We’ve all seen startup companies flourish, and we’ve all seen them fail. You’ve probably noticed that success or failure is often based on a company’s financial situation. By “financial situation” I don’t necessarily mean just how much money you do or don’t have, but also how you track it, where you spend it, your expectations, and so on.
There is much more to a business than having a good product or service and talented staff. You must have a solid financial plan and good accounting practices in place. With that in mind, here are 12 do’s and don’ts every entrepreneur should consider when starting a company.
- DO keep your business and personal finances separate.
It’s not fun to sit at a bank for hours on end, but it is important to open a separate business checking account. If you are capable, you should also open or dedicate one credit card to the business as well. If you start off with your accounts combined, there will come a day when you need to unravel the two. This is not only costly and inconvenient, it’s also extremely time consuming and takes you away from the work that really matters.
- DON’T fall behind on the bookkeeping.
If you don’t keep your bookkeeping current, errors will accrue as the “trail goes cold.” That transaction you thought you’d remember to input in a week turns into a month, and then a year, and the details have long since been forgotten. Once you fall behind, catching up can seem impossible and will, once again, take you away from doing the work that will get your business to the next level. Not to mention that if you know you are falling behind, you will worry about it. Worry will only distract you from the bigger picture, allowing more room for more errors and potential failure.
- DON’T assume your bookkeeper or accountant knows as much as you do about a transaction.
It’s crazy, but, they can’t read your mind. With that being said, communication is key. If you aren’t giving them the full information needed to properly input your transactions, they could make incorrect assumptions and take your finances off track. You also want to review their work. They do their best, but it is not uncommon for items to be misinterpreted or for them to make mistakes. After all, accountants are only human.
- DON’T ignore the financials just because it’s hard.
It is crucial that you take the time to understand your financials and, above all, don’t be afraid to ask for help. The more questions you ask, the more explanations you will receive, and over time the numbers will start to make more sense. Set aside a few hours each month to devote to the review of your financials. If you can’t get an expert to join you, log your questions and follow up with them.
- DO prepare a budget forecast.
Budgeting is essential in writing a business plan. Without a business history, new and emerging businesses need to present a convincing business plan when raising capital. The best option is a 12 month rolling budget, adding a new month as each month passes. Your budget can also be adjusted to become a rolling 12 month cash flow projection. Always remember: a coherent, realistic budget forecast is an essential component of any business plan, but even more so for a start-up.
- DON’T undervalue your bookkeeper or accountant.
Often business owners wonder, “Where did all of the profit or money go?” When that happens, simply call your bookkeeper or accountant. They will have the answer 99% of the time, and can show you what happened to your funds. This will allow you to see where your money is being spent—and sometimes wasted.
- DON’T think that you are “above” getting down into the numbers.
The best new businesses, large or small, keep tight financial controls and understand where the revenue comes from and where the expenses are going. Monitoring your books with precision will not only help you understand the flow of the business, it will also allow less room for error. One dollar here and five dollars there can add up overtime.
- DO understand your costs.
Take the time to figure out why costs change. Doing so won’t make you a tight wad, it will make you successful. If you can confidently explain why you spend “x” amount of dollars on one particular product while cutting back on another, you will be able to make financial decisions in the future that could make or break you. Wasting money is not an option in a startup.
- DO have a good bookkeeper & stay in touch with your CPA.
If you don’t understand bookkeeping and accounting, how can you effectively manage it? Earlier I told you to understand your financials, but I that doesn’t mean you have to become the expert…that is what your bookkeeper and accountant are for. Stay in touch with your CPA and have them periodically review your financials. It can make a world of difference. We aren’t only in the office on April 15th, I promise.
- DO understand that cheap is always more expensive.
Say what? That accounting class your neighbor took in college doesn’t make them an expert and the five months your mom worked in an accounting firm doesn’t make her a bookkeeper. If you put your financials in the wrong hands in order to save money, chances are they won’t be done right and the cost of fixing them will drastically exceed what you originally wanted to pay. You get what you pay for in all aspects of life.
- DO realize that poor financial reporting makes lenders and investors lose confidence.
I have literally overheard a lender ask a business owner if they knew “anything” about their business’s finances when they were receiving the projections for a loan. Don’t be that person. Chances are that loan will fall through and you’ll be back at square one. Impress the people who want to help you succeed. After all, part of your future is in their hands.
- DO have a good bookkeeper and accountant.
Am I aware that I am repeating myself? Yes. Yes I am. But I can’t stress this enough: DON’T FALL BEHIND. Confirming that your financials are in good hands will make your life easier and will help to ensure the success of your business all while keeping excess costs to fix your financials at bay.
If you follow the 12 accounting do’s and don’ts outlined above you’ll be off to a great start with your new business. Solid accounting processes and disciplined financial practices—together with your brilliant ideas and exceptional employees—will ensure a strong future for your company. No matter what challenges and upheavals you face as your business grows, make sure you stay on top of your bookkeeping and accounting. It’s worth every bit of the time and money you invest.