Bookkeeping is vital when it comes to running a successful business as it allows you to recognize the financial status of your business at any given time. That’s especially important given that the top reason startups fail is because they ran out of cash or failed to raise new capital. If you don’t have the correct financial picture, you could be headed for trouble.
But while you may realize that good bookkeeping for startups is crucial, it is also well known that it can be tedious and requires a keen eye. Plus, it uses financial knowledge that not everyone has. All of this makes it particularly easy for new businesses to make mistakes in their books, especially in five critical areas.
Avoid These 5 Startup Bookkeeping Mistakes
Here is a list of top mistakes that startups tend to make and ways you can avoid them.
1. Not Keeping Business Finances Separate From Personal Finances
This one is big and cannot be said enough. When you are just beginning to get your business up and running, it can be enticing to use your personal account for the costs of business, as you may be using money from your own savings anyway. Do not do this.
There are many reasons why combining your personal money with your business money (which is known as “commingling”) is a monumental mistake—the biggest one being taxes.
When tax season comes around, you will want to deduct your business expenses. It will be much more difficult to do this if your business and personal account are mixed.
You may be thinking that the purchases for your business are going to be easy to spot, and in many cases, they will be. However, there will be expenses that will be harder to distinguish. You may have bought office supplies from Amazon, but now it is mixed in with your household purchases from Amazon. Or that expensive restaurant bill, was it with friends, or was it a business meeting with clients? Having your accounts separated from the start avoids having to comb through and separate every transaction you made that year.
In addition to causing tax time troubles, commingling makes it nearly impossible to recognize your business’ wellbeing. It will be harder to track the money your business is spending if your personal finances are mixed in the account. Without this information, things like your burn rate are harder to figure out. This can cause you to make poor spending choices.
How to avoid commingling
Get a bank account and credit card set up for your business right away. Utilize these accounts for your business and only your business. If you ever find yourself unintentionally using the business account for personal expenses (or personal for business), make note immediately of the error.
2. Bookkeeping With A Single-Entry System
In the beginning, when you are first setting up your bookkeeping system, you will have to decide between single-entry and double-entry bookkeeping. While single-entry is easier and recognizable (bank statements are single-entry), it is also more susceptible to mistakes and fraud, making it a poor choice for your business.
Let’s look at an example of each method for clarity.
Single-Entry (one account for all records)
Beginning of Month: $8,000
- Inventory ($6,000)
- Marketing ($750)
- Labor ($2,500)
- Sales Revenue $12,000
End of Month: $10,750
Using this method is simple, but if you enter an incorrect amount, it will be likely you won’t notice until you examine your bank statements. The same thing goes for fraudulent activity—it will be harder to identify until you compare your books to your bank statement.
Double-Entry (two accounts)
The double-entry system for bookkeeping allows you to see most errors right away and leaves less chance for fraud. This is because you are recording each transaction in two separate accounts. One account is your debits, and the other is your credits. For instance, say you buy yourself a new chair for your office, and it costs $350. In the double-entry system, you still note the expense just as in the single-entry system, that you used $350. However, you will also record that $350 as a new asset. Yes, you spent the $350 cash, but now you own a chair worth $350. This method allows you to maintain a balance, and both accounts should match.
As you can see, both account totals are $350. If these two totals ever disagree, that means there is an error. You can then search for the error right away versus not knowing the error exists until your bank statement arrives. A double-entry system is more precise and dependable and is the industry standard.
How to avoid a single-entry bookkeeping system
This is very easy to avoid. Just start off your bookkeeping with a double-entry system from the very beginning. The double-entry system is required for publicly owned companies since they must follow GAAP, but also investors will want to see you using this method. It is much easier to start off with double-entry books than have to switch down the line.
3. Choosing to use the cash-basis accounting method
When you are getting your business off the ground, you will have to choose an accounting method, just like you chose a bookkeeping method. The two options you will have are a cash-basis method or an accrual-basis accounting method. As with your bookkeeping options, one of these methods is best for the long-term growth of your business.
Cash-basis accounting is the simpler method to use. You merely record when money is coming in or going out. This means if you make a sale in February, but the client does not pay until April, you only record the transaction in April when you receive the money. This may seem like a great idea, only counting your cash once it is in your hand, but it can prove problematic.
On the other hand, the accrual-basis accounting method shows a better picture of the overall financial status of your business. This method records all transactions as they occur. So, the sale above that happened in February but was not paid for until April would still be recorded in February.
Looking at these two methods, it may seem like the cash-basis method makes the most sense. However, look at it on a larger scale. Say you made sales in February, March, and April, yet none of the cash for these sales was received until May. If you were using the cash-basis method, to an outsider it looks like you had little to no business activity for several months, then received a large amount from sales in a single month. An investor may see that and think your business is unstable. If, on the other hand, you were using the accrual-basis method, the sales would be recorded as you made them, showing that your transactions are stable and frequent.
The accrual-basis accounting method is beneficial to a business as it allows the owner and potential investors to get an accurate look at how the business is performing. As an extra incentive, this method also helps when bills are due since you record expenses and income as they occur. Planning for the future of your business is easier when you know exactly what is going on with your finances.
How to avoid cash-basis accounting
Just as with your bookkeeping method, it is easy to avoid cash-basis accounting by using accrual-basis from the start. Accrual-basis accounting is an industry standard, and once your business grows large enough, it is required by the IRS to use this method. Just start from the beginning with the accrual-basis method and save yourself the future headache of having to switch.
4. Letting your books fall through the cracks
As a new business owner, you have what seems like a never-ending list of things to get done. From finding investors to creating your products and assembling a team, among many other tasks, it may be tempting to let your bookkeeping needs slide to the back burner, especially if you have very few transactions occurring. You may find yourself thinking, do I even need to keep up with the books already?
The answer is simple, yes, you really do.
There are many reasons why your bookkeeping should be up to date, but leaving the bookkeeping undone until you feel your finances and transactions are more extensive is a disaster in the making. You will eventually reach the point where your books need to be completed, and then you will be left with the massive task of sorting through the chaos of your records.
How to avoid a bookkeeping backlog mess
Similar to most of the things in this article, the important part is to start at the beginning. Just because it seems like your finances are simple and bookkeeping would be easy to catch up on, it doesn’t mean it’s what you should do. In fact, early on, when the process is easy, is exactly the best time to get into the habit of doing your bookkeeping on a regular basis. A great bookkeeping foundation will be an asset to your business as it grows.
5. You don’t recognize when the need to hire a bookkeeper arrives
This bookkeeping error is linked with the previous mistake of getting behind on your books. In fact, not hiring a bookkeeper when your business needs one can directly lead to a backlog in bookkeeping. Many new business owners don’t switch from doing the books themselves to hiring a professional when the business is in desperate need of it.
In the early days of your business, your time is a resource that is extremely valuable. As the company grows, the need for that resource grows along with it. While you could teach yourself how to be an excellent bookkeeper, if you’re spending your time on that, who is running the company?
In the beginning, it might make sense for you to do your own books, as you probably have minimal expenses and only yourself and maybe a co-founder for employees. However, as your business grows, bookkeeping will probably not be the best way to spend your time. It will most likely be more beneficial for your growing company that your time be spent on cultivating other things.
Avoid miscalculating when you should hire a bookkeeper
You need to be able to realize when bookkeeping is taking the time from you that would be better spent on another part of the business. You should be asking yourself how much time you are taking on the books. Are they staying up to date? Are the financial statements accurate? If you find yourself saying too much time, not up to date, and not accurate, it’s time to bring in a professional. Remote Books Online can help.
Remote Books Online Stops Startup Bookkeeping Errors
We’ve helped thousands of small businesses steer clear of bookkeeping mistakes by:
- Recording your transactions and reconciling bank statements
- Getting your books up-to-date and ready for taxes, loans, or other transactions, for a clear picture of your business’s financial situation
- Handling accounts receivable and accounts payable
- Handling payroll and payroll taxes, so you don’t have to worry about calculating, filing, or paying your taxes, all while ensuring your employees are paid on time
- And more
Our convenient, online bookkeeping services start as low as $95 a month and are provided by certified QuickBooks ProAdvisors and Xero-Certified Advisors. And we include accounting software and automated and secure encrypted monthly bank statement downloads.
If you’d like to try us out, we can enter all transactions, make necessary journal entries, and reconcile one month of your books for FREE. This way, you can experience exactly how we work and understand the benefits of having our team behind you.
If you’re a startup business owner, you have a choice. You could handle your books yourself and hope you avoid making any of these five common errors, or you can let us handle them for you. Contact us for a no-obligation quote today and learn more about how we can quickly and easily help you with your bookkeeping needs—so you can get back to your startup.