Starting a small business is loaded with exciting aspects like creative design, brainstorming ideas, and drafting prototypes – but many start-ups struggle with the financial side of business.
The best way to avoid accounting issues is to correct them before they become a problem. Ignoring these common mistakes could lead to big complications.
- Avoiding and denying a need for accounting
For the business person with little financial know-how, the idea of bookkeeping may be daunting. Many startups and small businesses founders have strong skill sets, such as fluency in coding or a certification as a life coach, but they aren’t qualified to run all aspects needed for an entire company. Sidestepping the dreaded balancing act of tracking your finances creates a recipe for headaches down the road.
Luckily, for the number-phobic amongst us, there are plenty of options. There are a variety of accounting software options, however, learning accounting software may not be at the top of your bucket list. Instead, you may consider engaging a part-time bookkeeper to crunch numbers for a reasonable fee.
Another option is outsource the administrative tasks of accounting so someone actually does the work for you. Your books will stay organized for a reasonable fee. There are also outsources experts who manage all of your company’s financial needs - everything from sending invoices and tracking receivables, to updating your investors and keeping you audit-ready. It’s like having a full service finance department without needing to make several full-time hires.
- Trying to do it all yourself
Once you decide to make accounting a serious priority for your business, you may be tempted to pile it all on your own plate to save a few bucks. Don’t! Less than two thirds of individuals who claim financial literacy actually understand the most basic economic concepts like interest rates and inflation. (In younger age brackets, only 14% grasp these ideas!)
While it may seem manageable during the initial stages of developing your company, the demand and complexity of finances will continue to escalate as your business grows. Hiring reliable, experienced accounting services will quickly prove to be a worthy investment. Individuals who seek the help of outside financial professionals not only lower their stress levels, rates of delinquency, or debt, but will also avoid risk by staying compliant.
- Combining personal and business bank accounts
When starting a business, it may seem like the easiest option is to just lump your personal and professional spending into a single account, but this quickly causes issues. Establishing a separate company account makes it easier to manage and track expenses and simplifies the tax filing process.
Not only do separate bank accounts make your business look and feel more professional, having a legitimate business account is a win all around. A unique account for your work-related affairs enables you to more efficiently deduct losses from income, have a clean record to show to the IRS should you be audited, and make your business look less like a “hobby” — thereby preventing you from claiming losses should they occur.
This barrier also creates an important mental distinction that will enable you to feel more empowered to drive revenue. In case you are paying other employees, sending them a check from an LLC (or other corporate entity) is far more professional than sending one from your personal checking account. Paying wages from LLCs also ties back to keeping your personal assets free from liability, in case you are ever in a legal situation.
- Not staying organized
Maintaining an order is important in all aspects of business, but it is especially crucial for the financial side of start-ups. Keeping track of your accounting in digital, organized documents is vital, as is retaining receipts from business expenses. In fact, the mere appearance of orderliness (read: files in their rightful places, organized desktop documents, a tidy desk) may help keep your mindset oriented towards achievement and goal-setting.
It may seem tempting to ignore the details of your start-up spending, but you’ll be grateful for a highly organized system when tax season approaches. The experience of starting a new business comes with both enticing and intimidating to-dos, but putting effort into establishing and maintaining an organized, well-managed accounting system will ease your challenges. By correcting existing issues and preventing further stress, you’ll point your business towards further success.
- Failing to frequently back up your data
Technology is designed to make our lives easier but when things go wrong, chaos ensues. It’s absolutely critical to back up all of your data on a frequent basis. Data backup reminders are included in some accounting software tools─all you have to do is obey the reminders when they come up. Whether you are keeping track of your own finances or are outsourcing your accounting needs, keeping several copies of your data in various secure locations will save you a lot of anxiety and potential financial liability in the event of hardware or software breakdowns, power outages, and other unforeseen circumstances.