Entrepreneurs and startups are renowned for their culture of risk-taking – indeed, launching a successful business often rides on the willingness of small business owners to take risks. But this also increases the scope of stumbling into pitfalls and making mistakes, some of which can end up being the make or break of a business venture.

Of all the challenges facing entrepreneurs, one common obstacle regularly overlooked is the management of internal finances. While focusing on a company’s internal accounting is not something that naturally conjures excitement, this doesn’t mean it should be overlooked as a minor concern. In my experience, mistakes made by young companies when it comes to accounting can lead to significant long-term problems. Indeed, recent research by CB Insight identified poor cash management as the second most common reason as to why startups fail.  

I’ve worked hand in hand with small businesses to create and implement long-term growth strategies, and over the years, I’ve witnessed first-hand a few common mistakes business leaders make when managing their finances. So here is my accounting advice for those preparing to launch their own startup or are in the crucial formative years.

Separate your finances

Having a separate account for your personal and business finances sounds intuitive, but you’d be surprised at how many make the fatal error of not dividing their accounts.

Those striking out on their own as a sole trader or small business owner must ignore the calls of convenience, and instead create a separate business account before they start collecting revenue. Doing this from the beginning will offer a more accurate picture of the company’s financial health and make it much easier to manage financial flows in the long-term.

What’s more, by ignoring this crucial first step, business owners are overlooking software designed specifically to facilitate the account management of small businesses. Some accounts like Coconut, for instance, come with a simple cost analysis tool included; this is often more than enough to meet the needs of fledgling businesses and sole traders.

Manage your money matters

In a similar vein, it’s crucial for businesses to have a financial infrastructure set up from the get-go; never consider this to be a low priority. This means having a process in place to manage daily cash flow like expenses, earnings, and payroll – whether this is by relying on an accounting professional (which, due to budget restrictions, is often out reach for many startups), or else by enlisting the help of ready-made tech solutions.

Coming in at a fraction of the cost of hiring a professional, software solutions can take the pain out of bookkeeping. Precious time and resources that would otherwise be spent on micro finance tasks like managing invoices and monitoring outgoings can now be delegated to technology.

Many will not have heard of cloud-based software solutions like FreshBooks and Intuit QuickBooks, but for those who have not yet experimented with such software, I’d encouraged you to explore the benefits on offer. Most crucially, this new breed of online systems is hosted in the cloud, which means that business leaders and employees can all access and update data on a regular basis, from the comfort of their own smartphone or laptop. This ensures transparency and ease when it comes to managing business finances.

Get tax-ready

No one likes to think about the upcoming tax season, but it’s helpful to have some foresight and prepare your business as best you can in the lead-up to the yearly tax returns.

Once again, this doesn’t have to be an overly complicated or tedious process. By offering a clear overview of long-term business cash flows, the aforementioned cloud solutions can also be used to ensure your business is satisfying the necessary tax requirements.  

For instance, the first phase of Making Tax Digital came into force on 1 April 2019; at present, this new reform only applies to VAT-registered businesses with taxable turnover above £85,000 and requires them to submit taxes through digital records.

Regardless, this is reflective of a wider move by the government to do away with traditional time-consuming processes and encourage businesses to transfer online. For this reason, I would urge small businesses to do their due diligence and explore software solutions that could both meet their daily needs and help them stay ahead of the curve. A comprehensive list of solutions that have been approved for Making Tax Digital can be found here.  

Have a financial blanket

Not having a savings pot for unexpected expenses is a fatal mistake that many business leaders make. While you can budget and plan expenditures meticulously, the reality is that small businesses must be prepared for surprises to come their way in the form of unforeseen costs.

To mitigate against this, I would encourage businesses to put away money into a contingency fund should the time come. This will save you having to dip into your current business earnings, or even worse, your personal savings pot, to overcome the setback.

Be wary of incurring debt

Lastly, I would warn businesses of taking on more debt than they can handle. This relates closely to the previous point, as it can be hard not to do when you hit a bump in the road and need fast access to capital.

While putting business expenses on credit cards is a routine practice, it also has the potential to expose you to debt. Namely, due to their convenience, many business leaders fall into the trap of multiplying their expenses by incurring interest charges every time they don’t pay off their balance at the end of the specified time frame. To resist the urge and avoid this pitfall, it might be wise to stick to a debit card for business outgoings. I acknowledge that this is certainly not an exhaustive list of common challenges that business leaders face when it comes to finance. Nonetheless, I hope that these tips give an idea of the many ways that businesses can protect themselves from some of the common pitfalls made when it comes to accounting and financial management, and instead set themselves up for

By Nic Redfern, Finance Director, KnowYourMoney.co.uk