It’s no secret that more and more startup companies are cropping up these days, catering to a wide range of industries. These startups all share the same dream: to build a product that makes people’s lives better – with a bonus of gaining some profit!
However, as with all new businesses, challenges arise as the start-up pioneers build their corporation. Since some teams come from a purely technical background, one major challenge is the financial aspect of running their company.
So in this series of accounting for startups, we’ve listed the top five mistakes most newly established businesses make and how you can prevent your team from being thrown into financial chaos.
Accounting issues and their solutions
Accounting as an Afterthought
The first thing that startups should know is that accounting must be integrated into the process of the company. Just like how the technical team creates code constantly, and how the marketing team advertises the product steadily, accounting must be done consistently, and not pushed back as an afterthought. In short, accounting for startups should be the first priority.
This accounting issue can be avoided by including accounting in daily tasks or checklists. Explain to the team the importance of accounting, and the possible consequences of not doing it on a regular basis. Let the members try it out on a smaller scale first, then eventually move on to larger accounts once they get the hang of it.
There are also various applications that can help startups with their accounting. James Thorton recommends the best accounting applications for small business owners who hate bookkeeping which would definitely help the team consolidate their finances.
Exhausting Cash Flow
Sometimes startup teams seem to be profitable on paper, but actually, they have no cash on hand. This accounting issue happens when the company fails to understand how the credit system works.
In most cases, the company should receive the payment earlier, even for future services, to maximize cash flow. An easy way to do this would be to offer subscriptions – which is why most companies offer an incentive to those who pay annually – because they’re basically investing in products yet to be delivered.
Similarly, the company’s payments should be staggered to build up a fund between the company’s inflow and outflow of cash. Manny Davis advises start-up companies to spread out payments whenever possible to build cash reserves. This cash reserve will come in handy whenever there are purchases that need to be paid immediately, or for items that cannot be financed through a credit system.
Lumping Finances Together
One of the most common issues in accounting for startups is the blurring of the line between personal and company finances. Fresh companies tend to put off establishing a company bank account until the team grows large enough, which is a mistake that could cost a lot of complications down the road.
Startups should also establish the company as an official business. Karin Price Mueller stresses that having these entities not only makes accounting straightforward, but it also protects personal finances from future business liabilities.
Neglecting Tax Information
We get it – working out tax information is daunting especially for the newer entrants to the startup scene. However, note that taxes are one of the most common pitfalls in accounting for startups.
This only means that the company should pay attention to the tax-related items in their transactions. It may be overwhelming at first, but since it’s a necessity, startup teams must prioritize learning about their taxes.
While the policies may vary in different regions, most companies are required to pay tax on a quarterly basis. If the team is unsure of the specifics, a good rule of thumb would be to keep track of all the company’s expenses – down to the last cent. Filing receipts properly would also help avoid this accounting issue. Nellie Akalp notes down eight common tax mistakes that startups make; any budding company can run through the list for a quick review.
Disregarding Professional Input
We can’t stress this enough: accounting for startups is crucial. Like marketing and technology, accounting should be ingrained within the startup, done as a regular activity within the team.
In case a company with the members having no prior knowledge of money matters, it might be a good call to hire a professional accountant or consult with specialists. Try to hire an established accountant as opposed to a non-professional; amateur accounting might lead the company to a whole new set of problems.
It would also be good if the specialist could teach basic financial know-how to the team, but this will depend on the agreement between him and the company. Of course, this consultation would cause a dent in the finances of the company, but it will eventually pay for itself in the long run – think of all the issues you could avoid!
These five issues in accounting for startups are not the only challenges that a newly established business would face. Keeping track of finances may seem tedious and unnecessary at first, but rest assured, the future of the company lies on a solid accounting base.
It is a good investment for startup companies to pay attention to their accounts as early as possible. Startups should focus on the numbers just as much as they do with their advertising and coding. Also, take advantage of this trick to help you succeed.
Knowing how to file taxes, manage cash flow, and integrating accounting into the business are just the basics. Over time, the company may flourish and face more accounting issues for start-up businesses, but as of the moment, make sure to avoid these problems.