The 7 Most Common Accounting Mistakes Entrepreneurs Make
Statistically, your business is more likely to fail than flourish. If you are in business or looking to get into entrepreneurship, the goal is obviously to build a profitable enterprise that will enjoy longevity.
It's often said that more than half of new businesses fail during the first year. According to the U.S. Bureau of Labor Statistics (BLS), data shows that approximately 20% of new companies go out of business during the first 2 years, 45% during the first 5 years, and 65% during the first 10 years.
Only approximately 25% of new companies survive at least 15 years. These statistics haven't changed much over time, and have been fairly consistent since the 1990s. Though the odds are better than the commonly held belief, there are still many businesses that are closing down every year in the United States.
6 most common ways that lead the company go out of business are:
- Not investing in the market, market research, or ignoring the market state. This can be obvious - don't get blinded by your idea and always consider the market. Based on German's small business statistics, the most important factor for the company to succeed is timing. Are you selling middle-class oriented cars and economy is bad? The middle class and poorer people are likely hit harder than the rich, so it is likely your car sales will suffer. Or do you have a farm with foxes harvested for their lovely hides, and at the same time are you living in a heavily nature-protected country? Likely, these won't sell well either.
Second and third most important factors to succeed as a startup are business plan (business idea) and funding. - Business plan problems. As mentioned in the previous step, the business plan is the second most important factor for the company to succeed. The plan should be goal-oriented, solution-oriented and shouldn't get blinded by your ambitions. It can be tempting to make numbers look just a little bit better. This small tweak may mean the plan on paper will look great, but in reality may not. Especially in tight competing industries or industries with razor-thin margins, like groceries even the smallest calculus changes can result in very different outcomes.
- Letting your accounting slip. Having your paperwork right is obligatory. No matter how great product you might have, or how awesome your services are, if you don't have your accounting in order, you may spend too much on unnecessary purchases, too little on important items, or don't evaluate properly business opportunities.
- Not sufficient funding. As mentioned in the first point, it is super important to get your funding right. Without funding, it will be hard to scale up, and that could lead to your business's premature death.
- Bad location, missing internet presence and badly build marketing of your product.
- Remaining rigid. Never stay on the spot. With super quickly moving and developing economy it is simpler than ever to copy your business ideas and implement them with the same value proposition, cheaper, more efficiently and on a larger scale. Only by moving and keeping innovating you can survive.
- Expanding too fast is yet another danger. When a business expands too fast and doesn't take time to research, to strategize, and to plan, the financial drain of the failing business parts can sink the whole enterprise.
Learn more about the most common reasons businesses fail in this guide by Investopedia.
As mentioned above, having your accounting right is one of the most common reasons businesses fail. Company accounting is one area of running a business that can significantly contribute to your success - or lack thereof.
By being cognizant of common accounting pitfalls and how to avoid them, you can significantly increase your odds of a long, lucrative entrepreneurial journey.
Here are some of the more common accounting mistakes you should avoid and why.
1. Equating Profits With Cash Flow
Take a scenario where you bag a $100,000 deal, with an expected delivery date in three months. This project will take $30,000 to execute. Entrepreneurs in such a scenario are tempted to book a $70,000 profit before ever getting started on the job.
Big mistake.
Take the above scenario. If the project takes longer than expected or costs more than estimated, it could create a lot of problems for your business.
By spending more cash than anticipated, you risk leaving your business cash strapped. This would mean struggling to pay utilities, salaries, and even taking on more work.
By taking the time to understand the fundamentals of profit vs cash flow, you will be a step ahead in protecting your business from cash flow issues.
2. Not Differentiating Contractors From Employees
Whether a worker is contracted or is a permanent employee impacts your taxes significantly. It affects how much taxes you should withhold, the types of taxes as well as additional overheads your business must pay.
Because the two forms of employment are different, the differences must be accounted for as well. Failure to do this can cause the IRS to flag your business. You need to understand the consequences of this or hire an accountant who can guide you.
3. Slacking on Bookkeeping
At times entrepreneurs fail to do proper bookkeeping, especially when they deem their company to be doing well.
From small to large payments from clients, it's important to ensure all transactions are categorized and recorded.
This is important for companies of any size.
Doing so will give you a clear picture of your company's financial health. It helps you make projections for the coming months and can be useful when you need to cost cut.
Some items tend to fall through the cracks, especially when travelling or when constrained by time. A cloud business accounting software allows online bookkeeping by allowing you to access and update your records anytime, anywhere, and anytime.
Check out this guide by business-money to learn more about why to hire an accountant.
Tools like ZarMoney go a long way in supporting internal reporting, which ensures sound business accounting. Check it out.
4. Attempting an Inclusive DIY Without Experience
Understandably, you would not want to spend a dollar more than you should have to. And new entrepreneurs tend to want to handle their accounting themselves.
From errors in your books to missing out on tax deductibles, running your business accounting in-house can be disastrous.
If hiring an accountant on a full-time basis is not an option, a business software can help you run your accounting. A cloud business accounting software works best as you can access your information from anywhere provided you have internet access.
It’s of paramount importance to have a trained accountant handle regulatory issues, and here are few common reasons why:
- Staying focused on your company’s growth. Focus is super important. No matter if you decide to hire a professional accountant, a third-party company to manage your accounts or you choose an accounting software like ZarMoney, it will help you stay focused on your business. Develop it, engage with clients, get more contracts, rather than be bothered whether you need to fill in form 104/66 or 1044/4 C.
- Making your business legitimate. Show your business partners you mean it seriously with professional looking and functional invoices, flawless billing and never missing a payment. This can be again done with all 3 options: accountant, third party accounting company, and accounting software.
- Identifying profitability opportunities to exploit. This is going to cost you. Even tho at the beginning it might seem silly, experienced accountant or accounting software will point you to directions where you can save or right away earn more money.
5. Failure to Reconcile Bank Accounts With Books
It's not uncommon to have a few errors when recording transactions. This makes reconciling accounts critical.
Reconciling is checking that your account balance reflects correctly in your business bank account. When this is not done often, the two statements might fall out of sync, depending on how often errors are made.
Ensure to reconcile your accounts frequently. This ensures you track your business finances accurately.
Today, you can get good business accounting software, like ZarMoney that can help with reconciliation.
The good news is that cloud business accounting software is affordable and comes with different pricing plans to fit your needs. Check out the comparison of two Cloud Accounting Software Solution providers, ZarMoney and Quickbooks here.
6. Working With Ambiguous Budgets
Often, entrepreneurs will pick up a project without knowing how much it will cost them.
When you do this, you will sometimes spend more than intended or more than makes business sense.
One of the initial steps to take before commencing any project should be to create a budget. This shows you what your potential ROI will be. It also acts as a gatekeeper in matters of finance. By consistently comparing project progress vis a vis your budget, you can track spending and take corrective measures when need be.
If you are using a cloud business accounting software, everyone on a project can access the budget and act accordingly. This is because online bookkeeping systems allow multiple users at a go.
7. Blurring Business and Personal Finances
First-time entrepreneurs also make the mistake of mixing business and personal finances.
These infractions might seem minor when your business is small but can pose significant issues once you begin to scale.
The best way to set up a business is by opening a business account. Among other benefits, this will make business accounting functions such as reconciliation and tax processing much easier to execute.
Streamline Your Processes with Business Accounting Software
Understandably, you might be unable to hire full-time accounting staff when starting.
An online bookkeeping software, ZarMoney, solves this problem perfectly. ZarMoney is a trusted business accounting software that helps entrepreneurs track their business finances.
Undoubtedly, a reputable online bookkeeping system is one way to streamline your accounts and take your business to great heights.
