12 Accounting Mistakes New Entrepreneurs Often Make

A new business will not survive long if it does not have solid cash flow and a good accounting system. Unfortunately, some of the most common financial problems stem from simple mistakes new business owners can make when they first need to keep the books.

Fortunately, there are ways to avoid or fix most of these common mistakes and save your company’s profits. To that end, a panel of members of the Young Entrepreneur Council (YEC) answered the following question:

“What is an accounting mistake new entrepreneurs might make, and why? How can they fix it?”

Read on for their insights.

1. Focus on Total Revenue

“Note the actual profit and cash flow. Many new entrepreneurs focus on the total income coming in, but once you factor in the cost of goods, staff, fixed costs, etc., the net profit for the business can be very different from the income coming in. ~ Lisa Song Sutton, Sin City Cupcakes

2. Struggling with Classifications

“New entrepreneurs sometimes have trouble categorizing purchases as personal or business. As a result, leaders may have to pay more or less taxes. This number may vary based on the type of error. If you’re not sure how to classify something, it might be time to call a professional accountant to keep your finances on track. ~ Chris Christoff, MonsterInsights

3. Not hiring outside help

“Bookkeeping can make or break your business. Budgeting monthly expenses, bookkeeping, analyzing profit and cash flow statements, and financial planning are critical, detail-oriented tasks that require a lot of attention. If accounting is not your area of ​​expertise, you need outside help quickly. Hire a professional who can focus on these activities while keeping you busy and building the business better.” ~ Brian David Crane, spread great ideas

4. Ignoring the difference between cash flow and profit

“The biggest accounting mistake many new businesses make is ignoring the differences between cash flow and profit. You can sell a product for $1,500, but what if the buyer doesn’t make the payment on time? In that case, your accounting will yield a profit, but you may not have the money despite the profit you have made. So keep a close eye on your sales versus spend data.” ~ Josh Kohlbach, Wholesale Suite

5. Reporting on a cash basis instead of an accrual basis

“An accounting mistake that business owners often make is reporting on a cash versus accrual basis. A cash basis means when money is received or spent; accruals for when the sale or expense occurs. If you plan to sell your business or even acquire financing in the future, advisors only look at the imputation basis.” ~ Jessica Fialkovich, Exit Factor

6. Not Logging Expenses and Deposits

“The biggest mistake entrepreneurs make is not recording expenses and deposits. That makes it difficult to reconcile the books at the end of the week or the end of the month. It also makes it challenging if the IRS or your tax accountant starts asking questions.” ~ Baruch Labunski, Rank Secure

7. Failing to Maintain an Emergency Fund

“One accounting mistake most new businesses make is not holding an emergency fund. Emergency funds can help you bridge the gap between the temporary shutdown of your business and its full bankruptcy. So start depositing an amount separately as an emergency fund.” ~ Thomas Griffin, Optin Monster

8. Forgotten Upcoming Taxes

“One accounting mistake new entrepreneurs can make is not keeping track of upcoming taxes. It’s possible to estimate how much money you’ll make and put money aside for taxes, but it’s still important to keep track of when they’re due. If you don’t pay your taxes on time, you could be charged interest and penalties.” ~ Blair Williams, MemberPress

9. Underestimating Expenses and Overestimating Revenue

“New entrepreneurs can make accounting mistakes due to a lack of experience or knowledge. They may not know how to calculate the correct tax rates or they may not be aware of different types of taxes. The most common mistake is underestimating their monthly expenses and overestimating their monthly income. This leads to underinvestment in the company and ultimately bankruptcy.” ~ Kristin Kimberly Marquet, Marquet Media, LLC

10. Combining Business and Personal Purchases

“This is understandable for starting entrepreneurs. You go to the store to pick up office supplies, then add a few last-minute home purchases to the same transaction. However, this can cause major headaches at tax time and you can easily miss out on an expense that could be deductible. Always use a separate business and personal account for this.” ~ Shu Saito, all filters

11. Not taking small expenses into account

“One of the most common accounting mistakes new business owners make is not accounting for all expenses, especially the small ones. This can add up quickly and put your company in a difficult financial position. To avoid this, keep track of all your expenses, no matter how small, from the start. That will help you keep your finances in order and keep the business going.” ~ Tonika Bruce, Lead Nice, Inc.

12. Forgetting to keep an eye on everything

“A common accounting mistake new entrepreneurs make is not keeping a close eye on their finances. This can lead to cash flow problems and other financial problems later on. It is important to learn the basics of reading financial statements and tracking the progress of your business so that you can avoid this mistake. ~ Syed Balkhi, WP Beginner

Image: Depositphotos

This post 12 Accounting Mistakes New Entrepreneurs Often Make was original published at “https://smallbiztrends.com/2022/07/accounting-mistakes-new-business-owners-make.html”

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