One of the most important aspects of running a business is practising good money management. Staying on top of finances is just as crucial for young firms as it is for established companies, helping founders, entrepreneurs, business leaders and managers assess the financial health of their companies, attract investors, identify growth opportunities and make more informed business decisions.
However, many professionals mistakenly believe that accounting for startups and small and medium-sized enterprises (SMEs) doesn’t require much effort or implication, which is why they often put accounting tasks on the back burner and focus more on developing their products and services instead.
In reality, things are not as simple as it seems. Although the financial requirements of a startup are less complex than those of big companies and corporations, there are unique accounting hurdles that one has to be aware of. Startups are not smaller versions of large businesses; they are completely different entities, with specific structures and characteristics, and that means their accounting needs and challenges also differ.
For example, startups have fewer resources at their disposal and a lower tolerance for financial errors; they also develop at a faster rate and it’s more difficult for them to acquire funding. All these aspects can pose numerous obstacles when it comes to bookkeeping and accounting. So, if you’re thinking about launching a startup or if you’re already running one, here are some of the most common accounting challenges to expect and how to handle them.
Maintaining accurate financial records
From sales and expenses to loans, debts, receipts and invoices, startups are flooded with an overwhelming amount of financial data that they need to record and process. And the data volume continues to increase as the startups grow. With the majority of startup owners having to wear many hats and focus on multiple tasks daily, many of these documents can get lost along the way and create chaos over time.
Poor financial record-keeping can lead to inaccurate financial reports, late payments, compliance issues, time inefficiencies, loss of productivity and even security risks. If financial documents containing sensitive information are not stored and managed properly, the possibility of falling victim to a data breach increases considerably. Then clients can claim compensation for the damages they’ve suffered, as you can read at https://www.databreachclaims.org.uk.
All these potential issues can be addressed by setting up a solid accounting system that can help you stay organised and maintain accurate financial records. An accounting software keeps all your data and documents in one place, ensuring quick access to them, and offers a range of features that allow you to automate a variety of accounting tasks and streamline the entire process.
Ensuring a healthy cash flow
Startups don’t usually have a solid financial foundation and can’t afford to make mistakes if they want to keep afloat and grow. So, they need to make the most of the resources they have and this implies good cash flow management. Coming up with an innovative product or service means nothing if your cash outflows surpass your inflows as you’ll eventually run out of money to cover your expenses.
So, how can you avoid this unfortunate situation? Planning ahead can help you maintain a healthy cash flow without having to resort to a loan or tap into your personal savings to restore the balance. You need to look at your company’s past performance in order to create a cash flow forecast and estimate the cash coming in and going out of your startup in the future. Since these predictions are not always accurate and unforeseen circumstances may arise, having an emergency fund in place can help you get through difficult times.
Managing payroll
Startups might be small but that doesn’t mean their staff only consists of one person or a handful of people. Some startups have large teams working behind the scenes, and all these employees need to be paid on time, otherwise you risk losing your workforce. This brings us to another common challenge, namely payroll management.
Some equate payroll with paying wages, but there’s more to it than compensating employees for the work they’ve conducted over a certain period of time. Apart from calculating hours and wages, there are numerous other tasks involved in running payroll such as processing bonuses, calculating taxes and other deductions like insurance, retirement contributions, child support and so on.
Needless to say, the more employees you have, the more complicated your payroll gets, especially if you have a mixed workforce. That’s why it’s best to outsource payroll to a third-party provider instead of handling it in-house.
Staying on top of taxes
Taxes represent a real conundrum for all businesses, startups included. Tax legislation is so complex and ever-changing that navigating it can feel like a maze. This also means that tax mistakes like misclassifying workers, overlooking deductions, late filings or filing errors are quite common and can lead to all sorts of issues for businesses from fines and penalties to criminal charges.
Since understanding and managing taxes is a complicated issue, it’s best to seek support from a tax professional. An experienced accountant or tax professional can help you explore your options and advise you on the best strategies an all tax-related matters, so you can make sure your taxes are filed correctly and your startup is not running any risks. If you’re confident enough in your tax handling skills, you can use tax software to manage your tax obligations.
Wrapping up
Running a startup is by no means an easy endeavour and accounting challenges can make it all the more difficult for entrepreneurs to reach their goals. Fortunately, leveraging tech solutions and implementing robust accounting systems and practices can help you overcome these common challenges and increase your startup’s chances of success. In the end, no one should expect the process to be easy which is why proper preparation is required.
CAclubindia
