A new business won’t survive long if it doesn’t have solid cash flow and a good accounting system in place. Unfortunately, some of the most common financial problems stem from simple mistakes new entrepreneurs may make the first time they’re tasked with keeping the books.
Luckily, there are ways to avoid or fix most of these common mistakes and save your business’s bottom line. To that end, a panel of Young Entrepreneur Council (YEC) members answered the following question:
“What’s one accounting mistake that new business owners might tend to make, and why? How can they fix it?”
Read on for their insights.
1. Focusing on Overall Revenue
“Pay attention to actual profit and cash flow. Many new business owners focus on overall revenue coming in, but once you account for the cost of goods, staff, fixed costs, etc., net profit to the company can be very different from revenue coming in the door.” ~ Lisa Song Sutton, Sin City Cupcakes
2. Struggling With Classifications
“New business owners sometimes struggle when categorizing purchases as personal or business. As a result, leaders may need to pay more or less on their taxes. This number could vary based on the type of mistake. If you’re unsure how something should be classified, it may be time to call a professional accountant to help keep your finances on track.” ~ Chris Christoff, MonsterInsights
3. Failing to Hire Outside Help
“Accounting can make or break your business. Budgeting monthly expenses, bookkeeping, analyzing profit and cash flow statements and financial planning are critical, detail-oriented tasks that demand a lot of attention. If accounting is not your area of expertise, you need outside help fast. Hire a professional who can focus on these activities while you hustle and build the business better.” ~ Brian David Crane, Spread Great Ideas
4. Ignoring the Difference Between Cash Flow and Profit
“The biggest accounting mistake many new businesses make is ignoring the differences between cash flow and profit. You might sell a product at $1,500, but what if the buyer fails to make the payment on time? In that case, your accounting records will show a profit but you may not have the cash despite the profit you made. So track your selling versus spending records properly.” ~ Josh Kohlbach, Wholesale Suite
5. Reporting on a Cash Basis Instead of an Accrual Basis
“One accounting mistake business owners commonly make is reporting on a cash basis versus an accrual basis. A cash basis accounts for when money is received or spent; accrual accounts for when the sale or expense occurs. In the future, if you plan to sell your business or even acquire funding, advisors will look at the accrual basis only.” ~ Jessica Fialkovich, Exit Factor
6. Failing to Record Expenses and Deposits
“The number one mistake business owners make is they fail to record entries for expenses and deposits. That makes it hard to reconcile the books at the end of the week or the end of the month. It also makes it challenging if the IRS or your tax accountant starts asking questions.” ~ Baruch Labunski, Rank Secure
7. Failing to Maintain an Emergency Fund
“One accounting mistake most new businesses make is not maintaining an emergency fund. Emergency funds can help you bridge the gap between your business’s temporary closing and going out of business entirely. So start putting in some amount separately as your emergency fund.” ~ Thomas Griffin, OptinMonster
8. Forgetting About Upcoming Taxes
“One accounting mistake that new business owners might tend to make is not keeping track of upcoming taxes. It’s possible to estimate how much money you’ll make and set money aside for taxes, but it’s still important to keep track of when they’re due. If you don’t pay your taxes on time, you could be charged interest and penalties.” ~ Blair Williams, MemberPress
9. Underestimating Expenses and Overestimating Revenue
“New business owners can make accounting mistakes due to a lack of experience or knowledge. They might not know how to calculate correct tax rates or might not be aware of different types of taxes. The most common mistake is underestimating their monthly expenses and overestimating their monthly revenue. This leads to underinvesting in the business and, eventually, bankruptcy.” ~ Kristin Kimberly Marquet, Marquet Media, LLC
10. Mixing Business and Personal Purchases
“For new business owners, this is understandable. You go to the store to pick up office supplies and then add a few last-minute home purchases on the same transaction. However, this could cause a big headache at tax time, and you could easily miss an expense that could be deductible. To fix this, always use a separate business and personal account.” ~ Shu Saito, All Filters
11. Failing to Account for Small Expenses
“One of the most common accounting mistakes new business owners make is failing to account for all expenses, especially the small ones. This can quickly add up and put your business in a difficult financial position. To avoid this, be sure to track all of your expenses, no matter how small, from the beginning. That will help you stay on top of your finances and keep the business on solid footing.” ~ Tonika Bruce, Lead Nicely, Inc.
12. Forgetting to Keep an Eye on Everything
“One common accounting mistake new business owners make is not keeping a close enough eye on their finances. This can lead to cash flow problems and other financial issues down the road. It’s important to learn about the basics of reading financial statements and tracking your company’s progress so you can avoid making this mistake.” ~ Syed Balkhi, WPBeginner
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