What it means
Every industry accumulates lessons about what works and what causes trouble. Best practices capture those lessons in a form that others can follow.
Instead of each finance team working out the best way to close the books or approve payments, it can adopt a method that has already proved itself elsewhere. In finance and accounting, best practices appear in many forms.
Examples include reconciling bank accounts monthly, separating the duties of those who approve and those who make payments, preparing rolling forecasts and documenting accounting policies. Professional bodies, regulators, auditors and software vendors publish guidance that reflects such practices.
The value is consistency and risk reduction. When everyone follows the same method, results are easier to compare, errors are easier to catch and new staff learn faster.
Lenders and investors also take comfort when they see sound practices in place, which can lower the cost of capital. Best practices are not laws, and they are not the same as the minimum required by accounting standards or regulation.
A company can comply with every rule and still be well behind current practice. On the other hand, a practice that suits a global group may be too heavy for a ten-person start-up.
The wise approach is to treat best practice as a starting point and adapt it. Ask what problem the practice solves, what it costs to run and whether a lighter version would still manage the risk.
Review the choices regularly, because what counts as good practice changes as technology, regulation and business models evolve. It also helps to write the practice down.
A one-page procedure with named owners and deadlines turns a good idea into something that survives staff changes. Without documentation, even a sensible practice tends to fade after the person who championed it leaves.
In practice
Real-world examples
Example 1
A manufacturer notices that its month-end close takes ten working days, while peers finish in five. The controller reviews a professional body's guidance and adopts a checklist, standard journal templates and a daily cut-off review. The close drops to six days within two quarters.
Example 2
A charity with a $3 million budget wants to strengthen its controls without hiring more staff. It adopts a simple practice that requires two signatures on every payment above $5,000. The extra check costs a few minutes and has already caught one duplicate invoice. The finance manager reports the number of errors caught to the board each quarter.
Example 3
A software company builds an annual budget once a year and finds the numbers are out of date by March. Its CFO switches to a rolling forecast updated every quarter, which is widely regarded as good practice for fast-changing businesses. The leadership team now plans with figures that are at most three months old. Hiring and marketing decisions are made against current numbers instead of a plan written the previous year.
Think of it
Best practices are proven methods that work well-the techniques used by the most successful.
Case study
Seen in the real world
Fairhaven Distribution is a fictional wholesaler that grew from 20 to 150 employees in four years. Its finance function still worked as it had at the start, with one person entering invoices and approving them. An internal review found three duplicate supplier payments totalling $38,000.
In this illustrative scenario, the new finance director introduced a short list of best practices: separate approval from payment, match every invoice to an order and a delivery note, and review the supplier master list each quarter. The company did not buy expensive software and trained existing staff instead. Duplicate payments stopped, and the external auditors reduced the amount of testing they needed to perform.
The finance director summarised the change in one page for the board, showing the cost of the new steps against the $38,000 recovered. The board approved a yearly review so the practices would keep pace with the company's growth.
Watch out
Common mistakes
- Copying another company's practices without asking whether they fit. A method built for a large group can slow a small team.
- Assuming best practice means zero risk. It reduces risk but does not remove it.
- Treating practice as fixed. Technology and regulation change, so best practice needs regular review.
Questions
People also ask
Is best practice the same as compliance?
No, compliance means meeting the minimum legal or regulatory requirements, while best practice usually goes beyond that.
Where do best practices come from?
They come from professional bodies, regulators, standard setters, audit firms, industry groups and the experience of successful companies. The most useful guidance explains why a practice works, not just what to do.
How do I know if a practice is right for my business?
Test it on a small scale, measure whether it saves time or reduces errors, and keep it only if the benefit outweighs the cost. Ask the people who will use it for feedback before rolling it out to the whole company.
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