Guide to Financial Management & Cybersecurity

The Benefits of Financial Management

Financial management is the language of business, and you need to pay careful attention to your financial management from the moment you start your business.

The process of proper financial management includes bookkeeping, projections, financial statements, and financing, which form the foundation for reaching your goals and making sound business decisions. Financial management also reveals if you are making a profit and helps you decide what you can afford in terms of your store or office location, inventory purchases, employees, and equipment.

You need sound financial information for many reasons, like setting your prices and selecting your vendors. Financial management also gives you the tools to plan for business growth, diversification of your product lines, or reaching new markets. It gives you tools to chart your course into the future, adjust your direction when needed, and help you find your way through challenging times. If your business growth requires financing, financial management provides the information to know how much you can afford for your business. It gives you the documentation needed for a loan application, and it helps you discuss your business circumstances with a lender in terms that improve your ability to qualify for the loan.

Establishing a Business Credit History

You should also register your business with the business credit reporting company Dun & Bradstreet (D&B) so you can receive a DUNS number and begin establishing a business credit history. A DUNS number is like your business’ Social Security number; similar to how you would provide your personal Social Security number for a personal credit application or whenever someone wants to check your personal credit history. Your DUNS number will let a creditor or another business easily view your business’ credit report.

Visit Dun & Bradstreet to get a DUNS number for your business.

Future Thinking

Your financial management will not only be necessary as you start your business, but it will also be important in the future. If you seek funding or grants, or if you want to sell your business, your accurate and current financial records will be critical to the process.

Establishing a Budget

Creating a budget is the first place to start with your financial management practices.

A budget is a list of all your (monthly or yearly) expenses, organized by categories. A budget is a tool that helps you:

• Track all your business expenses
• Plan for the future
• Economize when you need to
• Plan for expansion
• Make a profit

Once you create a budget, you can then use it to compare what you’ve budgeted to your actual expenditures. You’re Indiana SBDC advisor can help you think through your budget and provide templates.

Bookkeeping

Bookkeeping is the organized process of tracking all income and expense transactions, and it’s a critical component of financial management.

Good bookkeeping leads to better business decisions regarding financing, taxes, owner’s draw, and retirement. Here are 10 basic bookkeeping steps which you should begin following immediately once you start your business:

1. Obtain Business Accounting Software
   1. Proper software selection is critical for success.
2. Open Separate Business Bank Accounts
   1. Do not mix business and personal financial accounts.
3. Reconcile Your Business Accounts
   1. Each month, reconcile your accounts using business accounting software or a cloud computing reconciliation process.
4. Track Sales
   1. Create an airtight system for tracking sales using tools such as a register tape, invoices, and a sales book. Always use this sales tracking system.
5. Deposit All Sales
   1. Using duplicating deposit slips, deposit all sales in your business checking account. Alternately, remote deposit capture (RDC) may be available for depositing checks. This technology allows you to deposit a check into your account from your office by sending the bank an electronic image of the check. Total sales should equal total deposits. Do not spend cash sales. Link all forms of sales documentation (such as invoices, cash register tapes, and sales books) with a specific deposit.
6. Write Business Checks or Use a Business Check Card for All Business Expenses
   1. Don’t use a petty cash system until you gain significant experience at bookkeeping.
7. Obtain a Separate Business Credit Card
   1. If you plan to use a credit card for business expenses, consider obtaining a card in your company’s name. Doing so will help you keep track of business expenses.
8. Always Pay Business Expenses First
   1. Many new businesses start as sole proprietorships. In sole proprietorships, you, the owner, do not get a salary; rather, you take an owner’s draw. But how much should you take? Here’s a rule of thumb: Sales pay for business expenses first and personal expenses last.
9. Run a Profit and Loss (P&L) Statement
   1. A checking account balance is not a good indication of how much profit the business has made or what amount is available for an owner’s draw. A P&L statement can provide a better picture of the financial health of the organization. Your Indiana SBDC advisor has P&L templates available to get you started.
10. Pay Yourself
    1. Depending on the legal structure you use to set up your business, there are different ways to pay yourself. Check with your financial or tax advisor to identify the process that works for your business.

Cash Flow and Cash Flow Projection

Cash flow can be defined in two ways:

• Balance of cash received minus the amount of cash paid out over a period of time
• Moving cash in or out of a business

A cash flow projection is a financial statement that shows how cash is expected to flow in and out of a business over a period of time. It is used to see if projected cash receipts (called “inflows”) will be sufficient to cover projected cash disbursements (called “outflows”). Unfortunately, a business can be profitable and still run out of cash. A cash flow projection can help you manage your cash so you can pay your bills in a timely way and keep the doors of your
business open.

You can also use a cash flow projection to set sales goals, plan for related expenses and determine your break-even point during a start-up or expansion phase. If you need to plan for a large expenditure, such as an equipment purchase or moving to a new location, a cash flow projection is the perfect tool to help you effectively manage your finances during that time.

Similarly, if you have a seasonal business with large inventory purchases, a projection can help you plan to have the cash on hand necessary to make a large inventory investment. Unlike a P&L statement, which can mask cash shortages, a cash flow projection helps you see the cash status of your business now and plan into the future.

Your Indiana SBDC advisor has access to sample cash flow projection worksheets and online tools to assist you in this process.

Financial Recordkeeping

Accurate and complete financial records are the basis of understanding and monitoring the health of your business.

An accountant or bookkeeper can be indispensable to a new or growing business, not only as a financial record keeping service but also as a key advisor on issues related to taxes, cash flow, payroll, credit, systems management, and changes within the tax system. Good financial recordkeeping allows you to create reports of current data so you can compare your current status to your financial goals and business plan. 

Using your financial records, it is essential to:

• Regularly review and compare your balances
• Evaluate the reasons for differences, whether positive or negative
• Consider changes to your business activity
• Make necessary adjustments to your business and financial plan

Other Recordkeeping

Along with your financial records, you will want to make sure that you have an orderly and disciplined practice of storing other business records.

Along with your financial records, you will want to make sure that you have an orderly and disciplined practice of storing other business records. Your success depends on creating and maintaining an effective recordkeeping system not just for your finances, but for other important documentation.

Recordkeeping systems range from simple manila folder filing systems to commercial software programs to complex online cloud-based systems.

However you want to collect and store your records, you will want to make sure that you maintain the following types of documentation:

• Accounting records – profit and loss statement, cash flow statement, income, expneses, balance sheets, petty cash, status updates, etc.
• Client files
• Contracts and vendor files
• Corporate or organization records about meetings, resolutions,etc.
• Bank and credit card statements
• Annual tax returns, quarterly tax filings, and other tax documentation
• Personnel files (for specific requirements related to this, consult with a qualified human resources professional)
• Inventory tracking reports
• Status reports
• Vehicle use logs, travel logs, equipment logs, etc.
• Legal documents
• Insurance documents
• Receipts for purchases

Why Do You Need to Keep Business Records?

Below, is a list of what you should be keeping track of:

• For annual tax filings and potential audits
• To separate personal and professional expenses
• Check your business progress
• Prepare tax returns
• Project your tax liability
• Keep track of all deductible expenses

The IRS recommends the following record retention schedule

• Financial Records: The IRS can request six years’ worth of financial records. The IRS can contact you at any time and you need to have the documents they ask for.
• Employment Tax Records: Keep for at least four years after the tax is paid or is due.
• Failure to File: If you fail to file a return, keep your financial records indefinitely.

Business records that should be kept indefinitely

• Active lease agreements
• Operation permits
• Stock certificates

Create Separate Bank Accounts for Your Business

Before you start accepting or spending money for your business, you should open a business bank account. Business owners cannot comingle their business income with personal income. Common business accounts include a checking account, savings account, credit card account, and merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers.

If you plan to use digital apps, such as CashApp, Venmo, Paypal, etc., you will need a business bank account for those services as well, as you cannot comingle your business revenue from these platforms with personal accounts.

To open a business bank account, go online or to a local branch to begin the process. Banks typically ask for the following information when you open a business account, but some banks
may ask for more:

• Employer identification number (EIN) (or a social security number if you’re a sole proprietorship)
• Your business’ formation documents
• Ownership agreements
• Business license

NOTE: Be sure you’ve finalized your legal structure and registration process before you set up a business bank account.

Different Business Bank Accounts

Most business bank accounts offer perks that don’t come with a standard personal bank account. Examples include the following:

Protection and Security

Business banking offers limited personal liability protection by keeping your business funds separate from your personal funds. Merchant services also offer purchase protection for your customers to ensure that their personal information is secure.

Professionalism and Convenience

Customers will be able to pay you with credit cards and make checks out to your business instead of directly to you. Plus, you’ll be able to authorize employees to handle day-to-day banking tasks on behalf of the business.

Preparedness

Business banking usually comes with the option of a line of credit for the company. This can be used in the event of an emergency or if your business needs new equipment.

Purchasing Power

Credit card accounts can help your business make large startup purchases and help establish a positive credit history for your business.

Some business owners open a business account at the same bank they use for their personal accounts. Rates, fees, and options vary from bank to bank, so you should shop around to make sure you find the lowest fees and the best benefits.

When you’re opening a business checking or savings account, ask about the following items:

• Introductory offers
• Interest rates for savings and checking
• Interest rates for lines of credit
• Transaction fees
• Early termination fees
• Minimum account balance fees

When you’re opening a merchant services account, you’ll want to consider additional factors, such as:

• Discount rate (the percent charged for every transaction processed)
• Transaction fees (any additional amount charged for each transaction
• Address Verification Service (AVS) fees
• Automatic clearing house (ACH) daily batch fees
• Monthly minimum fees

Payment processing companies are an increasingly popular alternative to traditional merchant services accounts. Payment processing companies sometimes provide extra functionality, like accessories that let you use your phone to accept credit card payments. The fee categories that you need to consider will be similar to merchant services account fees. If you find a payment processor that you like, remember that you’ll still need to connect it to a business checking account to receive payments.

Cybersecurity: Take It Seriously!

For some businesses, your entire operation can be quite literally in your computer’s hard drive and online, so protect it!

Businesses have become increasingly engaged in online business activities like sales, vendor purchases, email, marketing, website hosting, e-commerce, and much more.

Protecting your business and your customers’ data from online threats has become a critical consideration for everyone, especially small businesses. Guidelines about the sharing of passwords, use of personal devices on business systems, and the reporting of possible security breaches should be covered in a signed policy document such as an acceptable use policy. Consider the questions on the following page to evaluate your cybersecurity risk.

Different Securities to Consider

Password Security

• Do you save passwords in your browser?  
• How safe are your social media passwords? 
• Do you write passwords down? 
• Do you save passwords in a file on your computer?  
• Do you have a password on your phone?Do you use complex passwords? 
• Do you use shared passwords?
• Do you use the same password for multiple logins?

Smartphone Security

• Who is your provider? 
• What is on your phone?
• Do you lock your phone?
• Do you leave wireless (Bluetooth, Wi-Fi, or Location) on? 
• Who uses your phone?
• Are your smartphones encrypted?
• Do you use antivirus and malware protection?
• Can you remote locate and remote wipe your smartphone?
• Do you share your phone?

Computer Security

• Is your technology up to date?Who takes care of your computers?
• Who do you call in the event of an emergency?
• Who takes care of your software?
• Do you use antivirus and malware protection?
• Do you use cloud services?
• Are your computers physically secure? 
• Are your computers encrypted?
• Do you share computers?

Data Security

• Where is your data?
• Do you have a disaster recovery plan? 
• Do you know who to call when your data is gone?
• How do you protect your data? 
• Do you have a plan in case your data is unavailable?
• Do you have a data classification policy? 
• Do you have a data handling standard? 
• Are your computers encrypted?
• Do you know what data you have?

Internet Security

• Who is your provider? 
• Do you have a firewall? 
• Who uses your internet?
• Who is watching out for you on the internet? 
• Do you deal with vendors on the internet?
• Do you do business internationally?

Ransomware Attacks Dos and Don’ts

Ransomware locks all available files on your computer system, and the attackers will make you pay for a code to restore them.

It may also lead to losing all your files! Ransomware attacks can affect any business. If you fall for it, it will infiltrate your system, regardless of company size.

DO

• Backup your computer somewhere you cannot always access. The more often, the better.
  • Ransomware will encrypt anything it has access to, including network drives, connected local drives, and any system that acts as external storage.
• Have a disaster recovery plan
  • Ransomware can be a disaster. Make sure you have planned for it and have tested every option.
• Train your people, even in a small company
  • Training is the best defense; people are often the weak link that lets ransomware in.
• Use a firewall
  • Some ransomware attacks through known security issues; make sure it can’t get through with a business class firewall.
• Use IPS/IDS
  • Intrusion prevention and intrusion detection systems (IPS/IDS) can isolate an attack as it gets in. It also offers protection for your users when they are in the wrong place.
• Use antivirus and antimalware software
  • Antivirus software saves people all the time. The statistics are indisputable. Make sure you pick a trusted antivirus program.
• Use a DNS protection system (Domain Name System)
  • Sometimes one extra layer of security is something that will save you. DNS Protection provides an excellent opportunity for improved security.
• Know who to call
  • Whether it is for ransomware or other questions, don’t rely just on internet searches. Look for a credible company to help you when you need it.

What NOT to Do

A quick list of what you should absolutely not do when dealing with a ransomware attack.

DON’T

• Open emails from unknown sources
  • Ransomware will encrypt anything it has access to, including network drives, connected local drives, and any system that acts as external storage.
• Underestimate the threat. No one is safe from ransomware.
• Wait to install updates or security patches
  • Many ransomware exploits are solved quickly in patches. Waiting to update your system could leave you and others vulnerable.
• Keep your data only on site
  • Remember that you should keep several copies of your data as a backup: 3 copies, 2 media types, and 1 off-site.

The U.S. Small Business Administration (SBA) has additional information and resources available at sba.gov

The Federal Trade Commission in partnership with the U.S. Small Business Administration and other federal partners have published a cybersecurity booklet – available online at sba.gov/managing-business/cybersecurity