10 accounting mistakes for start-ups to avoid

Start-up business accounting is critical because you’re most likely operating your new business on a shoestring budget. Potential investors will want to know where their money is going, so keeping clean, clear books provides a wealth of information about your business, helping you spot inefficiencies, manage spending, and much more.

Back-office processes like accounting are often last on the list for most new businesses. Before getting to financial record-keeping, most usually prioritise other areas like figuring out products or services, pricing, payroll, and many other things.

However, it’s only a matter of time because any business that wants to survive has to have an accounting plan – and the sooner, the better. Although founders should always understand accounting basics, goals can range from hiring a professional, collecting receipts smoothly, digitising documents, automation, and generally reducing errors from the start, amongst other things.

Start-up accounting shouldn’t take a long time to implement, and it doesn’t have to be overly complex. You will minimise the inevitable risk of making mistakes in your accounting journey with good, smooth processes in place.

Here are ten common accounting mistakes that start-ups should avoid making:

1. Starting too late

This is perhaps the most common, concerning, and dire mistake that start-ups make. There are numerous benefits that your new business stands to gain from clear books. The most important benefit is the wealth of information about your own business. Clear books are a great way to spot inefficiencies and areas to reduce (or increase) spending.

If you want to claim tax relief, you’ll also need to be able to prove where your costs are going. So, getting your accounting done right from the start is critical. Bookkeeping is one of those tasks where if you do a little bit every day, you will always be in control.

2. Storing everything in spreadsheets

The beauty of accounting today is that it is made much easier through various online tools and automation. Using spreadsheets can be another complex, manual, and tedious process for you or your business, while electronic bookkeeping systems are much more convenient.

Some spreadsheet disadvantages include time consumption, lack of collaboration, vulnerability to costly human errors, inability to make quick decisions about your deals, inconvenience for remote working, and potential to lose valuable data.

There are, however, numerous online accounting systems and tools available, including Sage Business Cloud Accounting. You can start with a free trial or opt for the affordable entry-level package that grows with your business. Modern software unlocks the full potential of accounting and finance teams. They can now quickly move past many of the slow, tedious manual tasks they’re often forced to endure.

There are also numerous benefits of accounting software, including direct bank feeds, which eliminate manual entry and errors, integration into SARS for automated VAT filing and compliance, and easy, professional invoicing.

3. Not staying on top of paperwork

It is impossible to overstate the necessity of collecting and storing company expense data and keeping an up-to-date general ledger. Not staying on top of the paperwork (and storing your receipts in a shoebox) can be a hurdle, particularly during an audit where everything needs to be in order. So, digitising and keeping records like receipts, bank statements, bills, invoices, tax returns, etc., for at least three years is advisable.

4. Not hiring a professional when you grow

Not getting a professional accountant once your business starts growing can lead to numerous challenges. Naturally, accountants do accounting, but in start-ups, these could be outsourced professionals or simply the founders taking responsibility for the books themselves if they have a thorough understanding of things like balance sheets, general ledgers, tax returns, and financial statements. Your priorities will expand as your business grows, so you’ll save a lot of time, hassle, and money outsourcing the books.

5. Not tracking payroll

Tracking your payroll is crucial, even if you have only one employee. Payroll systems manage everything having to do with the process of paying employees and filing employment taxes. Without the right system, this could be a dreary process, which is why it’s advisable to use an affordable, simple, reliable, and flexible online payroll system such as Sage Business Cloud Payroll.

Keeping track of hours, calculating wages, withholding taxes and other deductions, printing and delivering checks, and paying taxes can all be done with ease.

6. Not keeping track of tax expenses

You should keep records of expenses that you can claim from SARS, as well as keeping up with your tax filings. VAT submissions can be an accounting headache. Staring at a manually compiled submission for hours, searching for the wayward human error that keeps creeping in can be frustrating.

One great alternative would be to consider automated solutions, like the VAT 201 feature in Sage Accounting Accountants Edition. A solution like this revolutionises submissions, streamlines compliance, and reduces the need for manual data entry for accountants and their customers.

7. Not separating bank accounts

Apart from leading to a highly messy record-keeping process, not having separate business and personal bank accounts can ruin your business altogether. This is one error every start-up should avoid because you want to treat your business as an entirely separate entity to yourself.

When you start a business, the first step is to open a business bank account and run all income and expenditures through this account.

8. Spending on credit cards

After getting separate accounts, always try to avoid using your company credit card for small expenses. This creates a tedious record-keeping process because reconciling company cards can be a lot of work.

It’s also difficult to track payments in real-time because you usually have to wait for a statement at the end of the month and then figure out who used the card for what.

Using personal employee debit cards is advisable because they have each employee’s name on them, and you can set limits and spending rules. The primary benefit is that you always know who made a payment, and you can monitor these in real-time from an app.

9. Not paying electronically

If you pay by electronic transfer, credit card, or debit card, your bank statement will include a permanent record of the transaction, including the date, amount, and recipient’s name. This eliminates the risk of losing your financial records.

Smart payment methods and digitised documents remove a lot of human intervention, reducing human error. And that means a lot less time at the end of the month trying to figure out why the numbers don’t balance.

10. Not organising documents sequentially

As simple as it may sound, failing to arrange your books in an orderly manner can lead to disaster. You will be more organised if sales invoices are numbered sequentially, for example. It also allows you to keep track of when bills should be paid by, allowing you to set up an effective strategy for following up on outstanding invoices. Having precise and up-to-date financial information about your company will enable you to assess its performance and forecast and address cash flow issues.