Starting a business is no small feat. You want him to succeed at all costs, but having not run a business before, there is a high likelihood of making mistakes along the way. They say you learn from mistakes, which is true. However, if you know what not to do, you can avoid costly mistakes that can slow your startup’s growth.
One of the areas where many beginners make mistakes is finance. Fortunately, many entrepreneurs run successful businesses. They were once startups and they learned a few accounting secrets here and there along the way. It is essential to know them to ensure stay on track. This feature sheds light on those secrets by discussing common accounting mistakes you can make and how to avoid them. Continue reading.
These errors are:
Mistake 1: Manage finances independently
As a startup, there’s always the idea that you need to keep your expenses to a bare minimum. It’s true; Nevertheless, you need to identify the aspects you need to spend on. One of these aspects is business accounting. Managing the accounts independently can potentially be an inconvenience and you will miss out on crucial aspects of your finances.
Solution: Use professional services
Accountants are experts in finance and will do your business good. They know the math that will help you grow your business, in addition to knowing your cash flow. For example, they know how to calculate break even point of your company. The break-even point projects when your startup will start making a profit. If the projections seem too far off, you can adjust your operations to try to reach your profitability objective more quickly. On the other hand, if you’re close to breaking even, you’ll make sure you stay consistent to hit projections on schedule.
In addition to performing the financial analysis of your startup, professional accountants are less prone to making mistakes in their duties. With no mistakes, you won’t make bad decisions that would happen if you relied on bad data.
Mistake 2: Mixing business and personal finances
While trying to grow your startup in the market, you might end up using your personal account to receive business payments. It may be intentional or you may have forgotten. Either way, it’s not recommended. By mixing the two, you will not be able to tell them apart. You might think that a given amount in your bank account belongs to your business and spend more than you should. By the time you realize the mistake, your personal finances will have suffered.
Imagine a situation where a client sues you and the courts decide that you must pay them, as compensation, if they find you liable. Since you are a startup, you may not have acquired assets that would have responded to the lawsuit. In such a case, the courts allow the other party to obtain compensation from your company’s finances.
Remember that you have mixed your personal finances with those of your business. There is a high probability that you will lose not only your business finances, but also your individual deductions. It will be difficult to prove to the courts that a given percentage belongs to you and the other to your company.
Solution: open a business account
Open a business account will help you separate your personal and professional finances. In the process, you will not make business decisions based on incorrect data and you will protect your personal assets. You will also have an understanding of your startup’s cash flow. Banks offer different business accounts. Carefully consider each of them and choose the one that suits your needs as a startup.
Mistake 3: Not being proactive in accounting
Accounting is a process that helps you become aware of your finances, in this case, those of your startup. This involves knowing how much you have spent in a day, your debts, deficits and others. All of these aspects help keep your startup afloat; hence their importance.
Some business owners postpone accounting until the end of the month, others do it because they have to pay taxes. This is risky for your startup since you won’t notice errors as soon as they occur. You will identify them at the end of the month and it might become difficult to trace what went wrong.
Another one accounting deficiency one can engage without knowing it, it is not to like the small transactions which you carry out; you only focus on big deals. Small transactions also make a difference in your startup business.
Solution: Be proactive in accounting
How to become proactive in your accounting? It’s simple; balance your books daily. Consolidate all your daily transactions at the end of each business day. Your day’s transactions don’t just include the sales you’ve made. Also identify your debts and obligations. If you have many liabilities, find ways to offset them as soon as possible.
By doing daily accounting, you will identify errors early enough to track them down and make amends. It will also reduce your burden when keeping your monthly or quarterly accounting, which can be error-prone.
Accounting is an essential aspect of any startup. In most cases, finances are the main factor in the success or failure of businesses. This article has discussed common accounting mistakes made by startups and their solutions. Be sure to note them down and implement them in your operations; you don’t want to make the same mistakes.