More than 90% of business owners surveyed, cited bookkeeping and a lack of regular financial statements as their biggest accounting challenge. As business owners, we all know the importance of having easy access to relevant financial information, but oftentimes, the systems necessary aren’t put in place before nice-to-haves become must-haves.
After years of helping entrepreneurs solve this specific challenge, we’ve compiled a list of the most common mistakes business owners make in organizing their accounting and finance operations – as well as ways to avoid them.
1. No Clear Revenue or Cost Models
Sometimes first-time entrepreneurs fall in love with an idea and skip (or ignore altogether) the important steps in evaluating the financial feasibility of a business. At DCC Accounting, we help clients formalize revenue models, understand unit economics, validate cost margins, and build projections.
Successful entrepreneurs understand how to effectively research, strategize, and execute. Getting some market validation before building out expensive infrastructure is absolutely a worthwhile approach. But understanding the underlying mechanics of your business model, even if it isn’t in a fancy detailed business plan, is crucial. We believe that any big business investment should be coupled with a solid understanding of the full potential of the endeavor. The idea of hiring a team of experts may seem daunting, but with the right team on your side, financial analysis projects like these are often quick and relatively inexpensive.
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2. Waiting too long to operationalize accounting and finance
Why does it happen?
Entrepreneurs cite stress when having to hire people to manage areas where they lack experience or expertise. This delay can cause a build up of “operational debt” that will have to be corrected for down the road. In other cases, business owners might be waiting for, what feels like ‘the right time’, to bring on an outside firm or hire an employee internally.
Try this instead..
Finding mentors or advisors that can help you along your journey is one of the first places you can look for help. If you’ve got friends, family, or former colleagues who are also operating a businesses, reach out. Ask for recommendations. Consider adding domain experts to your management team. Take advantage of free demos and consultations. Find opportunities to network. Lots can be learned from sharing experiences, challenges, and insights with respected peers.
3. Not investing in the right software
Quickbooks (or similar accounting software) can cost thousands of dollars per year, depending on your business. It’s no wonder why some entrepreneurs postpone investing in accounting solutions. Building your accounting function in a way that doesn’t scale could lead to larger costs down the road should you have to reengineer your accounting setup.
What to do?
Research. There is no perfect solution, but there are solutions for every budget, company size, and unique set of needs. When evaluating software, establish a list of outcomes you are looking to achieve. Schedule demos and ask questions. The right software can save you hundreds of hours per year.
In addition to investing in the right software, you’ll also want to consider forming a relationship with a trusted accounting professional who can help you navigate financial decision making as your business grows and gets more complex.
4. Not setting the right financial indicators and a timeframe to track them
With financial data being tracked more accurately, the next thing to set up would be financial indicators.
Financial reports can take time to prepare and setting aside time every single month to analyze them may prove impossible. Setting up financial indicators on the other hand, markers that help measure business results within a specific time period, might prove extremely valuable. While accounting reports typically detail all of the data, financial indicators are your business’s most important data points
A restaurant operator for instance might closely track the establishment’s total orders over the course of a day or a week. Even if the business owner does not have a complete picture of every sale and expense, their point-of-sale system may have the ability to report on total orders, as well as whether they are increasing or decreasing. Multiplying the total number of orders by the average order value would provide a quick revenue snapshot with just two key indicators.
5. Failing to Consider Taxes
What it means?
Consult a CPA who can weigh all options relative to your personal situation. Is running your business as a sole proprietorship the right strategy? Should you be a C-Corp or an S-Corp? Am I more protected if I set up an LLC? What are the tax ramifications of these decisions?
The answers depend on various factors, but you can find your optimal path by sharing your goals, and financial situation with the right professional and understanding your options.
Owning a business is a journey that comes with both risks and rewards. Understanding how to balance the two, learning from mistakes others have made, and putting the right systems, people, and processes in place can be your key to business success!