Common (and sometimes fatal) Accounting Mistakes
There are various challenges to deal with as an entrepreneur. This can be in regards to sales, investors, demanding customers, cash flow, competition, regulations and hiring. All of which are conducted under limited time and money. Studies have indicated that on average, 60% or more of businesses fail within the first 18 months. This is despite increasing capital from banks and investors, operating in a fast-growing market, and having customers.
IMPROPER BOOKKEEPING AND ACCOUNTING
Essentially, accounting records what goes in and out of a business such as sales and expenses. It can have detrimental effects on the business if not completed accurately. Accountants often say “if you can’t measure it, you can’t manage it”.
Entrepreneurs often focus on the more exciting stuff like goal-making, creating visions, marketing, fundraising, strategy, and product development. The accounting is often neglected which leaves records incomplete or outdated. This is challenging to fix over time. Therefore, implementing proper accounting software like Xero with clear budgets, policies and processes is a good starting point.
Maintaining a proper paper trail of all contracts, receipts, and documents in both a digital and physical copy is incredibly important. An accounting software package can ensure that this information is captured and recorded properly. Moreover, this makes audits or other compliance matters that come along, easy to complete.
HIGH BURN RATE
New businesses often have a “grow fast, grow big” mindset. Thus, they fall into the trap of taking on more costs than they can sustain. They may end up over-hiring, splurging on unnecessary equipment, having more inventory than they can sell, or being unable to pay back their loans. They tend to focus on capital expenditures and leave limited liquidity for operating expenses.
Every decision, even simple ones have a flow-on effect. For example, a decision to hire not only involves basic salary but incremental costs such as training, visa, deposits, insurance, gratuity, paid leave, office space etc. Inflation of 4-5% and VAT of 5% can also impact the numbers. Therefore, it is important to be frugal and focus on the essential items that will directly drive sales.
NOT INVOLVING OWNERS IN ACCOUNTING PROCESS
Owners not being involved with the accounting is another common mistake. As they believe they lack the knowledge. While accounting is a specialised skill. As an owner, there is no excuse not to know the basics. For instance, understanding key ratios, cash flow analysis, or reading financial statements is crucial. You can hire a part-time accountant or a virtual CFO to guide you. Alternatively, you can self-learn from platforms such as YouTube and Coursera who have fantastic and easy-to-follow video tutorials. An accounting package like Xero makes these reports easy to run, easy to understand, and they can be tailored specifically to the nuances of your business.
Pricing is a balancing act. You risk losing customers when a product or service is overpriced. Likewise, if it is overly discounted with gimmicky marketing, it loses money. If it is not appropriately priced, it ends up with limited or no profit margins. Additionally, a lack of understanding of costs incurred in running a business can be expensive. At the end of the day, you need your customers to keep your business running. Assessing the needs of your customer is important to ensure you price your product and service appropriately. That way, they will see value in what you have to offer.
A clear paper trail should be implemented to track bank statements or incoming or outcoming money. This can be made possible with appropriate periodic reconciliations.
MANAGING CASH FLOW
Managing cash flow is a crucial step in defining your ability to meet immediate and short-term commitments. A business can have chronic cash flow issues if there is no sync. For example, if your payment terms are 90 days of delivery, but your customers rarely pay on time, your suppliers demand 100% in advance and wages and other bills are payable monthly. Problems will occur regardless of if you are sitting on a huge sales pipeline. Thus, a proper cash flow forecast for 90 days is vital.
Entrepreneurs fail to answer basic questions such as “what are your expected sales in 3 years?” or “when do we break-even?”. These answers will be made clear with proper accounting.
While accounting is simply recording numbers, it is a vital step. If the numbers don’t add up, nothing else will!
HOW WE CAN HELP
If you would like help with your business, or simply want more information about our tax and accounting services, please do not hesitate in contacting us through this link. Our friendly accounting team are highly skilled in the setup and ongoing work of Xero and are more than happy to assist!
– 13 January 2021 –
In preparing this article, Praescius Financial Consultants NSW Pty Ltd, Praescius Financial Consultants NT Pty Ltd, Praescius Financial Consultants HB Pty Ltd and Praescius Financial Brisbane Pty Ltd have not considered your personal circumstances, goals or objectives; as such the information, commentary and assertions made within this article may not be suitable to you. Please seek personal financial advice prior to acting on this information, or making a decision regarding the choice of a financial product or strategy. Further information and disclosures can be found in our Financial Services Guide or by contacting us on the phone numbers provided.
Praescius Financial Consultants NSW Pty Ltd, Praescius Financial Consultants NT Pty Ltd, Praescius Financial Consultants HB Pty Ltd and Praescius Financial Brisbane Pty Ltd are authorised representatives of Praescius Financial Holdings Pty Ltd ABN 14 610 960 980 AFSL 486455, 2a/57-59 Oxford Street, Bulimba Qld 4171.
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