Starting your own business is an amazing thing to do but it’s also notoriously risky. There’s a lot to think about when you first start out on your own and it can be tempting to put accounting on the back burner, but that would be a huge mistake. Good accounting is crucial to the financial health of your business and mistakes can be devastating, especially in the early days. It’s important to know which mistakes to avoid to ensure that your small business is around for years to come.
1. Bad Bookkeeping
New business owners are often overwhelmed and tend to neglect bookkeeping. However, it’s essential that you keep the books up to date and record all of your earnings and expenses. Without this data, you won’t have a clear picture of how you’re faring financially, which can lead to a myriad of nasty problems.
Meticulous bookkeeping allows you to spot trends, understand your spending and examine which practices generate the largest ROI. You can then leverage this data to improve the financial health of your business, maximise your profits and manage your cash flow. Staying on top of the books allows you to stay one step ahead and put out fires before they start.
2. Confusing Cash Flow and Income
The money you take isn’t the money you make.
$100,000 in revenue sounds great, but if you had to spend $30,000 on equipment, insurance and employees to make that money, you’re actually left with $70,000 profit. You’ll then have to pay tax on your profit, so the net amount will be smaller again.
It’s vital to know not only how much money is coming into your business, but how much is going out. Getting carried away with gross numbers is a common mistake that new business owners make, and it quickly lands them in hot water. It’s important to stay grounded in reality and know how much you’re really making so that you don’t overspend.
3. Forgetting about tax
One of the most common mistakes that we see with new businesses is failing to put money aside for tax. The best way to approach this is to remember that the taxes you collect are never your money to spend. We encourage all new business owners to set up a separate bank account solely for tax. Then on a regular basis, put a % of everything that comes in from customers into this account to cover your tax obligations and DO NOT touch these funds unless you are paying tax. As a starting point we recommend 15% for GST and anywhere between 15-30% for income tax. If you make a habit of this, you will have enough cash to cover your tax obligations when they fall due and this will eliminate one stressor from your life.
4. Using Outdated Practices
You’re a 21st century business and your accounting practices should reflect that. Online accounting and bookkeeping software is faster, easier and dramatically more efficient than ledgers and Excel spreadsheets.
Online accounting software is easy to learn and significantly reduces the margin of human error by automating processes and calculations for you. This means that you’re much less likely to make mistakes on your accounts. It also reduces the risk of making the wrong financial decisions due to inaccurate information.
With this type of software, you won’t have to spend hours updating and organising your financial information. Another benefit is that it allows you to locate and cross-reference information quickly and easily, without having to spend hours searching for the right files. It may be more expensive than the DIY approach initially, but using online software will save you many man hours.
5. DIY Accounting
Accounting is complicated; there’s a reason it takes accountants years to fully qualify. Trying to manage your accounts all by yourself is a surefire way to waste time and stress yourself out. Besides, without extensive financial knowledge it’s unlikely that you’ll be able to save a significant amount of money on your tax return. Furthermore, you’ll be heavily penalised for making even a minor mistake on your return which could cause financial problems for your business.
Trying to manage on your own is a drain on your resources so the sooner you seek professional help, the better. Investing in the services of a qualified and chartered accountant is one of the best decisions you can make regarding the financial health of your small business.
Summary
It’s important to avoid the above accounting mistakes in order to set your business up for success. Neglecting or mismanaging your accounts can have serious consequences, so it’s best not to take any risks. Whilst it’s tempting to put accounting off until later, you need to make it a priority right from the very start. Good businesses and bad accounting just don’t go together.
Don't let accounting mistakes sink your small business! Contact us today to ensure your financial health is on track from the very beginning.