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Launching a start-up comes with no shortage of big decisions andfast-moving priorities. In the rush to grow, financial fundamentals cansometimes take a back seat — often with costly consequences. Some commonaccounting missteps that new business owners should avoid include:
Overlooking day-to-day spending.Starting a new business is exciting, and it’s natural to focus on generatingrevenue and building business relationships. But it’s essential to keepdetailed, timely records of expenses, including receipts and invoices. Thiswill help you properly allocate costs, price products and services, assess andimprove financial performance, and claim tax deductions.
Skipping regular account reviews.Reconciling accounts involves comparing your records to your bank and creditcard statements to identify and correct any discrepancies. Accountreconciliation helps ensure your business pays close attention to expenses andavailable cash. It can also help prevent and detect fraud by third parties andemployees.
Blurring the line between personal andcompany finances. When you own a business, you need tokeep personal and business matters separate for financial reporting, tax andlegal purposes. Maintaining separate bank and credit card accounts and clearlydistinguishing between personal and business activities will help avoidconfusion. These practices also make it easier to track business expenses andsupport accurate budgeting and forecasting.
Getting worker status wrong. Howmuch control do you exercise over the people who work for your business? Areyour workers an integral part of your operations? Misclassifying employees asindependent contractors can have serious legal and financial consequences. Makesure you understand the differences between employees and contractors andcategorize them appropriately. If you don’t follow the rules, the IRS, the U.S.Department of Labor and a state tax agency might challenge the status of yourworkers. Some state rules may be stricter than the federal ones.
Being unprepared for tax obligations.Because many start-ups run at a loss, at least initially, some owners forget toset aside money for taxes. This can lead to cash shortages and other financialdifficulties when tax time rolls around. Failure to make timely federal andstate tax payments can result in penalties and interest charges. And don’tforget about payroll, sales and property tax obligations. Even if your businessoperates at a loss, these taxes may still be due.
Neglecting formal accounting systems andcontrols. Entrepreneurs must select and consistently apply an accountingmethod that best fits their business needs. Many fledgling businesses start offusing cash- or tax-basis accounting, then graduate to accrual-basis reportingas they mature. But lenders, franchisors and investors sometimes requireaccrual-basis financial reporting from the get-go. Working with an experiencedaccountant can help you evaluate these requirements, select affordable,user-friendly bookkeeping software and establish consistent processes forrecording business transactions.
It also pays to invest upfront in simple internal controls —such as locks on file cabinets, regular software updates, network backups andantivirus programs — to help prevent theft and fraud. Start-ups with valuableintellectual property, such as patents, secret recipes and proprietarysoftware, should consider protecting these assets by implementing networksecurity policies, filing appropriate legal protections, and requiringemployees and contractors to sign noncompete agreements, where legally permitted.Additional internal control measures can be implemented as your businessmatures.
Fortunately, these common accounting missteps are preventable ifyou take proactive measures to avoid them. Building a strong financialfoundation begins with seeking guidance from experienced bookkeeping andaccounting professionals. In addition to helping you design and implement soundfinancial systems and controls, we offer interim CFO and bookkeeping servicesto support your business while you recruit and onboard the right talent foryour finance and accounting department. Contact us to learn more.
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