It is always thrilling to start a new business. However, this new venture is also often characterised by new prospects and risks that need to be heeded. However, success is not always about innovative or creative ideas, and failure is not always about mistakes and setbacks.
B.F. Skinner has said, “A failure is not always a mistake. It may simply be the best one can do under the circumstances. The real mistake is to stop trying.”
Starting a new business is always exciting and full of adventures, opportunities, and challenges. So rather than refraining from starting a new venture just because of failures and setbacks, it’s better to learn and grow.
Among the various aspects of new business that require due attention, accounting often stands out as a vital yet easily ignored element. It is the financial pillar of your brand-new business. Therefore, overlooking this important factor can cause serious concerns such as loss of cash, incorrect filings of returns, and financial losses too.
With this in mind, this article you are about to read is a great guide that will help you avoid a lot of bumps on your way through the startup’s accounting. Here is a list of 10 common mistakes that budding startup accountants make and how you can avoid them. Oh, and as for the books, if numbers are not your thing, you can contact Corient by clicking here. We focus on startup accounting, which means that we will be able to guide you and ensure that the financial side of your business is as efficient as possible.
Why Startups Struggle with Accounting
Most start-up business owners wear several hats and keep juggling. However, due to other responsibilities that need to be executed on a priority basis, it is common for accounting to be overshadowed. What many startup owners fail to understand is that accounting is not an appendage, or, to say in simple terms, it is not an attachment; rather, it’s the roadmap to the company’s financial environment.
An entrepreneur always aims to achieve the goals of minimising costs and maximising profits. However, to obtain such results, it is necessary to be aware of your company’s financial health. However, small start-ups, unlike large-scale companies, have very few employees and even fewer resources to spare for accounting purposes. Hence, there are high chances of making mistakes and, at times, being negligent in certain areas.
The other factor is that because many startup founders have no prior experience in financial fields, they are bound to make mistakes and even hold a lot of misconceptions. But even if these businessmen are using accounting software, they are not capable of understanding the financial reports and making business decisions that can lead to growth.
Last but not least, startups are volatile by the very nature of business. You have an agenda of growth, beating your goals, and possibly your fundraising round next year. In the midst of all this, basic accounting procedures may be violated, which leads to the production of erroneous accounts and law infractions.
Alternatively, all these challenges may seem rather intimidating, though one needs to understand that they are solvable. It is nothing more than being aware of them, and should you act proactively, managing a startup’s accounting is relatively easy.
Top 10 Accounting Mistakes Made by Startups
Mistake 1: Poor Record-Keeping
Poor record keeping is a very common issue many startups run into. It may not seem like a big deal when a company does not write down expenses, track invoices, or store copies of financial documents. However, significant problems arise during audit work and have legal ramifications.
However, experts in the field underline the critical role of organised bookkeeping in maintaining compliance and making informed business decisions. In short, poor record-keeping is a fundamental error that no startup can afford to make, so prioritise this aspect right from the start. You can also consider outsourcing accounting services for your bookkeeping and accounting needs.
Mistake 2: Mixing personal and business finances
There is always confusion between owners’ personal funds and the business’s operations. Among the most frequent mistakes startup companies make is mixing personal and corporate budgets. Mixing business with personal money, or the reverse, is dangerous since it leads to the intertwining of financial affairs. This practice complicates accounting procedures and also raises alerts during audits. It also distorts the picture of the actual financial situation of the startup business.
It is, therefore, always recommended that separate accounts be used for private and business purposes. The bottom line is that keeping your personal and business finances separate is crucial for both legal and practical reasons.
Mistake 3: Failing to reconcile accounts
More often than not, this process does not involve the reconciliation of accounts.
Proper account balancing is another common mistake among startups that they should avoid. Reconciliation of accounts is the process of checking, and comparing the internal records with the actual statements obtained from external records, for instance, banking statements. Thus, without this step, the probability of missing something like a mistake or a fraud increases, which, in terms of money, can be critical.
It is recommended that account reconciliation be conducted daily to prevent cases of embezzlement and fraud from occurring. In other words, the failure to agree on your accounts leads to problems in the financial situation of your startup; thus, it is one of the mistakes that should not be made. Considering accounting outsourcing companies to perform this task for you is one of the best and most cost-effective options. While they perform the accounting task, you can focus on other core business activities.
Mistake 4: Overlooking small expenses
The biggest mistake that often occurs is overlooking small expenses. Not paying attention to small expenditures is one of the most common yet seemingly harmless sins that can negatively affect a startup’s net margin. These costs might be small, but the total sum increases gradually and affects the organisation’s financial reports. Small expenses are also overlooked, and thus there is no accurate way of making a budget as well as a financial forecast.
Financial specialists always stress that one cannot spare a single pound, even if it is spent on some small thing. Excluding petty expenses is another improper policy, and it distorts the picture of the financial situation of a startup.
Mistake 5: Not setting a budget
One major mistake you are making is that you are not setting a lid on your spending.
Another shockingly familiar and frequent error that many startups make is the failure to set a budget. Flying blind financially means not having direction on how to spend the organisation’s money; hence, working with no budget in place means the financial ship is rudderless. This may create problems with the cash flow and sustainability of the business.
in case you are running a start-up venture. Officials in the field of finance and accounting advise that one of the most important preparation strategies is to develop a plan for the allocation of cash, which is a comprehensive financial plan for a startup. The biggest mistake is when you fail to set your budget; it can lead to serious implications for your start-up’s survival and sustainability. Your accounting outsourcing partner will guide you through budget and forecasting.
Mistake 6: Ignoring tax deadlines
Failure to pay taxes is also a major sin to commit, as they are due at an exact time and date that, if not met, exposes a business to higher penalties.
One of the classic mistakes you might make is to disregard tax due dates. and the former will lead to damaging penalties, while the latter will harm your startup’s image. An organisation must pay taxes at the correct time, and failing to do so attracts penalties as well as being the subject of a legal case.
Financial consultants recommended that one should make it a point to organise a tax calendar to ensure that he or she actualises all the set deadlines so that he or she is not subjected to unbearable penalties or other related legal procedures. In other words, failing to meet tax dates is one of the worst things a start-up can do since the consequences are expensive and last indefinitely. With the help of your outsourced accounting partner, you will never miss any deadlines or face penalties.
Mistake 7: Not consulting an accountant
Failure to consult an accountant can be nerve-racking for startups since venturing into it alone without consulting an accountant is dangerous for any business. Although it could be financially beneficial in the short term, one may fail to make the right decisions and also miss chances that may prove financially beneficial in the long run.
To this effect, it is suggested that persons involved in the management of the enterprise should consult professional accountants; as one of the prerequisites for sound financial management. In other words, failure to consult an accountant is a decision with undesirable consequences, sometimes with high risks for the financial position of a startup.
Mistake 8: Using inaccurate financial data for decision-making
Applying the wrong or misleading financial information is yet another major risk that many startups are bound to face, leading to incorrect financial information. Financial decisions with erroneous data can misdirect resources and strategies, eventually leading to business failure.
According to financial specialists, it is crucial to pay significant attention to data accuracy as the basis for making the correct decisions. To sum it up, the possibility that your organisation endangers the strategic course of the startup and its sustainability is among the main risks resulting from the use of erroneous financial data. Your outsourced accounting partners will always ensure that your financial data is correct and that you make an informed decision.
Mistake 9: Lack of cash flow management
Failing to manage cash flows is another big error that new business firms are likely to make. This is because most startup firms do not hire professional accountants to save on costs. Therefore, there is a chance that the in-house employees will fail to understand how to manage their departmental cash inflows and outflows. Many organisations fall into this category and, consequently, experience a lack of cash to cater for various expenses that may lead to a standstill of operations or even insolvency.
Financial specialists pay a lot of attention to the necessity of cash flow controls, especially for the continuity of business. One major failure that owners often commit is the absence of cash flow management; this is a serious mistake that will hurt your business operation and existence.
Mistake 10: Lack of Preparations for Expansion
Startups are anxious to grow and expand; however, the lack of adequate planning required for the purpose of growth and expansion can become a huge mistake, leading to the failure of the company. It means that if you are unable to judge any unforeseen circumstances and are not prepared to mitigate them, it could lead to a disastrous situation. Similarly, if you do not plan adequately for growth and expansion, you might also fail to anticipate any opportunities coming your way.
Therefore, accounting professionals advise start-ups to incorporate proper planning in their future growth plans into their financial model. In essence, not planning for growth can inhibit your startup’s potential and stifle opportunities for success. Accounting outsourcing companies will help you incorporate adequate strategies and planning so that you never miss any opportunities and are prepared for any unforeseen risk.
Key Points
For every startup, success is always a great achievement, especially in the area of effective management of the company’s finances. Accounting errors of any type can affect growth and may even collapse the existence of the start-up. To better equip this entrepreneurial journey, here are the key takeaways
- Poor Record-Keeping: Avoid lapses in documentation. If they occur, they are always followed by audits and legal entanglements. Always ensure that your financial records are maintained perfectly.
- Mixing Personal and Business Finances: Never mix your business and personal accounts of any kind to minimise accounting difficulties and to stay away from the legal problems that may occur in the future.
- Failing to Reconcile Accounts: Constantly cross-check the records kept within the organisation with the statements that are prepared to detect any inconsistencies and ensure the company is financially healthy.
- Overlooking Small Expenses: Every small expenditure could prove costly in the long run. Record them accurately for a better view of your financial status.
- Not Setting a Budget: Lack of a proper budget or completely operating without a budget can be risky. It can lead to serious cash flow, inconveniences, and limited strategic planning.
- Ignoring Tax Deadlines: Failure to meet tax requirements is dangerous since it leads to a lot of consequences, including legal issues. This means that one should maintain a tax calendar to avoid such crises.
- Not Consulting an Accountant: Consulting with an expert will certainly help in eradicating hitches and errors that can otherwise impact your monetary operations.
- Using Inaccurate Financial Data: This means that when decision-making is done, using the wrong data can misguide strategies and financial woes.
- Lack of Cash Flow Management: Mishandling of cash flow may disrupt business activities and result in insolvency.
- Not Planning for Growth: Lack of a growth plan means that you can miss out on scaling possibilities as well as other risks that you can encounter.
Thus, not only are you avoiding possible failures, but you are also preparing the paradigm through which your startup can blossom in the future. Always have these critical points at the back of your mind as you manage the financial environment of your startup.
In What Ways Can Corient Accountants Help Your Startup?
Have you planned to start a startup? It is wonderful to seek advice of experts in the quest of finding a solution to a particular problem.
Corient is an accounting professional firm that will guide you through the thorny bush of complex performance. We provide personal consultations based on your business needs,
Corient is among the foremost providers of accounting services for small businesses and, therefore, can help throughout the entire journey. We at Corient offer a comprehensive range of services in the UK, such as bookkeeping and accounting outsourcing, payroll outsourcing, tax and VAT outsourcing, tax and audit planning, and business advisories.
Contact us today for details on the numerous services we offer to enhance your financial planning.