Internal controls are the processes and checks a company puts in place to prevent errors and fraud in its financial records, things like requiring two people to approve payments over a certain amount, or separating who records transactions from who approves them.
At a very small company, formal internal controls often don't exist yet, and a founder or single bookkeeper handles everything. A real risk, nobody double-checking payments, one person with full access to the bank account, that usually goes unnoticed until something goes wrong, an error, or worse, actual fraud.
Investors and, eventually, auditors specifically evaluate internal controls as part of diligence, since weak controls are a red flag regardless of how the numbers themselves look. Simple steps, requiring a second approval on payments above a set threshold, reconciling accounts monthly, are usually enough at an early stage without needing a full formal controls framework.
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