Five of the biggest mistakes startups make with their accounting

Five of the biggest mistakes startups make with their accounting

Avoid startup accounting pitfalls! Discover common traps and how to steer clear for financial success.

By Austen Legler ・ 4 min read
Startups and Business Growth

You built this incredible thing. People love it, and you’re making waves. Adoption is increasing, the numbers are trending upward, and there’s talk of investors putting some serious cash into the company. This is the perfect storm for many startup founders, a point they’ve dreamt about. 

But when it comes to accounting, it’s a black hole - this is the place where that overarching vision can fall flat. Whereas when it comes to finding the most lethal individual contributors for the various needs of the product or service, those roles are filled immediately. But when it’s accounting’s turn sometimes, a founder tries to find ways to duct tape the problem and move it down the road. This is a big mistake. 

Startups fail. All the time. Go to cities like Austin, Seattle, or San Francisco, and you’ll see companies that were once red hot that are now a broken shell of their former “potential unicorn” status. And what’s the number one reason startups fail? Money. They run out of cash. Bye bye runway.

Founders must grasp the importance of one truth: accurate financial inputs achieve long-term success. Here’s the thing, though, running out of cash doesn’t mean your business is failing, and most companies don’t turn a profit until at least three years after launch. (Netflix still loses money.)

We’ve seen many companies doing many cool and innovative things, and we’ve also seen a few companies fail. We’ve created a comprehensive list of the things a startup needs to do if they want to keep business booming.

Your payroll process is a mess

This is one of those times where it’s not wise to let an old friend handle your books because they took a few accounting classes back in the day. Don’t go cheap – hire a payroll company to help manage deductions and how to set employment and payroll taxes.

Professionals should handle these things. Failing to do this could cause problems for business and personal taxes, and then there’s a remote workforce whose taxes may not be the same as where you’re located. This also rings true for auditing. You don’t want to get audited because if you’re balancing the books in an Excel spreadsheet, there’s a high chance for error.

You over-shot your revenue projections

We get it. People are optimistic, and it’s hard not to see the world with rose-colored glasses when stuff is going well. Who doesn’t get excited about many zeros in a bank account? 

When you’re cash planning, you need to be as realistic. What’s the actual length of your runway? Aggressive revenue forecasts for potential investors are meant to be optimistic; these show the possible return opportunity. Internally, revenue forecasts should be conservative. You don’t want to fall short because your numbers were too aggressive.

Also, revenue does not equal cash collections. If it takes 30 days for the cash to hit your account, you must include that timeline for Accounts Receivable. 

Your financial data is wrong

Fundraising is a tough gig. Founders obsess about the preparation of raising the money, but what happens when the money’s raised? 

Keep your financials realistic because what seemed like a clear forecast a few months back may not be what works today. You need to track the data of how the money looks realistically by annually comparing forecasted cash to actual cash within the correct variances. 

If cash is significantly lower than expected, you need to plan around this, not where there’s potential. 

You didn’t plan for enough runway 

Founders should always plan around a four-to-six-month buffer for fundraising. Often, a founder plans around potential and projections via customer validation data and market research. There are a lot of unknowns when it comes to finding investors and raising cash, and fundraising takes months. Don’t be too brazen; plan for cash accordingly and set a buffer equal to two years’ worth of exercisable money. 

You're not working with professionals 

Look, we’re not trying to make this about us. But, if you’re a startup founder, don’t try to cram your financials into a spreadsheet. First, it’s a bad idea for accounting purposes, but secondly, any investor will run for the hills if they see that as a means of keeping track of large sums of money. It’s crucial to know what taxes you must pay, how and where you can save money (like the R&D tax credit) or how to set your payment basis in the best way that works for the company’s long-term future. 

Don’t go to a lawyer from the back of the phonebook; they’ll only cost more in the long run. Do your homework and find a company that sees your future and can help grow your plans holistically.

TaxTaker specializes in R&D Tax Credit and the Employee Retention Tax Credits - if you haven't claimed these, let's see if you qualify!

About the author

Austen Legler
Head of Partnerships

Austen Legler, an experienced marketer and sales professional, has worked with fortune 500 companies, startups, and more. As TaxTaker's Head of Partnerships, he leads the partnership strategy and is focused on building out TaxTaker's partner ecosystem.

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