5 Common Accounting Mistakes All Startups Make
When thinking about what successful startups have in common, one might eagerly mention big ideas. While it may be so, successful startups managed to ride the wave because of a fair judgment and planning in terms of accounting. 90% of all startups fail, leaving only 10% to succeed and founders will tell you the same thing: there is a plethora of smart people with brilliant ideas, but the numbers are not the same when it comes to funding and cash flow management.
Looking at statistics, as well as success and failure stories alike, we’ve pulled out 5 common mistakes that startups seem to be making and that may be responsible for their failure.
Checks and balances
Literally. This is not about political power, but about a correct bottom line. Many people seem to think that bookkeeping only becomes an issue when their expenses and incomes are in the high numbers. They couldn’t be further from the truth. Bookkeeping is important for any company, but it is essential for startups. No matter how small, all payments need accurate tracking, otherwise, they can start piling up and might cost you your business.
Throughout any startup’s life, the CEO must prove both to himself, as well as the investors, that the company is viable. Bookkeeping helps you do that and it brings several benefits along:
- Helps provide a complete picture when it comes to the financial health of your business.
- Helps you to easily and simply track all business transactions.
- Enables an easy categorization of assets and liabilities.
- Forces you to check your books on a monthly basis.
Mixing it up
Mixing your personal finances with your business expenses is a mistake a surprisingly high number of business owners make when they first start out. They may argue that it doesn’t really make much of a difference, but statistics tell another story. Treating your business finances as your household’s budget can very well keep your business in a perpetual startup state.
Most often, the separation seems to be difficult when it comes to cash purchases. It may be a pain now, but saving all receipts from every little purchase and then separating them when doing the bookkeeping will show its benefits down the line. Do this from the very beginning and spare yourself unnecessary headaches.
Just a little bit more
Casually adding extra costs can permanently damage a startup. Dreaming big is what makes successful entrepreneurs what they are, but when it comes to finances, skepticism is preferred to daydreaming. You’ve managed to put that first brick down as the foundation of your dream, but that doesn't actually mean you’ve accomplished all goals, not just yet.
The hardest thing for startup founders is sometimes to see their business for what it is: an idea that is being built. Try to avoid costly businesses expenses such as:
- high business accommodation costs
- unnecessary staff
- expensive collaborations with HR companies
- costly equipment
Make the right, necessary decisions for your business and avoid adding extra costs.
Cash flow means profit
Poor cash flow management is the primary cause for which startups fail. You can’t treat it as your own expense report. The excitement of having work coming in is understandable, but businesses grow gradually and so do bank accounts. Future plans should never be in cash flow management because they tend to blur things up.
Nobody likes negatives, however, unpredictable issues can always arise and you might have to deal with unforeseen expenses, which will cut right through your cash flow like a sword. Remember, profit is a mighty fluctuating thing in startups. Beware of un-cashed payments, they don’t make for good business and keep your eyes on your bookkeeping as mentioned above. Taking a couple of courses in cash flow management wouldn’t hurt either.
Accounting for DIY enthusiasts
Having a hands-on attitude and trying to do most of the work on your own is natural when starting up a business. There’s a lot you can’t afford and probably many things that you can do yourself, but unless you’re a certified accountant, accounting is not one of them. You’ll end up spending more money to correct mistakes than you would have in the first place by hiring an accountant.
Do your research though and hire an accounting firm or an individual who has experience with start-ups and can advise well on where to splurge and where to cut. An accountant is a necessary cost for a business, and you will soon realize that they are actually an investment. They’ll know how and what expenses to deduct and how to file your papers in order to save you as much money as possible.