Starting a new business is hard. Even for 'multi-preneurs', different business types, different products, heck, different years, mean you can never know everything. It can often seem like you're endlessly just trying something, seeing what happens, and then trying again.
Now, this is great for many things. But when it comes to your accounting (and therefore your ultimate financial success) - it's definitely better to be on track from as early as possible. In my opinion anyways.
So what if you can learn the important stuff a bit, well, quicker?
So learn from what many other new businesses have done wrong to build your business better, earlier.
Here I'm going to talk you through five of the most common accounting mistakes new businesses make, and what you can do to fix them or, ideally, to stop them from happening in the first place!
You can even get a free worksheet and workbook to help you understand your costs and plan for profit from the beginning if you join the DaM good business club.
Ready to find out what the top five accounting mistakes are? Here we go!
1. Not separating business and personal transactions
You are not your business.
Yes it may seem to take over your life (and you), particularly in the early days (months, years…) but you must keep a line between business and pleasure (what is that I hear you cry) OK then. You must keep a line between the business and you. Not only will keeping an accurate record of the business’s transactions separately to personal ones help you to ensure you are profitable, but it will also be important for things like tax returns to ensure you can claim the appropriate allowances.
As well as keeping transactions separately, you should keep a record of all transactions between yourself and the business. Think of yourself as a lender to the business (just like a bank) and so you need to keep a record of what you are investing in the business as one day you will want it back!
2. Not having a separate bank account
It is much easier to keep the line between personal and business expenditure and income if you have a separate bank account. It doesn’t necessarily have to be in the business name to start with (there are rules for companies depending on where you are - if in doubt ASK!), it could just be a simple second current account (with your current bank or a different one) or even some sort of easy access (and free) savings account (you’ll need to consider what functionality you need, but it doesn’t necessarily have to be a full business bank account to start with unless required by law).
The key objective here is the habit of keeping things separate, the ritual of managing the money separately and having separate bank records.
3. Not writing down everything as it happens (and instead only when cash comes in or goes out)
How often do you go through your purse and find a receipt for something you forgot you bought? How about finding a receipt in your ‘to file’ pile, but not actually remember what it as for? I’m sure it’s not just me!
You may think you’ll remember what you have purchased… but sometimes you, well, you just don’t! As such, it’s important to keep a record of transactions as they happen so you have a note of:
What you have purchased and why
Who you owe money to (credit purchases)
Who owes you money (credit sales)
Why you received money (was it money they owed you or for new sales?)
*TOP TIP: Record credit sales and credit purchases when the goods/services exchange hands, not just when the cash comes in or goes out. This gives you a better picture of your financial position - i.e. what you are owed and what you owe*
Now depending on your business model, and business size, some of these things may not be a problem. Yet. Part of the key of business success is building good financial habits that will make things more efficient and generally easier as you grow, because at that point there will be other things you want to focus your time and energy on.
It is important to write things down as they happen so that you can have good credit control (with getting money in from customers), and for ensuring you avoid late fees and a potential negative impact on your credit rating in relation to who you owe money to!
This recording of transactions is the ‘bookkeeping’ element of accounting and finance, and annoying as it is, it is the foundation of accounting success!
Not paying all the wages
How many of your employees work for free?
For many new businesses I’ve discovered it seems to be very often at least one… the business owner, i.e. you! I’m sure you didn’t start your business planning to work for free for the rest of your life…
Now, a common response is that "the business can’t afford it". But if it can’t afford to pay someone minimum wage for the hours they are working, then the business probably isn’t profitable and won't be profitable in the long term.
This is not about earning mega bucks from day one. And actually it’s not even about taking money out of the business as I understand that cash flow can be a concern particularly in the early days. But, if you can’t afford to pay yourself for at least some of your time, then you are not making enough money - so your prices are too low or other costs too high!
Not knowing how profitable they truly are
If you are not including all of your costs, you can never know if you are truly profitable. Your business needs to fully cost products and services - including direct and indirect costs - those relating specifically to the extra product as well as overheads (and owners wages!).
If you don’t have an accurate cost of your products, you can never know for sure whether you are charging enough money and whether you are actually profitable! There are two levels of profitability to look at, gross profit and net profit. Although a new business may not be profitable on a net profit basis from day one, as you wait to build volume and a client base for example, a business should ALWAYS be profitable on a gross profit basis, otherwise you will be doomed to failure!
Not sure how to work out whether you are profitable?
Download your free Plan for Profit workbook if you join the DaM good business club.
Join us in The Club and you can get access to exclusive advice, resources and support. For free. Because you know, #newbusinessneedsfreestuff - and I'm happy to help.