5 Financial Management Mistakes Startups Make

Effective financial management is the lifeblood of any business. And for new startups, having good financial management is a matter of survival. Pakistani startups that are unable to manage their finances and bookkeeping are often unable to witness healthy growth and profits.

 

Hence, bookkeeping, budgeting, and accounting are all necessary for monitoring your company’s financial health. It is a detail-oriented job that can be tricky to grasp, especially for new startups.

 

So, to help you out, here are the top 5 financial management mistakes to look out for:

 

Top 5 Financial Management Mistakes Startups Make

 

1. Mixing Personal Finances with Business Finances

This mistake can not be stressed upon enough. So many new startups make the grave mistake of mixing their personal funds with their business capital. Some even go as far as keeping their business finances in their personal bank account.

 

This not only causes a huge amount of confusion and muddled accounting statements, but it creates the huge risk of spending business money for personal uses, and vice versa. Most complicated of all, it creates a huge headache when it comes to filing taxes for your business.

 

Avoid this mistake: Create separate financial accounts for your business, starting from Day 1.

 

2. Using Single-Entry Bookkeeping

Accountants use double-entry bookkeeping, in which transactions are either debited or credited. This paints a clear picture of your company’s financial health, makes it easier to trace fraud, and allows for accurate tracking of finances. Moreover, with double-entry bookkeeping, you can immediately tell when there is an incorrect entry, as the debit and credit totals will not be balanced.

 

However, most small startups who are unfamiliar with accounting principles opt for a single-entry bookkeeping style. This is where all transactions, whether inflows or outflows, are recorded in a single account. The reason why doing this is harmful is that it causes messy bookkeeping. It also makes it very difficult to track when mistakes are made in the statements and makes fraud difficult to detect.

 

Avoid this mistake: Adopt a double-entry system early on. Get help from a knowledgeable accountant if you are unaware of the system.

 

3. Not Using Accrual-Based Accounting

Most new startups record what is known as “cash-based accounting”. This means that they only record transactions where actual cash is involved. For example, if a sale is made in February, but the customer does not pay until April, the business will only record the sale in April.

 

However, accrual-based accounting practices allow you to see the complete picture. It records account receivables and account payables, therefore allowing you to see the true position of your company. It gives you a heads-up for any expenses that you will need to eventually pay, and shows how many sales you are making regardless of whether customers pay through credit.

 

Avoid this mistake: Always consider accruals when recording transactions.

 

4. Not Paying Attention to Finances

Many entrepreneurs and new business owners have a million things to do. And for a lot of them, they are more focused on the product or service, rather than operations that are vital for the success of the startup.

 

Therefore, many new businesses make the grave mistake of ignoring their bookkeeping, accounting, and financial responsibilities. Or, they try to handle the books themselves, and are eventually unable to. Eventually, they end up with a huge pile of messy records, and no way to figure out what the company’s true financial position is.

 

Avoid this mistake: Find someone who can dedicate their time to maintaining accurate financial records for your startup.

 

5. Underestimating the Importance of Experts

The importance of bookkeeping, accounting, and financing is often overlooked. This is the downfall of many new Pakistani startups.

 

By underestimating the importance of experts, business owners allow financial records to be neglected, or incorrectly kept, until tax season comes along as they are left with a huge mess.On the other hand, taking help from experts early on can avoid any confusion, fraud, and tax grievances.

 

Avoid this mistake: Realize when you need help and don’t be afraid to consult bookkeeping experts.

 

Now that you understand the top 5 financial management mistakes to avoid, you can make wiser decisions for your businesses finances. For more help, contact us at Vixperts for a FREE Diagnosis of your Startup’s Financials today!

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