Most people start a business with enthusiasm and the best of intentions. While they may have an excellent business idea and the passion for their product or service, they often fail with accounting and financial planning tasks because it’s not their area of expertise. You have probably heard the disheartening statistics from the Bureau of Labor Statistics that two-thirds of all new business ventures fail within the first two years. In many cases, this occurs due to financial mistakes made by novice business owners.
The Top Four Accounting Mistakes You Must Avoid
Our South Carolina payroll firm understands that all business owners will make financial mistakes. The important thing is to learn from them and not allow them to turn into bad habits. The following are some common scenarios we have seen from other new and small businesses that threaten long-term survival:
Not Separating Business Finances from Personal Finances
When you’re just starting out as a sole proprietor, it can be tempting to operate from a single personal checking account. However, this is a big mistake that can cause big issues with your tax filing later. It’s confusing to go back to separate personal and business income and expenses many months after the fact. Another common error among new business owners is not giving themselves a paycheck. While you might need to invest all profit back into the business at first, this shouldn’t go on indefinitely. If it does, it’s time to sit down with an accountant and re-plan your business strategy.
Not Establishing a Clear System for Accounts Receivable
If you’re not clear with your customers about when you expect payment, they may see it as an invitation to take as long as they want to pay an invoice. This will cause cash flow problems in a hurry. Before you send your invoice, be sure it explicitly states when payment is due and the consequences to the customer for failing to pay the invoice on time. Depending on your line of business, you may want to have each new customer sign a contract as well.
Allowing Entries and Reconciliations to Get Behind
It’s not uncommon for new and small businesses to go months without reconciling bank and credit card statements, sales tax accounts, and other financial accounts. While this can be a mess to clean up, it also means that your company’s reports and financial statements will be neither accurate nor current. This creates an extra challenge when it comes to making financial decisions for your business.
Making Too Many Math Errors
When you’re excellent at public relations but terrible at accounting, the errors in your books will show it. You might also try to save money by hiring a family member to keep the books who has no real experience doing so. This is one area where it pays to outsource from the start. It’s much easier than having to go back through months or years’ worth of financial statements later to discover the errors.
Having a professional accountant handle your financial affairs is one way to ensure that you’re among the new businesses that survive and thrive after the two-year mark. Please contact us today to schedule a consultation.