3 Common Accounting Mistakes Startups Make (And How To Avoid Them)

Starting a business is no small feat. You want it to succeed at all costs yet not having run a business before, there’s a high probability of making errors along the way. It’s said that you learn through mistakes, which is true. However, if you know what not to do, you can avoid costly mistakes that can slow down your startup’s growth. 

One of the areas many beginners make errors in is finances. Luckily, many entrepreneurs are running successful businesses. They were once startups and they’ve learned a few secrets regarding accounting here and there in their journey. It’s essential to know them to ensure you stay on the right track. This feature sheds light on these secrets by discussing the common accounting mistakes you can make and how to avoid them. Read on. 

These mistakes are:

Mistake 1: Handling Finances Independently

As a startup, there’s always a notion that you must keep your expenses to the bare minimum. This is true; nonetheless, you need to identify the aspects you need to spend on. One of these aspects is business accounting. Handling accounting independently can be potentially a drawback and you’ll miss out on crucial aspects of your finances. 

Solution: Seek Professional Services

Accountants are experts in finance and will do your business good. They know the calculations that’ll help grow your business, besides knowing your cash flow. For example, they know how to calculate break-even point of your business. The break-even point projects when your startup will start making profits. If the projections seem too far, you can adjust your operations to try and ensure you reach your profitability target sooner. On the other hand, if you’re about to break even, you’ll ensure you remain consistent to achieve the projections within the time frame.

Besides performing the financial analysis of your startup, professional accountants are less prone to making errors in their tasks. With no errors, you won’t make wrong decisions that’d arise if you relied on data with errors.

Mistake 2: Mixing Business And Personal Finances

In trying to make your startup thrive in the market, you might end up using your personal account to receive business payments. This can be intentional or you might’ve forgotten. Either way, it isn’t advisable. By mixing the two, you’ll lack the ability to differentiate between each one. You might think 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 you need to pay them, as compensation, should they hold you liable. Since you’re a startup, you might not have acquired assets that’d have catered to the lawsuit. In such a case, the courts allow the other party to get compensation from your business finances. 

Remember, you’ve mixed your individual and business finances. There’s a high probability you’ll lose not only your business finances but also your individually-owned withholdings. It’ll be challenging to prove to the courts that a given percentage is yours and the other belongs to your business. 

Solution: Open A Business Account

Accountant or Accounting Icon Set w money, accountant and figures images

Opening a business account will help you separate your personal and business finances. In the process, you won’t make business decisions based on incorrect data, and you’ll protect your personal assets. You’ll also have an understanding of your startup’s cash flow. Banks offer different business accounts. Vet each carefully and settle for one that suits your needs as a startup.

Mistake 3: Not Being Proactive In Bookkeeping

Bookkeeping is a process that helps you be aware of your finances, in this case, your startup’s. It involves knowing how much you’ve spent in a day, your debts, deficits, and others. All these aspects help keep your startup afloat; hence, their importance. 

Some business owners put off bookkeeping until the end of the month, with others doing so because they need to pay taxes. This is risky for your startup since you won’t note errors as soon as they happen. You’ll identify them at the end of the month, and it might become challenging to trace what went wrong. 

Another bookkeeping shortcoming one may unknowingly commit is not being keen on the small transactions you make; you only focus on large transactions. The small transactions also make a difference in your starting company.

Solution: Be Proactive In Bookkeeping

How do you become proactive with your bookkeeping? It’s simple; balance your books daily. Consolidate all your day’s transactions at the end of each business day. Your day’s transactions don’t only include the sales you’ve made. Pinpoint your debts and obligations too. If you have many liabilities, come up with ways to offset them as soon as possible. 

By doing daily bookkeeping, you’ll identify errors early enough to trace them back and make amends. It’ll also reduce your burden as you do your monthly or quarterly bookkeeping, which can be a source of errors.

Conclusion

Accounting is an essential aspect of any startup. In most cases, finances are the main make or breakpoints for businesses. This post has discussed the common accounting mistakes startups make and their solutions. Be sure to note them and implement them in your operations; you don’t want to make the same mistakes.