Common Financial Mistakes that Startups Make

startup mistakes

So you have decided to take the plunge and start you own business. Well that’s great. However, it is important to understand and keep track of your business finances. Book keeping is not an exercise to be carried out at the time of filing income tax returns. A successful business requires successful book keeping practice. While there are no set rules that every small business must follow (except as required by tax laws and industry specific laws), it is good to understand and follow the best practices in accounting.

Not seeking professional advice

Sure, your business may not be big enough to have an accounting team working full time. However, before you start your business, it is best to take a professional advice from a practicing Chartered Accountant (CA). A CA can guide you about the type of legal entity that you should float, the various books that need to be maintained, whether you will be liable for Income tax audits and about the important dates by which advance tax, income tax returns and other documents must be filed. You may also hire a CA to help you in some of these processes while you take care of day to day accounting.

Not making necessary registrations

This is linked to the first mistake. Because, often, startups don’t take professional advice, they don’t make necessary registrations. For example, if you are selling goods, you must take VAT registration. For services, service tax registration is necessary. Of course there are certain exceptions. Other registrations that may be required include Importer Exporter Code (IEC), Permanent Account Number (PAN), Professional Tax registration, Provident Fund and ESIC registrations. Check for other registrations that may be required in your state.

Not using a software

Maintaining expenses records in a dairy or a log book are things of the past. It is best to use some sort of software to help you with daily accounting needs. The most popular accounting software in India is Tally. However, you may not need it if your business is very small. Also there is a learning curve involved. Your CA can help you get all accounting entries done in Tally. Even maintaining the records in an excel sheet is better if Tally is a complicated software to work with.

Not using Credit Card/Cheque/Internet Banking

If you use your credit card, bank cheque or Internet banking for making payments, you automatically keep a record of your expenses. This comes handy at the time of finalizing your accounts and filing your income tax returns. Payments through cash not only have restrictions, they also leave no trail unless you keep a record of such transactions somewhere.

Not filing papers

Not filing important financial documents is one of the most important mistakes that startups make. It is important to make file your bank statements, payment receipts, credit card statements, purchase and sales invoices and other important financial documents. It comes in handy at the time of account finalization and audits.

Not understanding the difference between Profits and CashFlow

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 Cashflow. As a startup, you should prepare detailed cashflow statements on a month to month basis detailing the money that is coming in and going out. Keeping cashflows positive is key to running a business smoothly.


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1 Comment on Common Financial Mistakes that Startups Make

  1. Nobody starts business to become an accountant but basic accounting is a must for every entrepreneur. One of the most misunderstood concept in basic accounting is cashflow and profits. It would be good if you can elaborate more on this concept.

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