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The Three Most Common Accounting Mistakes Startups Make

Founders need to make strategic decisions for their company – and not get lost in the details. Nevertheless, they should make sure their accounting is taken care of. Otherwise, unnecessary follow-up costs and trouble with the tax authorities are guaranteed or even worse, investors are put off. Magnus Bilke, founder and CEO of DONE!Financials, explains the three most common accounting mistakes that founders make and how to avoid them.

Mistake No. 1: "I do the bookkeeping myself on the side"

When founders want to take care of every detail themselves, it usually goes wrong. Those who want to do the accounting "on the side" are distracted from more important issues. In addition, this leads to mistakes that eventually need to be corrected much later and with much more effort."A classic that causes a lot of manual rework are unallocated payments," says Magnus.

 If the bookkeeper has to take a deep dive weeks or even months later in order to get an understanding where the amounts came from and went to, this can consume an awful lot of time. After all, all bookings must be presented to the tax authorities in a digestible manner. In the worst-case scenario, receipts have to be sorted by hand and assigned to the correct financial transactions. This quickly adds up to many hours and days that the team would be better off using for more important matters.

 A common source of error is the blind spot for the external tax consultant’s office. "Tax consultants only care about what they receive from their client," warns the CEO of DONE!Financials. “What they don’t see can backfire on the company." Missing invoices often aren't noticed until the annual financial statements needs to be finalized.

"If missing invoices then have to be retrieved, the time required is immense," says Magnus. "At DONE!Financials, we have a lot of experience with this, because we've done this detective work for a number of clients already."

Founders can avoid this expense if they take care of accounting capacities right from the start. Relatively early in the start-up phase, it is a good idea to hire an inhouse bookkeeper.

Mistake No. 2: "It's okay if the financial plan roughly shows the direction"

A good financial plan is crucial for startups in all stages. Period. It costs a lot of time though, especially when founders take care of it on their own. Precious time that in consequence may lack somewhere else. Nonetheless, if founders decide to do it themselves, they should make it a priority it and pay a lot of attention to detail. Because if their financial plan only roughly outlines the expected business development and operates with speculative assumptions, they are putting the future of their company at risk.

The essential elements of the financial plan are: Sales and cost planning, a proper balance sheet, an overview of start-up and operating costs, an investment plan and the profitability calculation. It is also of upmost importance to have a reliable cash flow forecast, which shows at which point in time you are to expect to receive revenues. Another integral part of the financial plan is the financing plan, which displays all the sources of equity and debt capital your venture utilizes.

The financial plan must be updated regularly. On the one hand, it provides the coordinates that you use to manage your company. On the other hand, every potential investor will want to see precise figures before betting money on your company.

Founders need to understand the perspective of capital providers

"Unfortunately, we see it over and over again that founders draw up financial plans that look more like wishful thinking than realistic planning," says Magnus. "Professional capital providers immediately detect that sort of thing, and it can be the reason why they decide against an investment. Therefore, it's important to take into account what is important to investors."

An expert’s outside view can help startups take the perspective of the investor and avoid such mistakes.

Mistake No. 3: Wrong prioritization at the beginning

Everyone looks at the product in the startup phase, which of course is the most important thing. But sometimes this leads to an incorrect prioritization with serious consequences. “It’s not about something nice to have. I am speaking about meeting existing legal standards," Magnus comments.

When it comes to accounting, there are many legally binding rules to follow. Just one example are correct invoice addresses on the online portals. The experts of DONE! have experienced this several times in the practice. The effort of correction afterwards can be immense – as are the consequences if not.

But then there is more to it: After a relatively short time period, founders and investors usually want more specific evaluations from their accounting system. These can be key indicators, time series from the past for certain products, regional evaluations, or many other things. It depends on the type of business.

Sadly, it is often the case that at the onset faulty decisions were made that did not consider the possible requirements in the future. And the chosen set-up is not able to meet these new expectations. That is something worth avoiding:

“Set the priorities right at the beginning and lay the foundation for a legally compliant and efficient accounting”, Magnus says.

If you want to get in touch write Magnus an email: magnus@donefinancials.com