HOW START-UP BUSINESSES CAN AVOID ACCOUNTING PITFALLS
In my day to day interaction with clients I meet a lot of small business owners who are in their infancy. They are busy marketing their new business, finding customers and practising their particular expertise.
Most budding entrepreneurs do not, however, willingly spend time thinking about invoicing and tax. I understand that, as they want to make a dollar before they worry about these things. The problem is that accounting is a flow-on function. If you don't get the first month right, then there will be more to do the next month and the problem will grow. So here are my tips.
The most common pitfall start-up businesses make when it comes to accounting is a lack of integration.
What I mean by integration is when accounting, like product development and marketing, is part of the business processes. It’s not done once a month, or worse, once a year. You do it every single day. The problem, though, is the budding entrepreneur tells me they don’t have time to do all that. So what do you do then?
That’s part of integration - it has to be easy to do. A cloud-based accounting application, like Xero
Cashbook, can do that for you. It’s not complex, but it keeps the correct records that a spreadsheet can’t.
Understand the Basics
Now that you have the data, you need to understand the basics. For example, what are the basic documents you need? (Profit & loss statement, balance sheets and cash flow statements.)
What is the purpose of these documents? What’s the difference between cash flow and profit? That is a whole new blog, so I will keep this topic for another time.
I regularly see budding entrepreneurs think they are going great, only to realise that they are actually broke – i.e. the business is showing a profit, but doesn’t have any cash to pay its bills. You have to remember that making a sale is not the same as making money.
As a rule of thumb, you want to be paid as early as possible, even before the goods are delivered. With the invoices you need to pay, the rule of thumb is to delay them for as long as you can (unless there’s significant discount to pay early).
You can then use the difference between the amount you collect in advance and the delayed payments to do something else in the business – like expand and advertise.
Separate Business From Personal
This is important not only from an accounting point of view, but also from a psychological point of view.
What happens if you mix the two? You look in the bank account see that you have a balance of $15,000 so you decide to spend it on a new toy. Then one week down the track a business expense comes in and you can't pay it because you have spent it on something non business related. Important lesson to be learnt: separate your finances out and live within your means.
I regularly meet start-ups that do not undertake any form of forecasting. The excuse for this is that it generally takes time.
By undertaking this exercise, it makes you look at the business as a whole. It forces you to see different aspects you might have neglected. If you don’t know what’s happening in the bank, i.e. forecasting cash ebbs and flows, you might not be able to undertake important projects, such as marketing or product development. Simply put, without the right numbers, you can’t make rational decisions based on fact.
Not Hiring a Pro
If you’re not an accounting expert, then outsource it to a professional.
First of all, it doesn’t cost that much. All you need is a bookkeeper
to keep proper records in the beginning, and an accountant
to give you guidance and advice. If nothing else, the value you get from that service comes in the form of GST returns completed on time.
Secondly, you don’t want to risk it. Unlike say, marketing, the laws that govern accounting and tax-related processes are not at all “obvious”. The last thing you want is to get fined for ignorance.