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Taking the leap that is launching your own startup is a big undertaking, and brings with it a great deal of risk in the early stages when you’re still finding your feet. Accounting in particular poses a number of challenges for startups in their infancy - making it vital to get to grips with the processes and terminology involved so you can avoid making the same mistakes as the entrepreneurs who came before you.
To help you enjoy a relatively smooth first foray into startup ownership, we’re sharing some classic startup accounting pitfalls and explaining how you can arm yourself with the tools, knowledge and processes to sidestep these hazards and account like a pro from the word go.
Misunderstanding key metrics and terminology
Getting to grips with essential financial metrics is chapter one in the startup handbook. When the time comes to complete your financial reporting for the current tax year, if you don’t have a solid grasp of the relevant figures and what they mean for your business, you’ll struggle to complete your reporting without external help.
One common misunderstanding we see among our clients is confusing markup with margin. The former is the difference between a product’s sale price and its cost price, while the latter is the difference between your business’s sales and the cost of goods sold (COGS). If you’re ever struggling with accounting metrics or terminology, contact the experts for advice and guidance.
Procrastinating with your reporting
Expense tracking is a crucial aspect of your business’s financial reporting, and something that should be prioritised from the outset. Recreating an accurate account of historic cash expenses if an arduous task, to say the least - particularly if you haven’t been diligent with retaining and organising your receipts.
Transparent and comprehensive books are a gift to be treasured, not least due to the incredible amount of time they can save you on your financial reporting in the long term. So, the takeaway here is to pay electronically whenever possible, and report meticulously and consistently from your business’s conception to save yourself the trauma of retroactive reporting further down the line.
Mixing business with pleasure
Keeping your personal and business accounts and expenses separate from day one is absolutely vital. Even besides the reporting minefield that messy bookkeeping naturally creates, there’s also the matter of cash flow management and forecasting.
Without an accurate view of your business’s financial health (via its incomings and outgoings), it’s nigh-on impossible for you to effectively set and allocate company budgets. On top of that, failing to maintain two separate personal and business accounts could jeopardise your personal assets in a scenario where your business falls into significant debt.
Neglecting your digital accounting
Archaic accounting systems such as offline spreadsheets just can’t stand up to the power of cloud accounting, with its potential for real-time, collaborative updates and near-endless possibilities for time-saving automation. An overreliance on traditional bookkeeping - whether in the form of an offline spreadsheet setup or the dreaded paper-based system - means rejecting contemporary solutions designed to simplify day-to-day accounting and deliver improved accuracy.
With a range of state-of-the-art cloud accounting software solutions available, such as the ever-popular Xero, business owners can minimise wholly unnecessary admin, enjoy greater confidence in the accuracy of their bookkeeping, and access their all-important financial data on the go at their convenience.
Overlooking the benefits of outsourcing
There’s a sense of pride that comes with entrepreneurship which can all too often lead business owners to take on more than their fair share of administrative duties as their company grows. Accounting is a key aspect of the day-to-day running of a business that’s made dramatically easier by outsourcing to seasoned professionals.
Given the great importance of having oversight of your business’s accounts, delegating your bookkeeping to a third party can feel like a hard pill to swallow. However, to maximise your talents (which may lie in areas such as business development, daily operations or sales and marketing), it makes sense to focus the majority of your time on your areas of specialism and entrust your books to external experts whose forte lies in best-practice business accounting.
If you’d rather outsource your accounting to the experts, we’re here to help. Get in touch with the Harlands team today to discuss your startup accounting needs and get one step closer to spotless financial reporting.