Most entrepreneurs have no problem coming up with big ideas for how to start a new business. Despite this creative spirit, studies show that nearly 90 percent of all startups fail within the first five years. For many of these entrepreneurs, their problem is not their ideas or even the goods or services they offer. Instead, it all boils down to how they handle their finances. After all, without a stable financial footing, even the best businesses will soon find their demise. Here are the top five accounting mistakes entrepreneurs make when starting a business.
1. Blur the Line Between Personal and Business Finances
Many entrepreneurs make the mistake of mixing their personal and business finances. When starting a business, these small infractions may not seem important, but as your business grows, this blurred line between your personal and business finances can become a real problem. It is vital that you create separate accounts from the very start of your business and never cross that line. This is especially true when making cash purchases. Everything must flow through your business account so that you can achieve the greatest financial benefit.
2. Lax Accounting Practices
Most entrepreneurs will admit that they are not expert accountants. Yet, these same entrepreneurs try to handle their finances in house. This costly mistake forces startup founders to focus their attention on things like payroll and bank reconciliation rather than solely focusing on how to grow their business. A trained professional will ensure your records are up to date, record transactions properly, and keep track of your accounts receivable and payable. This will allow you to spend your time and resources into expanding your business.
3. Declaring Revenue Before Final Delivery
Declaring your revenue as soon as you make a sale can be a dangerous practice to start. It makes your books look better — at least at first — but it does little to show true profits. The problem with counting your revenue too early is that you overlook the expenses that go into the final delivery. Whether you are selling products or providing services, you should consider your expenses before you can determine your real profit. You put your startup in jeopardy when you start making business decisions without seeing the full picture.
4. Mismanagement of Capital Expenditures
You have probably heard about many startups that have a great year, only to be forced to shut down the following year. Where did these successful entrepreneurs go wrong? One mistake many entrepreneurs make after a good year is that they go on a spending spree with money from their cash flow. This tactic is especially dangerous when purchasing high-value items that can depreciate over time. Using cash for these types of items not only jeopardizes your startup's financial stability, but it can also hurt you when it comes tax time. It is better to keep this cash on hand and take out a short-term loan or even consider leasing.
5. Limited Financial Analysis
Developing a detailed budget is a standard practice for any entrepreneur starting a new endeavor. However, many startup owners fail to regularly assess the status of their business. This limits their ability to modify their budget as the business grows or to detect potential problems looming in the background. One of the best benefits of working with professional bookkeepers is that they can provide you with up-to-date reports that allow you to analyze the financial status of your business. Based on this valuable information, you can set effective long- and short-term goals that are in the best interest of your business's future.
Avoiding these common financial mistakes can reduce your risk of becoming part of the 90 percent. In fact, staying on top of your finances may help you grow your business and become part of the 10 percent of startups that succeed.
