Five Accounting Mistakes That Can Cost Your Startup A Fortune
Are you a small startup owner who needs help with accounting? Don’t look glum because you’re probably not alone! Just pick a ticket and stand in line with almost every newbie small business owner with limited financial know-how. And even if you have accounting knowledge, chances are you will still make some unintentional mistakes that will cost you brick loads of money down the road.
Not managing business financing and basic accounting processes properly can severely damper your cash flow. If you don’t keep track of your receivables and payables, you’ll be left wondering where all your money went in no time. While you might think it is okay to ignore such mistakes initially, you need to understand that doing so will have dire consequences in the long run.
Particular business practices serve as a foundation for every startup, and effective accounting practices are among them. Until you successfully conduct these practices, your startup will have difficulty surviving among other sharks in the ocean. After all, your business’s financial health will be a strong predictor of where it will be five to ten years down the line. Listed below are a few business accounting mistakes that you should avoid at all costs.
Throwing Away Paper Receipts
Despite being in an era where technology is king, physical receipts are still a thing! A paper trail still holds power when it comes down to recording expenditures or finding gaps and mistakes in accounting records. Whether it be a small business or a multi-billion dollar corporation, purchase records should always remain accounted for. If you ever need to prove business expenditures to the IRS, it will become tough to do so if you never keep purchase records. Without the appropriate purchase receipts, they will deem the purchase invalid and charge you tons of penalties and back taxes.
Always keep a paper receipt. However, if you own a startup and don’t like the thought of stacking a mile-high pile of purchase receipts, consider digitizing it. You can also hire an accounting professional to do the nitty-gritty or enroll in an online masters in accounting no GMAT, skill up and take up the responsibility yourself. The program will help develop sound know-how of basic bookkeeping principles that will come in handy while keeping track of all your paper receipts.
Not Knowing That It Takes More Time To Earn Profits Than Buying Something
Successfully operating a business requires particular investments such as product purchases, office supplies, and, more importantly, TIME. Now how is this an accounting mistake? Simple; if you don’t realize the value of time and payment cycles, you will find yourself in a butt-load of debt pretty soon.
You must be aware of how much money your business is bringing compared to the amount of cash you are spending to develop, market, and sell products. If you are earning a profit on paper but still have nothing left at every month’s end, chances are there are a few miscalculations in your earnings vs. expenses. And this right here is a fundamental accounting mistake even seasoned entrepreneurs and accountants can make.
A wise decision would be to onboard a certified CPA. He or she will keep track of all your losses, profits, costs, providing a clear picture of where you stand financially. Accounting experts also advise that you go over your financial plans before making any further investments to know its ROI over time.
Mixing Personal Expenses With Business Expenses
When you pay personal expenses with your business accounts, it complicates everything and sometimes raises a red flag with the IRS. Not to mention, paying for sexual adult novelty products via your business account/card doesn’t look professional when it pops up in your statements while going through an audit. The embarrassment alone is enough to complicate profit and loss calculations at the end of a reporting period.
You should always, and we mean ALWAYS, open separate bank accounts and use different credit cards for personal and business use. It will make your life easy when tracking profits, losses, and expenses for your company. Plus, it will make it matters a lot easier while filing your annual taxes and returns.
Not Viewing Vendor Statements And Invoices
Have you hired someone to check vendor statements and invoices to ensure everything matches up? If not, then you are in deep, deep trouble! One of the easiest ways your employees will try to steal money from you is by forging phony invoices that look legitimate. However, they will only appear that way on the surface. It only takes a little digging to know if invoices add up to something real or not.
It would help the cause if you kept a close eye on all purchases that your business makes. Also, various accounting software are available on the internet. These allow you to make it more challenging for your employees to get away with creating fake invoices or vendors. For example, you can even integrate it with an automated invoice processing solution like GetYooz, and completely eliminate any malicious human interaction. Give them a try if you don’t want your business to bleed money unnecessarily.
Not Managing Petty Cash Properly
Petty cash is the money that you set aside to pay for daily business transactions. Most startup owners ignore the importance of managing such cash as the amount is usually not large enough to ring any bells. Or so they think! They don’t track it and miss out on expenses when performing accounting tasks or preparing financial statements. It can include something as minor as paying a small invoice or purchasing software.
Although petty cash usually isn’t a significant amount for most startups, not tracking how much money you spend every day can amount to quite a large chunk if not monitored closely. This is the reason why startups need to set up a tracking system that records such small transactions. It is a whole lot easier to track expenses through the help of an electronic record-keeping system than by manual means.
Failing to address any accounting pitfalls that your business has will inevitably for you to close down your shop sooner than later. If you don’t have the necessary accounting knowledge, you can always hire a professional accounting firm to straighten your company’s financial situation. Or you can choose to skill up yourself. It is vital to identify any accounting-related mistake that you might be making before the water rises above the deck. If you’re making any of the ones we’ve mentioned, act quick, or your business ship will sink faster.