At most startups, there’s little margin for error. But staff can be inexperienced. Even founders can be inexperienced at most startups, and so they tend to make some basic bookkeeping mistakes that can cause major headaches down the road, and even threaten the viability of the business.
Here are eight of the most common bookkeeping mistakes plaguing startups today.
1. Not keeping the books at all
Lots of businesses start organically, with just a few transactions – then rapidly mushroom from there. Things can get out of hand before the founder even gets around to establishing procedures and policies for keeping the books.
The result is a hodgepodge of receipts stuffed in shoe boxes – if they’re retained at all, transaction notes scrawled on the backs of envelopes, lost invoices, and business expenses that will be left unclaimed and forgotten about.
And then there’s big trouble in case of an audit.
At a minimum, without a solid set of books, your business is virtually unsellable. But buyers pay a premium for businesses with solid bookkeeping in place.
2. Not leveraging technology
Paper systems are long outdated. And Excel spreadsheets are hopelessly unsuited to the task of modern bookkeeping and accounting. If you’re a business owner, you should be using accounting and bookkeeping software specifically designed for that purpose. Today’s software programs easily pay for themselves by saving untold hours over doing it manually or via spreadsheets.
3. Storing records locally instead of on the Cloud
Another related mistake is hosting all your accounting and bookkeeping on a local computer, where it can be stolen or where all your records could be lost with a single hard drive failure.
Instead, use a Web-based platform that backs up all your bookkeeping data to the Cloud, where you can access it on any device with Internet capability.
4. Commingling funds
Chiefly, this means failing to strictly segregate your personal transactions from business transactions.
Sure, it’s common to carry both a personal and business debit or credit card in the same wallet or purse. That’s ok. But problems multiply quickly if you start using your business credit card to pay personal expenses, your personal credit card to pay business expenses, or both.
That’s a sure way to get business deductions denied by the CRA if you’re ever audited. And it could jeopardize your company’s limited liability status, exposing your personal assets to the claims of business creditors.
Establish separate business and personal accounts, and treat them that way.
5. Not paying electronically
Many businesses pay employees and vendors in cash, instead of using a business credit or debit card or electronically wiring the money. Bars and restaurants and other businesses that handle a lot of cash often make payments out of the register. But in practice, recordkeeping gets very lax, very quickly.
On the other hand, if you get an invoice for every account payable, and handle all your accounts payable via your credit card, debit card or bank draft, much of your bookkeeping is already done for you. Reconciliation is a snap, as every transaction has a payee and amount listed on your bank statement already.
6. Failure to keep receipts
Startups often neglect to establish and enforce a system for capturing business expenses and maintaining records. But you need these to claim business expenses against your income, or you’ll overpay your taxes. No business can survive for long paying taxes on profits that don’t exist. But in a narrow margin business, this is precisely what can happen.
Remote employees and sales agents need a system for capturing and documenting expenses and getting them into your bookkeeping system.
Failure to do so not only means lower profits, it can also land you in trouble in case of an audit.
7. Avoiding reconciliation
Reconciliation is the practice of matching business expenditures with items on your bank statement. Every expenditure should have a bank statement debit line or be otherwise accounted for. Likewise, every debit line on your bank statement should have a transaction associated with it, with an identifiable payee.
This is particularly important as a financial control, as it helps prevent outright theft by anyone on the inside who has access to your business checking account. According to a recent industry survey, 16 percent of small businesses experienced payment fraud within the last year.
But startups often neglect or avoid this process, because it’s tedious or because everyone in a lean startup simply doesn’t have the time. But that’s a costly mistake. And the longer you avoid reconciliation, the bigger the problem becomes.
8. Failing to outsource non-core procedures like accounting and bookkeeping
Most startups have to operate lean and mean. That means all hands need to be focused on core tasks like product development, service improvement, marketing, and most importantly of all, sales.
Non-core functions like accounting and bookkeeping should be outsourced – which you can do at a fraction of the cost of trying to hire someone to do it in house.
Ready to take your business to the next level? Outsource your bookkeeping and accounting functions! To find out how moving your bookkeeping to the Cloud and outsourcing to a remote bookkeeping professional can help boost your bottom line, contact LedgersOnline.com today.