Looking to begin funding rounds for your startup? Congratulations! You have made it farther than most – you have a great idea, you have likely assembled a great team and you have an established vision for how your product or service will change the marketplace. It is an exciting and deeply rewarding experience for any entrepreneur – but securing funding for your startup is a major hurdle you must still clear before truly getting yourself off the ground.
To attract investor money, you are going to need to prove your idea and your business are both solvent – and this involves being able to show a potential investor your books. Sound easy? Well, the truth is it may be harder than you think to keep your records clean and straight.
Read on for more information about the dangers of inaccurate accounting practices. You will want to get ahead of these problems to avoid having your startup sink before it has the chance to get off the ground:
What Do Investors Look For?
To prepare for an investor it is important to think like an investor. The number one question any investor asks of their potential investments is “What is the risk?” and “What is the market size?”
Mitigating risk and going after a big market has to be your priority as you are trying to get your business off the ground, and the top factor that influences risk is, unsurprisingly, money. Your books provide a snapshot of your company's financial viability. Without good records, that snapshot will be out of focus and could alarm an otherwise interested investor.
How Does Inaccurate Accounting Happen?
As a new company, it is unsurprising that many startups run into some trouble as they are figuring out how to balance their books. You will want to get ahead of the curve in that respect, and one important strategy in this field is to understand where people typically go wrong.
Bad record-keeping practices among startups are, unfortunately, all too common. Some typical mistakes made by startups when getting started with setting up accounting include:
Not accounting for SaaS spend properly. You may be used to the cash accounting process, but if you are a technology company, you are going to want to implement accrual accounting in your records. All investors will want GAAP compliant accounting records. If you are a CEO/Owner of your Company, you may not have time to do this, so getting an expert involved must be a priority.
Not properly separating personal and business finances. One of the worst mistakes that startup owners can make is failing to have separate bank accounts for their business and personal finances. Having just one bank account will ultimately make it very difficult to track specific entries, particularly when preparing taxes and trying to claim business tax benefits.
Not properly managing petty cash. It can be easy to lose track of petty cash, or the small amounts of money every business needs for minute daily transactions. You should know that even small amounts of money add up – it is important to include every dollar you spend on your records. Invest in a system to take care of this.
Getting confused about taxes. Taxes are not just something you need to worry about at the end of the fiscal year. Many owners of startup companies overlook other critical tax payments like payroll and sales tax, or maybe they do not understand the differences between employees and independent contractors. If you fail to accurately calculate and pay the taxes you owe, you can be held liable and be subject to expensive fines.
Trying to do everything by yourself. As an entrepreneur, it can be tempting to feel as though you can handle it all. You are ambitious, smart and driven – why wouldn’t you be able to keep your own books? Maybe you do not quite have the help you need in general, but you should not skimp out on assistance with your record keeping. It is too crucial.
Avoid these pitfalls. Schedule a free consultation call with Josh Hall, founder of J. Hall & Company.
What are the Problems Associated with Poor Accounting Habits?
All investments are a little risky – every seasoned investor knows that. Nevertheless, keeping your books clean and organized can help give a potential investor peace of mind and grow some trust. Inaccurate bookkeeping results in inaccurate reports about your cash flow. This can turn off a potential investor quickly.
Mistakes happen, but as the owner of a small company, you need to appreciate that seemingly minor mistakes can end up causing serious financial damage for your bottom line and, ultimately, your future. Big corporations have large banks and accounts responsible for taking care of mistakes, but for you, accounting missteps can have larger consequences.
Clean, concise, easy-to-read financial reports are a sure sign to investors that you are not trying to hide anything from them during these early stages. When investors come on board, they will want to maintain a strong relationship with you and to work together as partners. Sharing financial data with investors in a transparent way extends the invitation for partnership. It implies trust and willingness to let them into the process.
If you are having trouble with your accounting, or are just sick of doing it on a daily/weekly/monthly basis, the team at J. Hall & Company is here to help. We offer a value priced accounting service to take the work off your plate. Schedule a free initial consultation call with Josh Hall here.