It doesn’t matter if you’ve been managing your business for decades or if you’re starting something new. These changes will affect everyone.
Today we will walk you through how to manage your business, focusing mostly on credit scores. We’ll then describe how to protect your business, explaining the compliance changes with a focus on international sanctions. And finally, we’ll guide you through important tips and steps to create a structured and safe business.
Chapter 1
Why Is A Company Score So Important?
Before we dive into the nitty gritty elements of business finances, we need to discuss the basics. A company score, or a business credit score, is a number-based judgment system that indicates to other companies the financial strength of your business.
It uses balance sheets, cash flow, accounts, payment behavior and financial history to figure out how likely your business will become insolvent.
Think of a company score like a personal credit score - the algorithm creates an easy-to-visualize number to indicate how financially stable your business is.
Understanding what your company score is can help you see how other companies perceive you. You can also keep an eye on incorrect data that has been stored (due to fraud or genuine mistakes), and correct them before they make a lasting impression.
A strong company credit score is extremely important as this will not only help you secure better interest rates when looking for financing, it can help you win more contracts as many businesses will look at credit scores to ensure a healthy and stable supply chain.
Chapter 1
How To Manage Your Business Finance
Cashflow is king when it ctextomes to business as this is the lifeblood of your company. Without a steady cash flow nothing else in your business can operate effectively.
Manage And Track Your Cash Flow
It is essential that as a business, there is time and effort allocated to monitoring your cash flow. To understand how money is flowing through your business you need to be able to account for any revenue that is owed to the company in order to ensure that you can meet your financial obligations on time and in full.
If you are selling your products and services on credit terms then it is important that you can understand your customers’ payment behavior so that you can protect your cash flow if they are notoriously late payers. For example, you could win a contract with a company who tend to pay their invoices 10 days after the invoice terms. If this is the case you need to be able to cover those 10 days with existing cash at the bank to avoid any defaults on payments you need to make.
Monitoring cash flow regularly will also help you to forecast for events such as a rise in fuel costs, as there might be other areas of the business that can scale back to expenditure to help cover these additional costs and not lead you to making late payments yourself.
Pick An Account Method That Works For Your Business
Generally speaking, there are two types of account methods. The first is Cash and the second is Accrual.
In the cash method, your focus is on revenue. You monitor when expenses are paid and cash is received. For example, if you were hired for a job you note how much it costs to complete the job but the expenses are not added to your accounting sheets until you are paid.
Once the translation is completed, only then is it added to your final accounting documents. This process is easy to understand, and it allows business owners to hold off on paying taxes until they have completed a transaction. However, this stops you from seeing your accounts as a whole and doesn’t make sense for all business types. Those who focus on inventory would never be able to record their accounts.
The accrual method is more complicated. You have to record when your income or expenses are earned, regardless of if they were paid or spent yet. For example, If you have a building job that will cost $300,000, you would have to note that income despite not receiving it yet. This gives a more realistic picture of how your business is operating, however, you’d have to pay taxes on income you may not have received yet.
Build A Company Credit Score
Just as a personal credit score affects your ability to get loans, mortgages, and credit cards, your company credit score opens or restricts your spending abilities. However, these scores have an added impact. As other companies can see your score, it can affect your ability to land contracts.
If you are just starting out in business then you may not already have a credit report. Submitting your data to credit reference agencies like Creditsafe, will help you to start to build your business credit profile so that you can start applying for credit and funding.
For more established companies, your business should already have a business credit report. At Creditsafe we hold data on over 365 million companies worldwide within our business universe and these are accessible instantly online.
Data is compiled from over 9,000 sources including Government entities, court systems, trade payment suppliers and many more. The information is then updated within the reports as and when it is verified. For example, some filings are done on an annual basis, whilst payment data from suppliers can be as frequent as daily. On average the Creditsafe database is updated 5 million times a day.
When you check your credit score, you need to look out for unexpected or unexplained activity. We have mentioned fraud briefly already, and soon we will explain what it means under common law. But for now, we need to ensure you know the basics. That means spotting fraudulent activity and preventing it from harming your business.
To allow you to easily monitor your credit report and those of your customers Creditsafe offer a Monitoring service. Say for example you received a notification that there was a change in your credit score, this would prompt you to review your report. If you were to spot something that doesn’t look correct or could be disingenuous then you should contact your credit bureau immediately.
Chapter 1
How To Protect Your Business Finances
Now we’re moving on to the legal changes in the business world. In this section, we will discuss how to protect your business from viruses, the changes in legality, and what you can do to protect yourself. We will also explain how these factors can affect your finances.
Invest In Cybersecurity
With more business than ever happening within the virtual world it is essential that your business, regardless of size has adequate cybersecurity to ensure the safety of your data.
Using free protection software isn’t recommended. Free options are often easier to hack as the software creators don’t have as many resources to outwit hackers. Instead, we recommend downloading well-known antivirus software such as Norton or McAfee. Use their free trials to learn which platform is the most user-friendly for your working environment.
If your data becomes exposed a hacker can sell the information to your competitors, making your clients vulnerable and possibly losing custom. In the worst case scenario, the hackers could take money from your business accounts directly, or you could be fined for breaches of data security.
Legal Business Elements To Follow
In every state, different laws and legislations are being created to ensure an updated state of compliance.
In Maine, the legislation called LD 225 will come into effect on the 1st of January 2023. At this time, employers will have to pay their employees their vacation days if they were left unused. While the LD 1786 prevents government businesses from discriminating against employees or customers for reasons such as sex, race, color, gender identity, sexual orientation, disability, religion, age, or familial status.
These changes may not affect your business's finances on a surface level, but failing to comply with them will cause hefty fines, damage to your reputation, and even legal action (such as imprisonment).
To ensure you follow the main issues in compliance, no matter your State of business, we will explain the three most important legal business elements.
KYC Compliance
KYC stands for “Know Your Client” or “Know Your Customer" and is typically used in the finance industry. It is a set of standards created to make sure that companies know their client, and therefore understand how much risk this person can handle or understand.
The KYC is designed to protect the advisors and the client against irresponsible investing and lending decisions, as the process will remove high-risk options from the client’s portfolio suggestions.
Before a customer can open an account with a new business, they must first fill in a KYC document. In this document, the customer needs to relay all of the essential information of their person or business. This includes those with authority on the account, special handling instructions, and historical details. The historical detail needs to include the client’s financial situation. This can help the business to understand the client’s financial abilities and trends.
Securing this information and ensuring customer due diligence can be overwhelming. Here at Creditsafe, we have a simplified KYC and Customer Due Diligence program called Protect. The service is designed to make screenings faster and confidently correct.
International Sanctions
In the world of business, sanctions are a type of penalty put on officials, individuals, or even counties that fail to conform to laws. The sanctions could involve travel bans, an inability to export to specific States, or hefty fines.
As with any failure in a business, the issue is normally due to an individual acting against company policy. Our Compliance Search software helps expose individuals that have had sanctions placed against them so you can avoid creating contracts with them in the future.
Our advanced screening also checks for disqualified directors, insolvent history financial regulations, and any adverse media coverage. Using our software, you can rest easy knowing your B2B plans can go ahead without the risk of sanctions.
Unfortunately, the full list of sanctions is too long and technical to explain here. However, you can read more about the laws and regulations on the government’s website.
Laws And Legislations For Sanctions Compliance In The US
From January 30th, 2022, the federal government declared that all new contracts, extended contracts, and renewed contracts must give employees at least $15 an hour.
In the same month, the tax laws change. If a small business owner or a freelancer used a third party to create a digital service helping you manage credit cards (such as PayPal and Venmo), the third-party provider must declare how much you earned. This change was designed to make taxes easier on small businesses and stop tax fraud.
And due to the pandemic, many states have declared family leave legislation. This allowed parents and caregivers to take leave to look after their family - such as disabled members, the elderly, or children.
Learn which changes are happening in your State by contacting a local business lawyer.
Chapter 1
Important Steps To Take
As you manage and protect your business, you’ll need to ensure these important steps are completed. Without them, you may end up failing in compliance or putting your business and employees at risk.
Analyze Your Pricing Strategy Frequently
Analyzing your pricing strategy means reviewing how you receive income and how it might be affecting your growth. With a B2B business, a one-time licensing fee may deter clients from taking advantage of the singular payment due to the large upfront cost. Or perhaps, clients that own small businesses might not see a benefit in a “per employee” pricing strategy.
Every year or so, you should sit down with your marketing department and inspect the areas that are losing and gaining custom. Being flexible or adding more payment options can help you secure a new demographic.
Review And Update Your Insurance Policies When Needed
As your business grows and matures, your insurance policy may no longer fit your business needs. Be sure to account for a growing number of employees, stock, buildings, and clientele when reviewing your insurance policies so every part of your business is still covered.
You may find that a cheaper and more appropriate deal is available with a new insurance provider. Although it’s best to stick to one provider for a long period of time. In this situation, you can show your current insurers the better deal and ask them to match it.
Create A Password Policy For Employees
Your employee’s passwords are arguably the riskiest element of your business. If someone thinks it’s appropriate to create a password like “Surname123”, then you'll be more open to successful attacks from hackers.
Instead, you should create a password policy that forces your employees to update the password every 90 days. The password should have a minimum character length and a minimum mixture of characters. For example, requiring 2 numbers, 1 symbol, and 3 capital letters.
You should also create a list of non-acceptable passwords. Following Microsoft's own advice, they suggest banning brand names, locations, company-specific terms, and common words such as weekdays.
Having a policy such as this can prevent easy mistakes from creating massive company-wide issues.
Be Up To Date On Your Financial Paperwork
Keeping up-to-date with your paperwork will prevent your company from falling behind. One of the biggest causes of late payment fees is mismanagement. Mismanagement is often a symptom of bad organization.
If your paperwork is online, you can create reminders with popups to keep your financial timetable on track. You can also see how long you have until these deadlines will become problematic.
Automating your organization can help you avoid human error and keep your financial records correct.
Obtain Legal Advice
The business sector is always changing. In January 2021, Tennessee created a new bill called House Bill 2087. It removed the ability for employees to pay disabled people less than the minimum wage (subminimum wage).
If you were unaware of this change, you may have been underpaying your employees. Receiving monthly or yearly legal advice can help you prepare for upcoming changes in your business sector.
Secondly, you should be talking to a lawyer whenever you obtain property, including intellectual property. Everything you put on the internet is technically part of your intellectual property, and if stolen you have a right to claim against the theft. However, the best way to protect your online business interactions is to register your valuable assets and IP. This way an intellectual property lawyer can confirm that you owned the data first and any attempts to copy it will go against your original copyright.
Lastly, having strong legal advice will help your business develop a level of credibility. You can display your connection to the third-party legal team or showcase your in-house legal advisor. Either way, this level of security will make your business connections feel more secure in their contracts with you.
Educate Your Staff
Although your staff should be educated on how to complete their tasks, compliance training, password policies, and ethics training can often become a forgotten aspect of their job. As a business leader, you cannot allow this to happen. Your employees need to remember the importance of compliance, safety, and ethics at all times.
To make sure the natural degradation of time doesn’t harm their abilities to create a protected working space, you need to give your staff frequent reminder courses. Every 3 months, a reminder course for previously passed training should be completed. This will allow your employees to keep these security issues at the top of their minds.
Chapter 1
How To Protect Your Business From Financial Fraud
Protecting your business from financial fraud is one of the most important tasks your accountants should be completing. However, you can make some systematic advancements to help your staff stay vigilant.
Perform Monthly Internal Reviews On Company Finances
Every month your accountants should be performing reviews. In these reviews, they should be marrying up the income and expenditure of the business and confirming that the company's finances match the paperwork.
They should then confirm that the paperwork is legitimate and matches the employees and tasks completed in the month.
Having a monthly review can help your staff point out issues or errors before they become a large-scale problem.
Protect Computer Systems
We discussed this before, but you should install antivirus software on every computer system your company owns. This means laptops, smartphones, IPads, and any other technology that can connect to the internet.
Any tech that is left unprotected becomes a security risk.
Practice Web Awareness
As part of your frequent re-training, there should be a course on web awareness. Knowing which websites are safe and which ones could contain malware is an essential part of online safety. Although many people have learned the difference passively, you cannot assume that every employee has had the same technology-based experience. Instead, you should include web awareness training as a recurring course.
Protect Your Sensitive Hard Copy Information
Although online information is often easier to manage, secure, and find, having hard copies can be just as useful. Hardcopies of handbooks, customer data, or legislation can help you keep important information at hand, and keep your business active if the internet were to fail.
However, if you do allow hard copies you need to protect them. This may mean having a secure room in your offices, which has security cameras watching the entrances. To enter this room you may need explicit permission through a key card. Lastly, you will need to protect this information from physical damage, such as flooding or fires. It may be helpful to use fireproof filing cabinets to ensure safety.
Use Secure Online Banking
Online banking is so normalized, that this point may seem redundant. However, physical banking is still the main movement of income for many companies. This may be due to a lack of understanding around secure online banking.
To ensure that an online bank is secure in the US, you need to look for FDIC regulations. Banks and lenders with this regulation have been deemed secure by the US government.
Get Insurance
All businesses should have insurance. Depending on your company, the type of insurance you need may differ.
All companies are required to have business insurance. This protects you if your customer sues due to injuries in your establishment, if a fire harms your building, or if customer information gets stolen.
Most states also require workers' compensation insurance. This protects your employees should they need medical care and if they miss wages due to illness or injury.
Chapter 1
How To Deal With Client Payments
Client payments are one of the largest forms of income. This means you need to ensure that costs and expectations are clear. Laying down this groundwork will help you avoid late payments from your clients, and create legal barriers for those who refuse to pay.
Discuss All Costs And Payments Beforehand
Making your costs and payments clear from the start, can help your client decide if your price range is in their budget. Budgeting is something that all businesses need to handle with care, so allowing discussions over deals and changes creates clarity on one of the biggest concerns in trade.
Send Invoices Accordingly
Depending on the type of business you have, you may find it easier to send an invoice right away or wait until the job is completed in full. Although some companies prefer to send billings up front, that doesn’t always make sense for every business.
For example, a construction company may create an estimate for the job, knowing the edge charge may be different. Complications may create a delayed time frame and raw materials may become more expensive in the meantime.
Instead, sending invoices as soon as the job is completed may be the best option. Either way, you should avoid delaying an invoice as it will create a knock on effect to your payment.
However if your business is service based and you invoice monthly, ensure your invoices go out on the same day each month. This will build familiarity with your customer base and ensure they are expecting to receive your invoices.
Consider Charging Late Fees
Even if you don’t encounter any clients that pay late, or struggle to pay at all, it’s a good idea to create a policy on late payment fees. This policy should scale with the delay and lead to further actions.
For example, you may say that a delay of 5 days comes with a warning and a reminder of further action. After 10 days, the fee is sent. Depending on your business, this might be a flat rate or a percentage. After 20 days a secondary late fee is presented and the service stops. Lastly, after 30 days, unless the client contacts with a reasonable explanation, legal actions are taken to receive the final bill.
Consider Setting Up A Payment Plan
The best way to ensure that late payments aren’t an issue is to create a payment plan. If you only allow direct debit payments, the finances will be secured on the same day every month through automatic payment.
If this format doesn’t fit your business style, you may showcase the monthly payments for the client to create a clear indication of the days and amounts expected. This shows a plan for both businesses to follow.
Figure out the best method for your business, and create a plan that gives your company and your client structure.
Chapter 1
Summary
Using our advice above, you can keep on top of your business credit score, protect your company from legal action by being aware of legislation changes, and take steps to stay on top of security.
Managing and protecting your business's finances means contacting a business lawyer in your state and in your sector. They will be aware of any changing laws that could affect your finances.
About the Author
Steve Carpenter, Country Director, North America, Creditsafe
Steve Carpenter oversees business operations, sales, P&L, product and data. With an impressive 16-year tenure at Creditsafe, Steve has played an integral role in the company's international expansion efforts, spearheading global data acquisition and fostering global partnerships.