While not always on the top of mind, keeping your business finances safe is one of your most important responsibilities. Besides ensuring that you can continue to run and grow your business smoothly, this also will save you time and money. How so? By making sure that you don’t bury yourself in debt or become a victim of fraud.
Keeping Your Business Finances Safe
Keeping your business finances safe protects your image. For example, if a hacker were able to access your customer’s credit card information that wouldn’t paint you in a favorable light.
Thankfully, keeping your business finances secure isn’t as complicated or overwhelming as you may believe if you take the following 10 steps.
Choose the right business structure.
“One of the most important decisions you will make as an entrepreneur is what business structure you will choose,” writes Miranda Marquit in a previous Due article. “It can have tax implications, and the way you prepare your taxes can impact how much money you have after Uncle Sam takes his cut.”
Additionally, having the right business structure can protect your finances. Specifically, it provides asset protection so that your personal wealth is safeguarded against business liabilities. For example, if someone slipped on ice while walking into your business, you aren’t personally liable so they can’t come after assets like your home.
To make sure that you select the right entity for your business you should turn to experts like your accountant, lawyer, or business counselors — you can use the Small Business Association to find local assistance.
The most common types of business structures.
- Sole Proprietorship: “This is the default for most businesses,” adds Miranda. “You and your business aren’t separated for tax purposes or liability purposes.” In other words, if you were to get sued, the other party could come after your personal assets.
- LLC or Some Type of Partnership: If there is more than one owner, then you can either go with a partnership or LLC. A general partnership shares everything equally, while a limited partnership is where one owner controls operations, while the other contributes and receives part of the profits. An LLC is a hybrid where you can receive the tax advantages of a partnership but limit personal liability.
- S-Corp.: “Many entrepreneurs like this business structure because it is a ‘pass-through’ where the business itself isn’t taxed,” explains Miranda. “However, you need to maintain payroll and give yourself a salary.”
- C-Corp.: “When you organize this way, there are some advantages, but your company also pays taxes, and you pay taxes on your own income,” Miranda adds.
Whatever entity you select, make sure that you play by the rules. The simplest way to do this is by keeping your personal and professional finances separate. When you do, you aren’t piecing the corporate veil — this means using your business credit card to redo the bathroom in your home.
Regardless of the size of your business, insurance is non-negotiable. After all, it will protect you against the unexpected and limit the risks of operating a business. Most importantly, it will keep your finances safe by protecting your assets.
At the minimum, your business should have the following policies:
- Property insurance will protect your property and inventory from damage caused by calamities like fire or flooding.
- Professional liability insurance offers professional liability if someone sues you.
- General liability insurance will cover medical bills if someone gets injured on your property. It may also handle property damage as well as libel, slander, and copyright infringement.
- Cybersecurity insurance assists with the prevention of sensitive data loss.
- Workers’ compensation insurance will protect your business and employees if they get harmed at work.
Also, you might want to have a life insurance policy for yourself. This is most true if you have a family. The last thing you would want is to leave them empty-handed in the event of the worst-case scenario.
Regularly check your credit report and bank activity.
“The United States government requires the three major credit bureaus, Equifax, Experian, and TransUnion, to provide a copy of your credit report at no charge once per year,” writes Eric Rosenberg at Investor Junkie. “The official government-approved website for your free credit reports is annualcreditreport.com.”
“Be aware that you don’t have to get the three credit reports all at once,” adds Eric. “The best option is to check one every four months so you never go a full year without reviewing your credit report. For example, you could check Experian in January, Equifax in May and TransUnion in September each year.”
Eric follows a schedule like this since 2007. “If you find any suspicious activity or errors, file a dispute with the credit-reporting bureau right away.”
You can also sign up for free credit monitoring to track any issues in real-time for you.
What’s more, you should also keep an eagle eye on your business checking account. It’s one of the best ways to be aware of any possible fraudulent activity. According to a Lexington Law survey, 36% of Americans stated that they review their checking account daily, while 30% do so once a week.
Audit your business operating expenses.
A simple way to not get cough-off guard by creeping business costs, discrepancies, or fraud is to frequently review your business expenses. Preferably, you would do this monthly so that you can nip any problems in the bud. To get started, make sure that you:
- Track fees associated with credit cards or invoice services.
- Track services, such as utility or professional providers, to make sure you’re getting the best rate or if they can be cut.
- Assess your stock purchasing.
- Keep an eye out on payroll and employee expenses like travel and petty cash.
Protect your digital assets.
I hope that no one takes this personally. But, how is it that in the 21st Century we still have to remind ourselves and team members about the importance of cybersecurity? Then again, 43% of cyberattacks have been aimed at small businesses with merely 14% being prepared.
With that in mind, make sure that cover the basics here. I’m talking about things like:
- Securing your server by setting up a firewall.
- Encrypting your data and back it up on the cloud.
- Make use of anti-virus and malware software to thwart computer viruses, worms, trojan horses, spyware, and scareware sent through email and websites. Also, use a VPN when traveling.
- Never click on links or attachments unless you know that they’re legit.
- Make sure that all of your software and operating systems are up-to-date.
- Wipe all the data from your gadgets when you replace them.
- Use “paraphrases” instead of “passwords.”
- Implement multi-factor authentication.
- Never share sensitive information with anyone unless you know who they are.
- Limit the number of people who have access to your business’s financial information.
Protect your physical assets.
“Protecting your digital information is a moot point if your brick-and-mortar office spaces or stores are not secure,” notes Kate Rockwood for the U.S. Chamber of Commerce. And, you can do this by:
- Making sure that your business is in a safe neighborhood. You should also get to know your neighbors so that you can look out for each other.
- Conducting comprehensive interviews and hiring practices. It’s recommended that you use “reference checks, background checks, personal character examinations, and police reports.”
- Investing in a security system.
- Making your physical space unattractive to theft. That doesn’t mean letting it fall apart. Rather, securing entry points, installing outdoor lights, and making regular deposits so that there is less cash available. You should also digitize paper records so that they can only be accessed digitally.
Have multiple income streams.
Just like in your personal life and investments, you need to diversify your income. That means having several different ways to earn money as opposed to being dependent on one primary income. The reason for this is that if you lose one source, you have others to fall back on.
Some ideas would be:
- Starting a blog and making money from affiliates.
- Becoming a business consultant.
- Selling a course or webinar.
- Adding related products or services to your existing business, like if you sell produce offer cookbooks too.
- Passive income ideas, such as REITs, peer-to-peer lending, leasing equipment, or renting out unused office space.
Even if you can’t create additional income streams at work, make sure that you have income diversity outside. For example, you could launch a side gig to supplement your income until you’ve reached your financial goal.
Get creative with financing options.
Debt may be inevitable for business owners. But, it can be cumbersome when having to be payback high-interest credit cards. Instead, look into more favorable options like factoring, crowdfunding, or pledging your future earnings.
Other considerations would be securing an SBA loan or attracting investors. If you don’t need that much, don’t be afraid to ask friends or family.
Build an emergency fund.
Even if you stay abreast of trends and changes in the economy, you also never know when disaster will strike. The COVID-19 pandemic is an unfortunate example of this. I don’t think that most of us realized just how devastating it would get.
While you can’t predict every worst-case scenario, you should have an emergency fund on standby. The general rule of thumb is that you have at least three to six months of expenses saved. While it won’t solve everything, it will give you some breathing room just in case you need to handle an emergency, like a piece of equipment breaking down, or an economic downturn.
Use multiple banks and keep cash-on-hand.
“Everyone says you should use password managers, and you should,” Atish Davda, CEO of EquityZen, told Forbes. “But, go a step further and use different banks and credit cards, so even if there is a compromise with one, you won’t lose it all.”
“Lastly, it sounds antiquated, but keep some cash with you, at home, and at the office,” suggests Atish. This way you won’t “find yourself feeling like a paper millionaire who can’t pay for a taxi to the bank branch.”
Image Credit: anna tarazevich; pexels; thank you!