Top 8 Accounting Mistakes to Avoid for Startups
Article written by Austin Page
Starting a business in Santa Cruz can be an exhilarating journey. You’ve got a vision, a product or service you’re passionate about, and the drive to make it succeed. You’re right, of course - while all that excitement kept up, most accounting details did slip through the cracks.
Well, that can be dangerous, can't it? If those accounting mistakes are allowed to start adding up, your cash flow problems, compliance issues, or even the very existence of your business can be on the line.
To help you avoid common pitfalls, let’s dive into the top 8 accounting mistakes startups should avoid—and how you can set up your business for financial success.
1. Failure of Separating Personal and Business Finances
Most startup founders make the common mistake of mixing their personal and business finances. While it seems convenient in the first few months to use your bank account or credit card to pay for business expenses, this will become difficult to keep track of and soon could even be problematic at a legal level.
How to avoid it:
As soon as you start your new startup, open a dedicated business bank account and business credit card and use these accounts only for business transactions. This will simplify bookkeeping and show professionalism and credibility with investors and stakeholders.
2. Failing to Track Expenses Diligently
When your company is a startup, every penny counts, and yet many entrepreneurs miss the importance of tracking expenses closely. The oversight can make you miss out on important tax deductions and unbalanced books, which, in turn, can set you on a poor course of financial decision-making.
How to avoid it:
Set a daily expense budget and invest in accounting software or apps to record real-time expenses. Start digitizing your receipts and organizing them along with your costs (marketing, office supplies, etc.).
3. Ignoring Cash Flow Management
Cash flow is the beating heart of a business, yet it is one of the things most often mismanaged by starting companies. The other caveat is that many startups concentrate on the cash profit side, but then they lose track of cash inflows & outflows.
How to avoid it:
Know when you’ll get money and when you’ll pay money out. Save your spare cash in case of unexpected hassle. And remember: Chasing overdue payments and prompt invoicing helps with your cash flow.
4. DIY Accounting Without Proper Knowledge
As a cost-saving measure, many founders attempt to do their accounting. While this might work in the early stages of your startup, as your business grows, the complexities of accounting will likely outpace your expertise.
Mistakes in bookkeeping, tax filings, or financial reporting can lead to costly errors, compliance issues, and missed growth opportunities.
How to avoid it:
It's important to grasp key accounting concepts like Generally Accepted Accounting Principles (GAAP) early on, but seeking professional help becomes crucial as your business scales. Industry-specific accounting software can also help you simplify the process without compromising accuracy.
5. Misclassifying Employees and Contractors
Startups tend to use a combination of both when working with employees and independent contractors, but getting that wrong can result in serious legal and financial penalties.
How to avoid it:
Become acquainted with the definition of an employee or contractor in your jurisdiction. When in doubt, an HR or legal professional is introduced to ensure proper classification. .contractors in your jurisdiction. Consult an HR or legal professional to ensure appropriate classification when in doubt.
6. Failing to Budget for Growth
Startups usually forget about upcoming costs, only to think of expenses due now. Scaling your business can be messy and unsustainable without a clear financial plan.
How to avoid it:
Find out what your money can do now and what it could extend into, including costs like hiring, marketing, technology, and more. You should review and change it regularly as your business changes.
7. Overlooking Professional Advice
Finally, one of the biggest mistakes startups make, especially in the B2C category of mobile app startups, is not seeking professional advice when needed. Experienced accountants and financial advisors bring expertise that can save you time, money, and stress. Neglecting their input can result in missed opportunities and avoidable errors.
How to avoid it:
Find a network of people who you can trust and who will guide you through the mysteries of accounting and finance. It may include an accountant, tax advisor, or financial planner.
8. Non-MSM Compliance With Tax Laws
Tax legislation, particularly for startups, is one of the biggest issues that should particularly interest organizations and businesses in Santa Cruz County. Its violation might lead to certain severe penalties, audits, or, in the worst-case scenario, the closure of your business.
For instance, companies managing local taxes such as TOT (Turnover Tax) or certain environmental compliance fees often face significant challenges in Santa Cruz County. Most startups lack the knowledge of correct filing duration, inadequate taxes, or inaccurate remittance of taxes, more so when the company is expanding or entering other regions.
How to avoid it
It’s essential to identify the relevant taxation requirements and understand the specific tax obligations for your business in Santa Cruz County and beyond. This includes details of corporation taxes, sale taxes, payroll taxes, and any other local laws, such as county license fees. Using tax software to identify the expiry of tax filings and estimate payable taxes is important.
The other method is requesting professional help; hiring a specific tax consultant aligned with Santa Cruz County laws is possible. They can assist your business in understanding how to avoid violation of legal requirements about local incentives like the new California Small Business Tax Relief Program to maximize your chances at new startups.
Final Thoughts
When running a startup, accounting may not be glamorous, but it’s key. By avoiding these common mistakes, you can set your business on a solid financial foundation and focus on what you do best: being a startup, building, innovating, and growing it.