Starting a business is a very challenging and exciting endeavour. However, when you are starting, there is so much on your plate, such as hiring staff, acquiring customers, and marketing. Among these aspects that require due attention, accounting and bookkeeping often take a backseat. When you own a startup, accounting is not just about having balanced books but also about establishing a strong financial base, necessary for growth and continuity. According to a study, running out of cash is one of the top reasons for startup failures.
Read on to know the common accounting errors that startups make and tips/suggestions on how to avoid them.
Improper Monitoring of Cash Flows
Cash flow is the life of any business. Although many business owners fail to understand that improper management of cash inflows or not planning for operational expenses may lead to severe liquidity problems, making it difficult to meet the day-to-day obligations.
Suggestions:
Create a Budgeted Cash Flow
Introduce a system to predict cash flows, this can give you an idea about probable shortages and surpluses in cash and help you in making decisions proactively.
Monitor Outstanding Invoices
Enabling the system to track invoices payments will help you keep a tab on late payments as well as plan incentives for early paying customers.
Oversee Expenses
Expense is one of the most important aspects of cash flow. You must keep a close tab on it as it will prevent you from non-essential expenditure and prioritise spending.
Unsatisfactory Records Keeping
When setting up a business, owners overlook the importance of accounting and keep their attention focused on core activities. However, this leads to disorganised finances, missing key documents, and incorrect/missed tax deadlines.
Suggestions:
Maintain Proper Documentation
Keep physical/digital copies of all the receipts and expenses, including sales, labor, research, and others.
Regularly Reconcile
Reconcile your bank statements with accounting records on a regular basis to detect and rectify any discrepancies promptly.
Record Every Transaction
Whether big or small, record every transaction your business enters into. This puts you into a position of making informed decisions based on the accurate financial performance of a business.
Ignoring Tax Obligations
Even though considered intimidating and complex, taxes play a vital role in the accounting process. Ignoring tax regulations or their misinterpretation may lead to penalties and interest charges.
Suggestions:
Understand Applicable Tax Laws
Even though you have an expert, you must know what tax obligations apply to your business, such as GST, payroll tax, and income tax, as it may vary based on the type and location of your business
Keep Detailed Record
Keeping detailed records for all transactions in an organized manner helps in accurate tax filings and avoiding penalties.
Hire an Expert
By far the best solution to abide by tax laws and avoid penalties is hiring a professional. This way you can focus on your business activities, while they can navigate you through applicable tax regulations and help file returns timely as well as accurately.
Keeping Personal and Business Expenses Combined
In the initial phase of a business, owners don’t understand the importance of keeping business expenses separate from personal accounts. However, this failure to separate personal and business finances will create chaos and misunderstanding during taxation or audit periods, making it difficult to sort things out.
Suggestion:
Create a Separate Bank Account
Opening a separate bank account for your business from the first day of operation is a smart decision. This way, you can keep track of your business expenses accurately, simplifying the preparation of your financial statements.
No Proper Planning
Another major planning that a startup owner overlooks is budgeting or financial planning, as just having capital is enough for them. This leads to inappropriate spending, which may create a situation of financial instability.
Suggestions:
Set Financial Goals
First and foremost, you need to set your financial goals. This can include covering your startup costs, breaking even, or increasing revenue by a specific percentage.
Incorporate Into a Business Strategy
While creating a business plan, you must include detailed budgeting and financial projections. You can put down estimated revenue and expenses, and the breakeven duration.
Review and Revise
