Entrepreneurs usually have great ideas for getting started in business. But staying in business requires discipline. There still is the nitty-gritty of everyday startup life. Poor financial management is the death of many businesses in the first five years. The founders of FreshBooks (cloud accounting) put together a list of accounting mistakes to avoid and not put the burgeoning business at risk. It may seem simple, but as accounting professionals (and entrepreneurs themselves), know the devil’s in the detail.
1. Not staying on top of receivables. Staying on top of your receivables is critical to ensuring your cash flow is healthy and that you know where you stand financially each month. It also ensures that at tax time, you’re not scrambling to piece together which payments belong to which invoice. Consider taking advantage of cloud accounting tools that allow you to send invoices and update payments from anywhere. Invoicing software like FreshBooks, for example, allows you to even automate most of the billing process, including sending out late payment reminders and enabling your clients to pay you online.
2. Not keeping expense receipts. How many times have you scanned your bank account statement trying to figure out what a charge was for–was it supplies for your office or was it an expense related to a client’s project? Not only is this frustrating, but not having copies of your receipts can land you in trouble at tax time. If you’re unable to accurately report your expenses, you might find yourself getting nailed with costly penalties. Keep copies of your receipts in one place and review them at least weekly or monthly while they’re fresh in your memory.
3. Mixing personal/business finances. Best practices for keeping organized include using only your business credit or debit card to cover business-related expenses. What’s more, this is an important signal to the IRS that you’re running a business vs. a hobby. Mixing your expenses also prevents you from really knowing how much money you’re actually earning vs. spending for your business, which increases your chances of running up debt or losing track of profit margins.
4. Not hiring a professional to handle taxes. Your accountant can apply the most up-to-date tax laws to ensure you’re benefiting from all the deductions you qualify for. For example, not many entrepreneurs realize their bank fees are tax deductible, or that they can claim that professional development course they took a few months back. A professional can help resolve any discrepancies or confusions resulting from guesswork (ex. incorrect tax categories, deductions) that might have otherwise lead to an audit.
5. Not getting on the same wavelength as your accountant. A CPA has the skills and training to help guide important business decisions. Is it time to hire your first employee? When’s the right time to make a big purchase for your business (upgrading your software or buying a new computer)? Hire an accountant with whom you feel comfortable asking questions and who communicates in the style that works best for you.