Starting a new business can be quite exciting, but for many startups, accounting and financial management can be a hassle. Aside from the fact that crunching numbers is not everybody’s strong suit, many startups tend to focus on product development, marketing, and acquiring customers in the early days, while neglecting the financial aspect.
Thankfully, solutions like Netsuite abound to help businesses of different sizes keep track of their accounts and manage their finances. Even at that, many startups still make some mistakes that can lead to serious consequences. Here are some of them and practical tips to avoid them:
5 Common Mistakes on Accounting for Startup and How to Avoid Them
1. Mixing Personal and Business Finances
This is a very common mistake for new business founders, and understandably so. In the early days, it might seem harmless and convenient to use personal money, accounts and credit cards for business purposes and vice-versa.
However, this can lead to audit and tax issues later on. It will also make it difficult to objectively monitor your business’ financial health and maintain transparency, which can even affect your creditworthiness.
To avoid this, set up a dedicated business account to exclusively manage all business transactions, no matter how large or small. This will help maintain a clear audit trail and save you heartbreak and confusion much later.
2. Poor Budgeting and Resource Allocation
One of the easiest ways to lose control of your startup’s finances is to run your operations without a budget or fail to stick with the one you created. This puts you at risk of overspending or misallocating resources (due to overestimation or underestimation).
Rather than run things on a whim or make assumptions, it would serve you better to create a detailed budget. Even if you do not have exact figures yet as a fledgling startup, it is better to work with a close enough estimate than having no budget at all.
Over time, monitor your expenses and income against your budget and make necessary adjustments till you are as accurate as possible. Of course, as your business evolves, your budget and resource allocation process will also evolve, so adopt a mindset of continuous review and improvement as required.
3. Inconsistent Book-Keeping
Maintaining accurate financial records requires proper and consistent book-keeping. Unfortunately, many startups have a lackadaisical stance regarding it, or get busy with other things with the intention to catch up later.
This often leads to errors, mix-ups, poor cash flow management and even missed deadlines with filing taxes, paying vendors and retrieving payments from clients.
Avoid this trap by building the habit of documenting every transaction, including invoices, receipts, bank statements, etc. You can build a system around this, say scheduling for the end of the day, week or month.
Some accounting software also help with automatic updates and syncing of financial records, reducing the risk of inaccurate or incomplete records.
4. Poor Cash Flow Management
For any business, cash flow is king. No matter how much assets or profit a business has, it can run into serious trouble if its cash flow is not properly monitored and managed. This can lead to an inability to make payroll, sort bills or make important investments into the business, thus slowing down its growth.
It is important to keep a close eye on your cash flow by regularly reviewing your accounts receivables and payables. Also create a cashflow forecast to stay ahead of your future cash needs and not get stranded.
5. No Tax Planning
Taxes are inevitable, yet many startups fail or forget to plan for it. For some, this is even an honest lack of awareness about all their tax obligations, especially industry or location-specific ones that they might not have thought about.
Whether intentional or not, this mistake can attract penalties and fines, which put more strain on the business.
To avoid this, you must be proactive and conduct adequate research to know about all relevant tax obligations. Also regularly set aside funds for tax payments, so you are not overwhelmed with trying to pay the bulk at once during tax season.
It might also help to leverage the expertise of a tax professional to understand and stay ahead of all requirements. Of course, look out for new ones that might be introduced later, so that you are not blindsided.
Conclusion
Proper accounting is essential for the growth and sustainability of any business, including startups. By avoiding these common mistakes and applying the tips to avoid them, you can lay a good foundation for your new business’ financial management.
This helps to maintain your financial health and transparency, which can even increase your chances of gaining better access to funding to grow your startup.
