Starting your very own business can be one of the most exciting adventures of your life. Colors suddenly seem brighter, you are singing “Eye of the Tiger” in the shower in the morning, your future is bright, and you are 100% in control of that future. Nothing will bring you down.
Regardless of the type of business, you will need to spend money. You will also (hopefully) receive money. Your long list of startup “to do’s” likely includes tasks such as setting up your social media pages and designing a logo, all fun things to tackle, but none of those are the foundation of your business. At the top of your list should be getting your finances, specifically, your accounting, started off on the right foot.
Here are a few common startup accounting mistakes and how your business can avoid them.
“I Will Worry About the Accounting at Tax Time”.
This is the kiss of death. By the time you start thinking about getting your records off to your accountant, usually in March, 12 months or more have passed since you spent the money. Your memory will have faded and your backup documents (i.e. receipts) are probably long gone. It will take hours to get everything together and the effort will be massive. We recommend tackling your accounting on a monthly basis. Not only will everything be fresh in your mind, but a couple of hours a month is much more manageable than three days in a frantic effort to complete it all before the tax deadline.
DIY but You Miss the Most Crucial Step — Account Reconciliation.
If you decided to go the DIY bookkeeping route, take the time to educate yourself on what the COMPLETE accounting cycle entails. Many folks fire up their accounting software, hop in, and start coding the transactions to the applicable category and think they are done. That is only the first half of the accounting cycle. To ensure your accounting records are correct, you need to make sure you complete your company’s accounting reconciliations.
Co-Mingling Business and Personal Expenses.
When you are a brand-new startup, you may be tempted to run all business and personal expenses through your existing personal account. Keep it simple, right? No! This is never a good idea. The most basic reason we do not recommend this is because it is very difficult to sort out personal from business after the fact. Was that purchase from the electronics store for a charger for my business laptop or a new cord for the kids Xbox? From the nuts and bolts bookkeeping side, it is very time-consuming to use an accounting program that pulls transactions from your bank account when you have to sort through hundreds of transactions to determine if they are business or personal. Our recommendation — open separate business accounts and only use them for business expenses. If you need to take money from your business for personal use, transfer the money out of the business account into the personal account.
Asking Other Business Owners (Who Are Not Accountants) for Advice.
We heard this recently, “My personal trainer said I should pay myself a $50,000/year salary and become an S Corporation, it will save me a lot in taxes.” We love personal trainers as much as anyone else, but they are NOT accountants or tax experts. We can guarantee you with 100% accuracy that your situation is different from your friend. Don’t get us wrong, if you have a friend that owns a business in the same industry and has a suggestion of something that is working for them, by all means…consider it. Just make sure you consult an expert to make sure it will work for you as well.
Not Following the KISS Principle.
We mentioned how the “keep it simple” principle should not be implemented when you are considering co-mingling personal and business funds, but the flip side is when it comes to setting up your systems for financial management, you can easily get sucked into something that is more complex and sophisticated than you need.
For example, you notice your accounting software has a feature to save your receipts right with the transactions. Wow, that looks slick. Unfortunately, the process involves going into each transaction and selecting the receipt (saved somewhere on your computer) and attaching it. This process involves scanning receipts into your computer then going into the software and attaching the receipts to each transaction. A simpler approach could be to scan them into your computer, label them, and be done with it. Not every bell and whistle is necessary when it comes to managing your finances as a startup.
Not Recognizing You Are in Over Your Head.
Bookkeeping isn’t for the faint of heart. It is something many startup owners successfully manage on their own. It is also something many startup owners fail to do properly and pay the price for years. Whether you don’t have the time or the knowledge to tackle your bookkeeping on your own, calling in a professional will give you peace of mind knowing it is one less thing on your plate and that it is done correctly. Even if you feel confident about taking it on yourself in the beginning, don’t neglect to reevaluate the benefits of outsourcing as your business grows.
Hiring Your “Aunt Karen” to Do Your Books.
You realized you are in over your head and know you need help. Your mom tells you about how Aunt Karen is a bookkeeper and you should talk to her. Sure, she hasn’t done bookkeeping for over 20 years, but hey, how much has it really changed? Our experience is that you will be further ahead by hiring a professional that is current with today’s accounting practices and up to date on technology. The old saying “Pay now or pay later” definitely applies when it comes to hiring a professional bookkeeper or accountant.
We hope sharing these simple startup accounting mistakes and bookkeeping blunders will help you avoid them and start your business off on the right financial foot. Keeping your financial foundation strong will help you turn your startup into a successful business in no time flat!