcile and review regularly
Regularly reconcile your bank statements against your accounting system. Review your payment history to spot unusual payments, such as multiple payments to the same vendor in one day or payments on a weekend, which can indicate fraud.
Payment controls FAQ
What are payment controls?
Payment controls are the specific checks and balances your business uses to manage its outgoing payments—the money leaving your company for vendors and suppliers. Think of them as a security system for your company’s cash. Their primary job is to ensure every payment is accurate, legitimate, and properly approved before any money leaves your account.
What are the internal controls of payment?
These are the specific internal controls focused on the payment process. Key examples include segregation of duties, requiring approvals for all payment transactions, performing the three-way match, reconciling bank accounts regularly, and securing access to your accounting system and bank portals.
What are the four types of financial controls?
Financial professionals generally group financial controls into four categories:
1. Preventive controls stop an error or issue before it happens, like segregation of duties.
2. Detective controls find an error or issue after it has happened, like an audit of your payment history.
3. Corrective controls fix a problem once it’s been detected, like correcting a data entry error or recovering a duplicate payment.
4. Directive controls encourage a specific, positive outcome, like a company policy.
What are the three types of payment systems?
This typically refers to the methods used for electronic payments and transactions. The main categories are card-based payments, bank-to-bank transfers, and digital/alternative payments, like with digital wallets and crypto.
