Despite the creative spirit of most entrepreneurs, studies show that nearly 90% of all startups fail within the first five years. For many of these small businesses, their problem is not their ideas or even the goods or services they offer – it’s the way they handle their finances.
Here are the top five accounting mistakes small businesses make and how to avoid them:
1. Mixing Business and Personal Finances: Many small businesses make the mistake of mixing their personal and business finances. When starting a business, this may not seem important, but as your business grows, the blurred line between your personal and business finances can become a real problem. It is vital that you create separate accounts from the very start of your business and never cross that line. This is especially true when making cash purchases. Everything must flow through your business account so that you can achieve the greatest financial benefit.
2. DIY Accounting: Most entrepreneurs will admit that they are not expert accountants. Yet, these same entrepreneurs try to handle their finances in house, and often fail. A trained professional will ensure your records are up to date, record transactions properly, and keep track of your accounts receivable and payable. This will allow you to spend your time and resources into expanding your business.
3. Counting Your Revenue Too Early: The problem with counting your revenue too early is that you overlook the expenses that go into the final delivery. Whether you are selling products or providing services, you should consider your expenses before you can determine your real profit. You put your startup in jeopardy when you start making business decisions without seeing the full picture.
4. Spending Too Much Too Soon: One mistake many entrepreneurs make if their first year is a good one is to go on a spending spree with money from their cash flow. This tactic is especially dangerous when purchasing high-value items that can depreciate over time. Using cash for these types of items not only jeopardizes your startup’s financial stability, but it can also hurt you when it comes tax time. It is better to keep this cash on hand and take out a short-term loan or even consider leasing.
5. Limited Financial Analysis: Developing a detailed budget is a standard practice for any entrepreneur starting a new endeavor. However, many startup owners fail to regularly assess the status of their business. This limits their ability to modify their budget as the business grows or to detect potential problems looming in the background.
Small Business Accountant in Maryland
Avoiding these common financial mistakes and staying on top of your finances will help you grow your business and help you succeed. If you are a small business that is looking to outsource your accounting or if you need help managing any aspect of your business’s or nonprofit’s finances, such as taxes, we want to hear from you. Call us at (301) 913-0008 or email firstname.lastname@example.org to make an appointment.