The 4 Biggest Accounting Mistakes by Entrepreneurs Launching a Startup

   

As if worrying about launching a new business isn’t enough, startup owners have to learn how to approach the world of accounting as well. And there are not a lot of accounting fans out there, am I right?

If you are new to the world of entrepreneurs and you’re having troublesome thoughts about confronting with accounting for the first time, I have some good news for you. The following examples will show you which accounting mistakes and errors small business usually make so that you can avoid them right away.

Not Filing the Proper Paperwork

I know, nobody likes paperwork, but you need to make sure that you start in the right way if you don’t want to it to be the source of many problems later on.

The state and local tax agencies are always on the lookout for small businesses who will make a mistake since they know that they are the ones who will be the first ones to omit some steps.

Those who run a business without the proper legal documents can even not be recognized as a business, not to mention all the penalties they will face.

To avoid these complications, make sure that you inquire in details what is needed for your type of business specifically and what are the laws in the state where your startup is based.

Don’t collect and file your paperwork based on someone’s advice who runs a business in a completely different market. Every company has its specificities, and you need to address them adequately.

Not Understanding the Importance of Bookkeeping

I believe you that you have a great memory and some impressive organization skills but still put all the aspects of your business in writing.

Effective accounting means recording everything.

Sometimes small businesses don’t take all the transactions seriously. No matter how small some payments may be, it is still essential to ensure that everything is recorded and correctly categorized.

To clear all your doubts, here are some key benefits of serious bookkeeping:

  • An accurate picture of your company’s health
  • Easily determined performance
  • Clear overview of your financial state
  • Organized and accessible information about your business
  • Reliable tracking of all the transactions
  • Correct categorization of different types of assets and liabilities
  • An easier monthly check of your books and accounts

Misunderstanding Cash Flow

Incoming profits don’t necessarily mean strong cash flow and some business fail to understand that.

By instantly writing down the apparent profit you can fall into the trap.

I will explain this by using a simple example.

Let’s say you just closed a $40,000 deal which you calculated to be done within 2 months. The cost of funding the project is $15,000, so you count on a $25,000 profit right away.

This is the point where businesses make their mistake.

What will happen if you encounter some difficulties and the project lasts longer or costs more? That means that both the costs and the profit calculations are inaccurate.

Peter Heald from Signature Analytics gave some clarifications on this topic for the Forbes, “Based on a U.S. Bank survey, 82% of startups and small businesses fail due to poor cash-flow management. Entrepreneurs need to analyze and manage their cash flow to more effectively control the inflow and outflow of cash. Depending on the sensitivity of their financials, this may be done daily, weekly or monthly.”

Understanding cash flow may seem obvious, but don’t let this fool you and take your business in an unwanted direction.

Relying on In-house Accounting

Small business owners tend to pursue themselves that they don’t need to spend money on bookkeeping because it is “just a small business” and they can do it on their own.

A few months later, papers are everywhere, IRS is breathing down their neck, and their head is stuck in the books trying to figure out is that amount written on a small piece of paper some sort of cost or an income from the previous month.

Taking care of your accounting yourself can seem like a great idea to save money, but what many don’t realize is that it could actually be costing them money.

Yes, accountants need to be paid, but having a professional by your side means that he or she will instantly know about errors that you would never think about and would probably make. By skipping that whole process of nerve-wracking search for mistakes and trying to fix them, you will actually save both your money and time.

Don’t hesitate to ask for help from professionals. From bookkeeping to even some writing services, establish yourself as a reliable business and have strong associates from the very start.

If you believe that you can do your own bookkeeping, go ahead. But don’t say that you haven’t been warned.

Conclusion

People often say that you should learn from your own mistakes but in this case, you can learn from the mistakes of others and save yourself some troubles. Take into account all the struggles mentioned above that small business face in accounting and be one step ahead.

Think of it in this way, why should you waste your energy and time on accounting troubles when you can learn from others and focus on your business growth? If you agree with me, follow this practical advice and good luck with your startup!

About the author:

Daniela McVicker is a freelance writer and editor at Top Writers Review. She graduated from Durham University and has an MA in Psychological Science. As a part of her everlasting wish to grow professionally and help others, she also took a Finance course and started volunteering as a financial advisor.

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