We started RHN CPA because we love accounting. But if that wasn’t the primary reason you started your business, we wouldn’t judge you.
In the excitement of building a startup, it’s easy to overlook accounting details in favour of the more exciting (and often more urgent) aspects of the business. But, if you don’t know what you’re doing, this may lead to a number of crucial errors and pitfalls that can have a lasting impact on your finances.
Here are three of the most frequent accounting mistakes that startups make, and provide how to avoid them, ensuring your business’s financial health and longevity.
Tracking profit, not cash flow
It’s easy to focus solely on profitability, especially when you’re striving to make your startup financially successful. However, profit is not the only indicator of your company’s financial well-being.
Cash flow refers to the money moving in and out of your business, whereas profit refers to the money your business makes after expenses. While your business may be profitable you may still have negative cash flow due to not receiving payments on time, the timing of your bills and a number of other factors.
Ignoring cash flow can lead to serious issues, such as being unable to pay bills or employees on time.
What to do instead:
Monitor your cash flow. Establish a cash flow management system that tracks both incoming and outgoing funds. This will help you anticipate cash shortages and surpluses, allowing you to adjust your operations accordingly. Regularly update your cash flow projections and be prepared to address any shortfalls proactively.
Manage your receivables and payables. Efficiently managing accounts receivable (money owed to you) and accounts payable (money you owe) is crucial. Encourage timely payments from customers and negotiate favourable payment terms with suppliers to maintain a healthy cash flow.
Combining personal and business finances
It’s tempting, especially in the early stages, to blur the lines between personal and business finances. However, mixing the two can lead to confusion, complicate tax reporting, and even put your personal assets at risk.
What to do instead:
Open separate bank accounts. From day one, establish separate bank accounts for your business and personal finances. This clear separation simplifies tracking transactions, ensures accurate financial reporting, and safeguards your personal assets.
Maintain proper records. Keep meticulous records of all financial transactions related to your business. This includes invoices, receipts, expense reports, and bank statements. Accurate and organized records are invaluable in the event of an audit and essential for claiming deductions and credits.
Doing everything by yourself
As a startup founder, you wear many hats and juggle numerous responsibilities. While multitasking is a valuable skill, handling all aspects of your business, including accounting, can lead to mistakes that could impact your financial stability. Accounting is a complex and specialized field that requires a keen eye for detail and a deep understanding of financial regulations.
What to do instead:
Invest in professional expertise. Recognize the importance of sound accounting practices and consider hiring an in-house accountant or outsourcing your accounting needs to a reputable firm. A qualified professional can help you set up your financial systems, track expenses, manage payroll, and navigate tax obligations, ensuring accuracy and compliance.
RHN CPA offers a number of different flexible services suitable for startups including bookkeeping support, education and full-service accounting.
This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation, please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.