Entrepreneurs must wear various hats to propel their venture to scalable heights. That includes being on top of your startup’s finances and taxes. Moreover, proper accounting and bookkeeping are the cornerstones of a healthy organization.
Keeping track of your startup’s financial statements and maintaining accurate financial records ensures your startup stays organized efficiently, bolsters your chances of obtaining financing, and you can quickly identify risks or opportunities for the business. Unfortunately, it’s almost impractical to elucidate all the benefits of investing in a solid accounting foundation.
Instead, this post elucidates the intricacies of the accounting process and, importantly, top startup bookkeeping mistakes to avoid. Proper bookkeeping can be complex and vexing to startup owners with inept accounting knowledge. It doesn’t get better; considering outsourcing or hiring a bookkeeper might be overwhelming for startups running on a tight budget.
The good news is that with a few tips, startup owners can manage the bookkeeping process and stay on top of their finances. For a starting point, knowing the prevalent accounting faults and eschewing them will go a long way in setting your startup on the right path.
Top startup bookkeeping mistakes to avoid
1. Neglecting the bookkeeping process from the start
Most entrepreneurs tend to overlook the accounting aspect of their business in the initial stages considering their expenses and cash flow might not be burdensome. Also, there are always seemingly more vital issues such as customer services, sales, and marketing to prioritize. Well, that will be your first mistake that will eventually culminate in a severe predicament.
Proper bookkeeping from the initial launch of your startup ensures there’s no pile-up, and you don’t get further behind to the extent of lacking the time and resources to catch up. In addition, a little bookkeeping every day puts you in control of your venture.
2. Mixing personal and business funds
It might seem like a practical way to manage a yet-to-be-established venture, but mixing personal and business finances or not having a separate bank account can be detrimental to your startup’s health. First, a financial mishap in your business could impact your assets to the extent of bankruptcy, lawsuits, and audits.
Also, it helps keep the records distinct and makes the tax process more streamlining. But, never cater to your expenses through your startup’s account. Else, you will be subjected to tax penalties, and worse, it limits your startup from attaining optimal growth.
Similarly, it would be best not to pay for company expenses with your personal account.
3. Using single entry bookkeeping
Bookkeeping is divided into either a single entry system or a double-entry system. The former is more uncomplicated and favorable to small sole proprietorship and partnership businesses. Nonetheless, the pitfalls of incorporating a single entry bookkeeping system surpass the benefits.
As the name gives it away, the single entry system entails registering only one part of a transaction. In most cases, entries in the income statement. As such, it’s somehow more vulnerable to errors and fraud since if you make a mistake when keying in numbers, it’s impractical to know until you receive a bank statement different from what you were expecting.
Also, the single entry system doesn’t track inventory accounts, accounts payable, and accounts receivable.
On the other hand, the double-entry bookkeeping system relies on a two-sided accounting entry. That is recording each transaction in two separate accounts — debit and credit. As a result, it’s a more accurate, complete, and reliable option for your startup. And since it performs a full-fledged recording of transactions, there are minimal chances of hoaxes, allowing you to easily recognize errors. In addition, it keeps track of assets and liability accounts, and you can accurately determine your profits and losses.
4. Using cash basis accounting
It would be best to incorporate accrual accounting instead of the more elementary cash basis accounting.
The latter involves recording revenue when you receive payment and expenses when you pay for them. So, if you make a sale in January and the client pays in March, you record the transaction in July. As such, this method limits your financial insight and makes your startup seem like it has poor economic viability.
The accrual method records transactions when they take place. As a result, it offers your startup a more accurate representation of its finances than cash basis accounting. Also, investors tend to favor the accrual method.
5. Creating multiple accounting sheets
Using several Microsoft Excel spreadsheets to consolidate accounting charts makes it challenging to organize, analyze, update and store data. Therefore, it’s vital to consistently use the same accounting sheet for easy reference and streamlining the bookkeeping process.
6. Throwing away receipts
Receipts can be helpful in several ways. First and most notably, they represent proof of financial transactions and certain expenses. As a result, you can keep track of taxable and nontaxable income. Even better, receipts will be handy when claiming possible deductions.
Fortunately, you don’t have to pile up boxes of receipts. Most accounting tools have picture-taking features for receipts and match them with the relevant register entry. Alternatively, there are several receipt tracking applications if you opt to keep your receipts separate.
7. Not using bookkeeping software
Applications such as Intuit QuickBooks and Xero or electronic bookkeeping systems are essential tools for your startup’s financial data. Unfortunately, bookkeeping can be a time-consuming and mundane task. However, appropriate accounting software can offer several features, such as automating records, speeding up the accounting process.
Also, it eliminates errors and can track your firm’s financial data in real-time. In sum, accounting software provides many components, including expense tracking, invoicing, and billing, that attribute to a scalable accounting solution.
8. Failing to adhere to compliance requirements
Non-compliance is a significant problem for startups and SMEs. Failing to comprehend your startup’s tax obligations can place you on the wrong side of the taxman. The cost of non-compliance can cause your entity to shut its doors. Moreover, the penalties and interest might go through the roof, and you are at risk of ruining your reputation. Not to mention losing your relevant licenses.
When your startup starts experiencing growth transitions and has the resources, seeking professional help from a qualified accountant will go a long way in ensuring you steer clear of bookkeeping blunders. But, all in all, it’s paramount to avoid these top startup bookkeeping mistakes to set your venture on the path to optimal success.