12 Accounting Practices That Will Damage Your Business

Running a startup can be exciting. You can innovate and implement your ideas and see your project reach new heights.

While it sounds great, you need to make sure that your venture is sustainable. Moreover, activities should be carried out through a well-managed and optimized process that keeps the cash flow constant.

However, it is easier said than done. 42% of the startups fail due to inflows of cash crying up. New ventures are often in a hurry to push sales and create a market niche.

They often neglect the lifeline of the business and the need for a fine-tuned accounting system.

However, with a little bit of caution, good accounting practices, and steady cash inflow, 29% of failed startups can easily be turned into flourishing businesses.

Without further ado, let us understand how poor accounting practices affect startups and measures to solve them.

How Poor Accounting Practices Are Responsible for Startups Running out of Cash?

Here are a few accounting practices that play a key role in pulling startups under.

1. Sole Focus on Selling

While sales is the backbone of your business, it is equally important to invoice and get the cash flowing in. Late invoicing, error-prone invoices, and delayed approval can lead to a slower collection against sales.

2. Not Following Market Costs

When you determine the price of your products, you consider prevailing market costs, overhead costs, and estimated gross margins. However,  over a period of time, these prices may shoot up, and you would not have made corrections to your sales price.

The result? Low cash-in flow and lowering margins

3. Rise in Expenses

Your initial estimates of costs can quickly become outdated. Suppliers will continue to revise rates, and expenses will increase in the short and long term. If these costs are not monitored, it can lead to a surge in your expenses and leave no profit-making margins.

4. Estimating Available Cash From Bank Records

In most startups, bank reconciliation is often neglected. On the other hand, updated bookkeeping software can give a better cash management balance and better cash flow estimates.

5. Not Following Tested Accounting Practices

It has been observed that startups deviate from basic accounting practices. This results in inaccurate expenses and earnings reports. Ultimately, it will only give you a distorted analysis of your company’s health.

6. Business Vs. Personal Account

Small business owners often carry out business transactions through their personal accounts. In the long run, it can lead to complications, as it will become tough to separate business and personal expenses.

7. Unorganized Receipts and Documents

Lack of accounting exposure can lead to receipts and documents that are not maintained in an orderly and organized manner. This, in turn, can lead to unnecessary complications if they have to be produced during the tax season.

8. Not Tracking Expenses Accurately

As an owner of a new business, it can be challenging to understand the various heads of expenses. They can be posted under the wrong heads, leading to incorrect income statements and deductible claims.

9. Delay in Tax Submissions 

A slight delay in tax submissions and notice from the Internal Revenue Service (IRS) can get your startup in big trouble.

10. Loans Taken As Share Capital

While there is a lot of difference between the two, startups often make the mistake of considering loans as share capital. You can always return loans but not share capital. Confusing the two can lead to an incorrect assessment of liabilities and business assets.

11. Not Seeking Professional Help

While it is a great thought to do everything by yourself, it seldom works when running a startup. You may need to hire a certified public accountant (CPA) to ensure that all the generated reports are accurate in all respects.

12. Lack of Basic Accounting Knowledge

Reaching out to investors, setting workflows, and hiring people can take a toll on startup owners. While some possess basic accounting skills, some are not well-versed in them. Not having a clear understanding can lead to erroneous and fraudulent transactions going undetected.

6 Important Accounting Practices for Your Small Business

Now that we are aware of the perils of poor accounting processes. Let us have a look at how to solve them.

1. Keep Invoices in Order

Your invoices are actually cash blocked up and must be stored in an organized manner. Thus, making it easy to follow up and monitor accounts receivable. You can also organize the information in a spreadsheet and record information like date, invoice number, amount, client name, and tax payable.

2. Monitor Bank Reconciliation

There will always be a difference between books and bank balances. This is because there will be a time gap between receipts and payments. All you need to do is check your bank statements online every day and tally the items with your cash book. This will give you a clear picture of the state of your finances and available cash on hand.

3. Maintain An Organized Expense File

It would really help if you keep all the original bills in a file and list the details in a spreadsheet. When you pay the bills, note the details of payments like the cheque number to better understand what has been paid and what’s pending.

4. Keep A Cash Book

Petty cash is essential for a startup as small vendors and contractors prefer to be paid in cash. Keep track of the expenses and balance the cash on hand with the expenses made at the end of the day.

5. Maintain an Asset Register

You will need to maintain a register and record all the assets, including printers, furniture, computer, and company vehicles. Moreover, you can also keep track of these records in accounts software and update them periodically.

6. Outsource

Hiring a virtual accounting firm for your business can help you streamline your financial data. They will have in-house experts and accounting tools to optimally handle cash flow and help you survive in this competitive market.

Following good accounting practices can help you avoid common accounting pitfalls and solve issues related to cash flow.

Did we miss out on any aspect? Let us know in the comments below.