What it means
Organisations do not have to discover everything for themselves. Most problems a business faces have been faced by others, and the approaches that worked have been documented by professional bodies, regulators, consultants, software vendors and the organisations themselves.
Adopting those approaches saves the cost of learning by trial and error and raises the floor of performance across an industry. In finance, best practice is codified in accounting standards, audit standards, treasury guidance and internal control frameworks; in operations it appears as quality systems, lean methods and industry certifications; in management it takes the form of governance codes and process models.
The value of a best practice depends on the evidence behind it and the fit with the organisation. A practice that works for a large listed company (a full internal audit function, a treasury committee) may be disproportionate for a small business; one that suits a manufacturer may not suit a consultancy.
Good practitioners distinguish between principles, which travel (reconcile every balance sheet account monthly; separate custody of cash from recording of cash; never let one person control a transaction end to end), and specific implementations, which need adapting. Best practices also change.
Monthly management accounts were once best practice; many businesses now run continuous dashboards. Manual three-way matching of invoices has been replaced by automated matching in most large companies.
A practice adopted a decade ago and never revisited may now be a source of inefficiency. Organisations that treat best practice as a fixed list rather than a moving standard fall behind while believing they are compliant.
The term is also overused. Vendors describe their product's defaults as best practice; consultants describe their methodology the same way; and "industry best practice" is sometimes simply what everyone does, which may be no better than average.
The test is evidence: does the practice demonstrably produce better outcomes, and for whom?
In practice
Real-world examples.
Example
A finance team adopts a documented month-end close checklist with owners and deadlines, a widely recognised best practice, and cuts its close from twelve working days to five.
Example
A charity adopts the governance code for its sector, including an independent audit committee and a conflicts-of-interest register, to meet funders' expectations.
Example
A software company adopts the practice of expressing every capital request as a business case with an NPV and a sensitivity analysis, replacing narrative proposals.
Think of it
“Best practices are proven methods that work well-the techniques used by the most successful.
Formula
Calculation
Best practices are not calculated, but their adoption can be evaluated like any investment.
Net Benefit of Adopting a Practice = (Improvement in outcome x Value per unit of improvement) minus Cost of implementation and operation
Worked example. A distribution company with $40 million of annual purchases considers adopting three widely recognised accounts payable best practices: three-way matching of invoices to purchase orders and receipts, a single invoice inbox with automated capture, and a weekly payment run timed to due dates.
Current position: duplicate and erroneous payments run at 0.4% of purchases ($160,000 a year), early-payment discounts captured are $30,000 against $110,000 available, and the AP team of four spends 60% of its time on manual entry and chasing approvals.
Expected effect, based on published benchmarks for companies that adopted the same practices:
- Duplicate and erroneous payments fall to 0.05%: saving $140,000 a year
- Discounts captured rise to 80% of available: additional $58,000 a year
- Manual effort falls by half: two staff redeployed, saving $90,000 a year
- Total annual benefit = $288,000
Cost: software licence $35,000 a year, implementation $60,000 one-off, process design and training $20,000 one-off.
- First-year net benefit = $288,000 minus $35,000 minus $80,000 = $173,000
- Ongoing net benefit = $253,000 a year
The company adopts all three. The exercise also shows why the practices are "best": each attacks a measurable loss, and the benefits are documented across many companies rather than asserted.Case study
Seen in the real world.
A fast-growing engineering firm had built its finance function around the founder's habits: he approved every payment personally, the bookkeeper held the only knowledge of how the ledger was structured, and reconciliations were done "when there was time". When the firm sought outside investment, the investor's due diligence produced a list of thirty gaps against recognised best practice, from segregation of duties to a documented chart of accounts. The founder's first reaction was that the practices were bureaucracy for big companies.
His finance adviser reframed them as insurance: each practice existed because a business somewhere had lost money without it. The firm adopted the twelve that fitted its size (monthly reconciliations, dual authorisation over $5,000, a written close procedure, a fixed asset register, documented credit control, and so on) and deferred the rest.
The investment proceeded, the close went from six weeks to eight days, and two years later a duplicate payment of $40,000 was caught by the matching control before it left the bank. The founder's revised view was that best practice was what he would have designed himself if he had had time to think about it.
Watch out
Common mistakes.
- Adopting a practice because it is called "best" without checking the evidence or the fit with the organisation's size and sector.
- Treating best practice as fixed. Practices evolve, and the list should be revisited regularly.
- Implementing the form of a practice without its substance, such as a reconciliation that is prepared but never reviewed.
Questions
People also ask.
Where do finance best practices come from?
Accounting and auditing standards, professional bodies, regulators, internal control frameworks such as COSO, and the documented experience of organisations that have solved the same problems.
Should a small business follow the same best practices as a large one?
The principles apply at every size; the implementation scales. A small business needs segregation of duties as much as a large one, but may achieve it with two people and a bank approval rule rather than a department.
How do I know whether a practice is really best?
Look for evidence of outcomes across many organisations, for endorsement by independent professional or regulatory bodies, and for a clear explanation of why it works. Be sceptical of practices whose main advocates are selling them.
From the founder's library
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