Startup Accounting: Good Practices Now Yield Big Dividends LaterThere’s no question that startup entrepreneurs are pulled in many directions. With so much focus on daily operations, managing employees, product development, and more it can be easy to overlook the importance of establishing strong accounting practices from the get-go. When there’s not a lot of $$$ coming in the door just yet, founders can make the mistake of categorizing finances as an “I’ll get to it later” task. However, just because you might not be making revenue just yet, doesn’t mean there aren’t plenty of expenses going out the door. If you don’t have an accounting practice established, when revenue finally starts coming in, your booming sales won’t amount to much if you aren’t aware of the expenses your business is incurring. Strategic business growth can’t happen without a real understanding of your financial statements. If you’re running a startup or small business, it’s important to fully understand your numbers so you can grow your business.
Here are seven common startup accounting mistakes and how entrepreneurs can avoid them.
1) Infrequent BookkeepingWhen startup owners don’t evaluate the financial status of their business regularly, their ability to detect problems and adjust budgets is limited. Brad Shaver, Director of Accounting at Nashville-based HR, PEO and accounting services company, XMI, recommends frequent invoicing and monthly bank reconciliations to ensure that cash flow—the lifeblood of startups and small businesses—is secure.
“The number one accounting mistake most startups make is that they do their bookkeeping infrequently,” said Shaver.
2) Not Understanding Tax and Compliance RequirementsAnother frequent misstep among startups is not understanding or fulfilling crucial tax, debt and other compliance requirements. State and federal filing requirements, like paying taxes and submitting certain reports, depends on your business structure and the state in which your business is located. There are also internal record-keeping requirements that are important to keep straight should you sell your company, if legal action is taken against your company or if your company is audited.
3) Not Clearly Documenting Startup Capital
No matter how you finance your startup, whether through a startup loan or equity, it is essential to make sure everything is documented clearly in a formalized agreement. Even if a startup owner or company partners infuse their own money into a company, it’s critical to distinguish whether the initial capital infusion was equity or a loan.
“If it’s a loan to the company, it will have different consequences if there’s ever an exit—most times, founders don’t know; they don’t decipher one way or another,” said Shaver. “They expect to get the payment back and maybe interest, so it’s best practice to write that out.”
4) Not Knowing How to Pay YourselfWhether a founder should take a salary or draw on net profits depends on the stage the company is in.
“You need to figure out what method is best for you for what you want to achieve,” Shaver says. “For instance, a salary will show up on the profit and loss statement on your income statement, but an owner draw will not because you’re reducing the loan or the equity money that you put in.”