Chapt 4 Starting a Business in Michigan Benefits of Financial Management

Benefits of Financial Management

• Financial management is the language of business and requires careful attention from the start.
• Proper financial management includes:
• Bookkeeping
• Projections
• Financial statements
• Financing
• These build the foundation for achieving goals and making informed business decisions.
• It shows if a profit is being made and helps determine affordability regarding:
• Store or office location
• Inventory
• Employees
• Equipment.
• Sound financial information is needed for:
• Setting prices
• Selecting vendors
• Financial management provides tools for:
• Business growth
• Product diversification
• Reaching new markets
• These tools help:
• Chart a course into the future
• Adjust direction as needed
• Navigate challenging times
• Financial management offers information on affordability for financing when business growth requires it, this provides the documentation for loan applications
• Registering a business with Dun & Bradstreet (D&B) enables receiving a Data Universal Numbering System (DUNS) number to establish business credit history.
• A DUNS number is similar to a business's Social Security number
• It allows creditors or other businesses to view the business's credit report.

Establishing a Budget

• Creating a budget should be the starting point for financial management.
• A budget is a categorized listing of all monthly or yearly expenses and helps to:
• Track expenses
• Plan for the future
• Economize when needed
• Plan for expansion
• Make a profit
• Once a budget is created, it can be used to compare what was budgeted versus actual expenditures.

Bookkeeping

• Bookkeeping is the organized tracking of income and expense transactions, and is critical for financial management.
• Good bookkeeping leads to better decisions about:
• Financing
• Taxes
• Owner's draw
• Retirement
• 10 basic bookkeeping steps to begin :
• Obtain business accounting software Software selection is critical
• Open separate business bank accounts Do not mix business and personal accounts
• Reconcile business accounts monthly Use accounting software or cloud computing reconciliation
• Track sales Use a register tape, invoices, or a sales book
• Deposit all sales Use duplicating deposit slips Remote deposit capture (RDC) may be available for depositing checks. Link all forms of sales documentation with a specific deposit and do not spend cash sales.
• Write business checks or use a business check card for all business expenses. Avoid using a petty cash system until experience is gained in bookkeeping.
• Obtain a separate business credit card for business expenses
• Always pay business expenses first. Sales pay for business expenses first and personal expenses last
• Run a Profit and Loss (P&L) statement A checking account balance isn't a good measure, a P&L statement can provide a better picture of the financial health of the organization.
• Pay yourself with an owner's draw Assign draw checks to an equity account called "draws" if a sole proprietor.

Cash Flow and Cash Flow Projection

• Cash flow is defined as:
• Balance of cash received minus cash paid out over time
• Moving cash in or out of a business
• A cash flow projection is a financial statement showing expected cash flow in and out of a business over time.
• Used to see if projected cash receipts ("inflows") will cover projected cash disbursements ("outflows")
• Can help manage cash to:
• Pay bills on time
• Keep the business open
• Cash flow projection can be used to:
• Set sales goals
• Plan related expenses
• Determine break-even point during start-up or expansion
• It is helpful when planning for large expenditures or seasonal businesses with large inventory purchases.
• Cash flow projection helps see cash status and plan, unlike a P&L statement, which can mask cash shortages.

Financial Recordkeeping

• Accurate and complete financial records form basis of understanding and monitoring business health.
• An accountant or bookkeeper can be indispensable, offering:
• Financial record keeping
• Key advice on taxes, cash flow, payroll, credit, systems management, and tax system changes
• Good recordkeeping allows reports of current data to compare with financial goals and business plan.
• Using financial records requires:
• Regularly review and compare balances.
• Evaluate reasons for differences (positive or negative).
• Consider changes to business activity.
• Make necessary adjustments to business and financial plan.
• Other recordkeeping includes maintaining an orderly and disciplined practice of storing other business records.
• Recordkeeping systems range from simple manila folders to complex online cloud-based systems.
• Documentation to maintain involves:
• Accounting records related to cash flow, income, expenses, balance sheets, petty cash, 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 (consult with HR professional and/or SBDC Consultant)
• Inventory and status reports
• Vehicle use logs, travel logs, equipment logs, etc.

Create Separate Bank Accounts for Business

• Open a business bank account before accepting or spending business money.
• Common business accounts include:
• Checking account
• Savings account
• Credit card account
• Merchant services account
• Merchant services accounts enable accepting credit and debit card transactions.
• Most business bank accounts offer perks beyond standard personal accounts.
• Business banking provides:
• Limited personal liability protection to keep business funds separate.
• Merchant services offer purchase protection for customers.
• Business banking offers professionalism and :
• Customers can use credit cards or checks made out to the business.
• Authorize employees to handle banking tasks.
• Business banking may include a line of credit for emergencies or new equipment.
• Credit card accounts help:
• Make large startup purchases
• Establish positive credit history.
• Some business owners use the same bank for personal and business accounts.
• Rates, fees, and options vary by bank, so shop around for the best benefits.
• When opening a business checking or savings account, inquire about:
• Introductory offers
• Interest rates for savings and checking
• Interest rates for lines of credit
• Transaction fees
• Early termination fees
• Minimum account balance fees
• When opening a merchant services account, consider:
• Discount rate (percent charged per transaction)
• Transaction fees (additional amount per transaction)
• Address Verification Service (AVS) fees
• Automatic clearing house (ACH) daily batch fees
• Monthly minimum fees
• Payment processing companies are an alternative to traditional merchant services accounts.
• These companies sometimes provide extra functionality and the fee categories will be similar to merchant services account fees.
• If using a payment processor, ensure it connects to a business checking account.
• Opening a business bank account is easy online or at a local bank branch.
• Banks ask for the following information when opening an account:
• Employer identification number (EIN) (or a social security number if a sole proprietorship)
• Business formation documents
• Ownership agreements
• Business license

Cybersecurity

• Businesses are increasingly engaged in online activities like sales, vendor purchases, email, marketing, e-commerce, and website hosting.
• Protecting business and customer data from online threats is critical.
• Guidelines on password sharing, personal device use, and security breach reporting should be in a signed policy document (Acceptable Use Policy).
• Cybersecurity planning sheet and checklist of ransomware dos and don'ts can help create a protection plan against cybersecurity threats.
• Password security encompasses consideration for:
• Where passwords are saved
• Strength and sharing of passwords
• Whether or not the same password is used for multiple logins
• Computer security covers:
• Keeping technology and software updated
• Identifying who manages computers and software, and who to call in an emergency
• Use of antivirus and malware protection
• Security and encryption of computers
• Internet security involves:
• Identifying your provider
• Having a firewall
• Monitoring who uses the Internet
• Being cautious with social media, vendors, and international business
• Smartphone security addresses:
• Identifying your provider
• Contents of your phone
• Locking your phone
• Wireless settings
• Encryption use
• Anti-virus and malware protection
• Remote locate and wipe capabilities
• Data security concerns:
• Data location
• Disaster-recovery plans
• Contacts for dealing with lost data
• Data protection methods
• Plans for unavailable data
• Data classification policy
• Data handling standard
• Knowledge of data held
• Ransomware locks computer files and demands payment for restoration.
• A ransomware attack can affect any business, so:
• Back up your computer in a secure, non-accessible location and do it often.
• Have a disaster recovery plan in place and test it thoroughly.
• Train everyone, even in a small company, as people are the weak link.
• Use a firewall to block known security issues.
• Use IPS/IDS to isolate attacks and protect users.
• Use antivirus and antimalware software from a trusted provider.
• Use a DNS protection system for extra security.
• Know who to call for help with ransomware or other questions.
• Do not:
• Open emails from unknown sources.
• Underestimate the threat.
• Wait to install updates or security patches.
• Keep your data only on site; keep copies of data as a backup in multiple media types and one off-site copy.