When Should You Be Using Authorized Transactions?

Authorized transactions take many forms when you run a small business. But whether they involve money coming in or going out, overseeing key business transactions is all about safeguarding your company against financial risk and inaccurate bookkeeping records.

To help protect your business as it grows, make sure you keep a finger on the pulse of when and where transactional reviews should be happening.

What is a Business Transaction?

A business transaction is essentially a financial transaction. Any action your business takes that can be measured in money – selling services to a customer in exchange for cash, for example - qualifies as a financial transaction, and likely warrants some form of approval.

Monetary transactions inevitably impact your company’s financial position. So, it’s important to verify the accuracy of your business activities before they’re logged into your bookkeeping records. In many cases, that verification will include authorizing certain transactions in real-time.

Why Many Business Transactions Should Be Authorized

Authorized transactions should form part of every company’s internal accounting controls. As policies and procedures instigated by you, these controls are specifically designed to prevent theft, fraud, and incorrect financial reporting.

Consider the fact that the more people who touch a given business transaction, the greater the opportunity there is for error or mishandled money. Then stop and think about all the people who may have a hand in conducting or processing your:

• Company purchases,
• Bill payments and payables,
• Employee payroll,
• Sale of goods or services,
• Point of sale receipts, and
• Client receivables

Even if you’re a sole proprietor and handle many of these tasks on your own, you can’t avoid the potential risk posed by unscrupulous customers, suppliers - even bookkeepers.

Establishing processes that prohibit unauthorized transactions from moving forward without the proper say-so will improve your financial security and mitigate accounting discrepancies.

Understanding When to Authorize Business Transactions

You needn’t look far for business activities that would benefit from an extra layer of approval, whether it comes from a sales lead, a manager, your bookkeeper, or yourself. In fact, it’s common practice for financial transactions to go through multiple levels of authorization before they’re committed to your books.

Here are just a few areas where it pays to implement authorized transactions:  

• Clearing purchase amounts for company supplies and inventory goods in advance,
• Confirming receipt of goods before payments are issued,
• Requiring two signatures on company checks,
• Approving employee expense reports before personnel are reimbursed,
• Reviewing employee timesheets and double-checking payroll calculations,
• Setting up passwords and identification codes for all point-of-sale system users,
• Prompting manager overrides on sales transactions that exceed a certain dollar amount or that involve large denomination cash payments

You should also bear in mind that, whether your business accepts electronic payments online, over the phone, or in person, following best practices for authorized transactions is especially important to avoid falling victim to credit card fraud.

Authorized Transactions for Electronic Payments

Protecting your company’s financial transactions by ensuring debit and credit card payments are valid takes a team effort.

Your customer must present their payment card (or card details) for approval, and verify their identity where appropriate.

Your merchant account provider must get approval for the payment from the card issuer’s bank, and communicate that approval to you.

The issuing bank must confirm the customer has access to sufficient funds to cover their purchase.

Your business must follow proper steps to ensure only authorized transactions are accepted for payment.

Once the issuing bank has approved your customer’s card payment – and you’ve received word that the transaction has been authorized – your bank can get to work depositing those funds in your account.

Skip the authorization process for any reason, however, and you risk not discovering that your client’s payment hasn’t gone through due to:

• Insufficient funds,
• Their card being expired,
• Their card having been reported as stolen or lost,
• Their card being counterfeit,
• Incorrect or invalid card entry

Authorized transactions also come into play any time your business needs to confirm in advance that funds will be available if and when you need to process a customer’s payment.

Hotels and rental car companies, for example, frequently take advantage of authorization only transactions to reserve funds in the event that a client becomes financially responsible for damages.

Don’t Forget Your Documentation

Equally important to setting up authorized transactions for various business activities is your ability to prove those events are legitimate.

With that in mind, your company’s financial transactions should go through an established approval process and be supported by appropriate source documents before they get entered into your accounting records.

Authorized transactions and paperwork like invoices, receipts, and account statements not only work hand-in-hand to ensure your financial data is trustworthy, they make it easier to rely on that data for better budgets and business decisions.

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