One of the biggest mistakes that start ups can make when they are starting is not tracking expenses and income carefully. Whether due to an influx of cash or lack of financial planning, oftentimes the looseness of early accounting procedures are insufficient to keep finances in order. According to New Century Financial (www.newcenturyfinancial.com), having a good idea of cash on hand versus real or expected debt will save you countless headaches later.
Be Ready Before You Need It
Oftentimes small businesses really begin establishing accounting management best practices with the hiring of a Chief Financial Officer, which usually coincides with a recognized need to have accounting management in places. A study of start up companies from the Stanford Center of Entrepreneurial Studies found that companies which are funded by venture capital are often more likely to put account management in place than those who start with private funding– because VC’s encourage sound financial practice from the outset. Meanwhile, companies that have such financial controls in place show higher employment and revenue growth rates.
Raising Money Intelligently: Think Lean When Raising Capital
One of the biggest mistakes start ups make when trying to raise capital is a lack of planning before trying to pitch for capital. Mistakes often include raising capital when bootstrapping will work fine, not having a clear objective of where money is going, not having a realistic assessment of growth potential, and other mistakes such as those listed here. According to New Century Financial (www.newcenturyfinancial.com), this is where the spectre of flying blind (as with accounting) comes back to haunt a nascent start up– without a clear understanding of both direct goals and objectives as well as a road map detailing how to get from Point A to Point B, start ups will find it difficult to even acquire funding.
In short, if you can’t demonstrate that you know how to work with your existing capital, you’ll have an even harder time trying to prove that you know how to work with more capital.
Your Company’s Money is Your Company’s First, Yours Second
A huge mistake smaller startups, sometimes run by one or two people, often make is that they confuse money that their company made with their own money (which is sort of true, but not exactly). Setting up a company’s finances this way is a recipe for disaster. Even regardless of the type of legal setup your company is using (LLC’s and above will require stringent financials even for tax purposes) it’s bad practice to use company money for personal expenses, especially if the person doing it isn’t invested in taking care of their personal accounting as much as their company’s. This can lead to “black holes” of money unaccounted for as well as other problems.
Taking a different approach in this scenario, however, requires a little bit of self-discipline and honesty. If you’re dipping into your company’s funds while taking a paycheck, a smarter move is to simply increase your paycheck. Not only will this make things easier for an accountant later, it will give you a realistic view of the health of your company.
Accurate Accounting: It Makes All the Difference
Everything boils down to accurate accounting when it comes to your start up. But, as noted above, accurate accounting isn’t just about keeping a balance sheet. It’s about maintaining fiscal responsibility which will help you run a more efficient company and increase your corporate and personal productivity.