May 04, 2021
Accounting plays a key role in the smooth running of a business because it helps keep a track of all the incomes and expenditures, ensures adherence to the legal and tax compliances, provides the all-important financial information to the investors, and guides prudent business decisions. And yet, many companies and startups screw up with accounting, which, in several cases, have cost the companies big time.
Senior Resident Mentor at IIM Calcutta Innovation Park, Debapratim Das, talks about 6 common accounting mistakes made by startups and how to avoid them.
1. Mixing up individual and business finances
Always keep in mind that a founder/promoter and his startup are two different legal entities. Personal expenses and incomes must not therefore be mixed with startup expenses, else it will throw up a totally incorrect picture for the business.
2. Booking sales before actual delivery
Revenue should be booked only after the dispatch is completed and relevant invoice has been raised.
3. Not considering own remuneration as an element of cost
This understates the expenses and gives wrong ideas about the true profitability.
4. Not maintaining records and receipts
Record all transactions, no matter how small or insignificant. This includes cash transactions at your storefront and the receipts from your client dinner. Keeping a record will help you catch any accounting mistakes, capitalize on tax deduction opportunities, and be beneficial if an audit takes place.
5. Not attaching adequate attention to mandatory compliance
Startups often are the culprits of not filing papers with regulators within the stipulated time and such non-compliance can hit the reputation as well as the financials of the company very badly.
6. Not understanding the difference between profits and cash flow
Your business could be in profits and still left with no money to pay the bills. It is important to understand the difference between Profits and Cash flow. Prepare detailed cash flow statements on a month to month basis detailing the money that is coming in and going out. Keeping cash flows positive is key to running a business smoothly.