Avoid these 6 accounting mistakes

Effective financial management is crucial for business success; it serves as the fundamental principle for financial stability and facilitating growth. Accounting, financial management and tax management are often overlooked in the early stages of business.  Starting and scaling a business is crazy difficult…we get it!  

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However, your approach to financial management can significantly impact your business, especially when it comes to future capital raises, decision making and tax optimization.  

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Having worked with hundreds of startups and scaling digital businesses, we have come up with the six accounting & financial management mistakes that have the potential to derail your business and the corresponding insights on how to address such mistakes. 

1. Do not neglect the monthly financial close

A crucial aspect of effective accounting involves conducting monthly financial closures. Too often, scaling startups let a month slip by and then all of a sudden they are 6 months behind.  By hiring an internal bookkeeper or external cloud accounting firm, you can greatly reduce the risk of missing the month end close.

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This process includes reviewing each line on your balance sheet, identifying and correcting any errors, and publishing the results for management to review. As we say at Anomaly, “the balance sheet will never lie to you!”  By ensuring the founders have a reconciled balance sheet each and every month, the risk of significant financial errors being reported will drop. 

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Neglecting the month end financial close will lead to inaccurate financial reports, ultimately impacting decision making within the organization and in many cases, lead to incorrect tax projections.

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To avoid these potential issues, prioritize the process just as you would with your sales or operations processes and set up a regular review schedule with your internal or external accounting team. As a founder or business owner, you need the facts to make the informed decisions to run your business. Without a streamlined process at month end, your decision making will be hampered.  The most successful (and largest) businesses we work with rely on their monthly results to tweak their business processes and strategies into the future.  Without a proper month end close, the ship will begin to stray off course. 

2. Avoid creating complex incentive programs

Incentive programs can have a positive impact when it comes to employee motivation and performance, however, developing overly complex structures can create accounting challenges and have a boomerang effect.  Growing small businesses and startups should “keep it simple”. 

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Different incentive programs such as employee production bonuses, sales incentives and unique commission agreements with complex calculations can be challenging to track properly, especially if you are outsourcing your financial function.  

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While these often seem like a great idea, we urge our clients to ensure the system is scalable and can be managed by someone other than the founder or CEO.  Too often we see the calculations become overly complex or the data is sparse, leading to disagreements and disgruntled team members who have calculated the incentives in a different manner. 

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Keep the incentive calculations straightforward and transparent, focus only on key performance indicators which align with your business goals. 

3. Do not rely on multiple accounting systems

Reliance on multiple programs can lead to data discrepancies and errors. If it goes on too long, these errors can be time consuming and costly to reconcile.

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Many businesses use multiple systems in order to fill the gaps in their accounting software or simply due to scaling issues over time. For example, using scheduling software that is not integrated in your accounting software may result with inaccurate inventory and work-in-progress balances.  There can only be one source of truth in this case.  Another example would be if your accounts payable and accounts receivable systems do not directly link and integrate with your accounting software.  Which balance is correct?
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One way to avoid these issues is to use “connector” softwares like “Zapier” or “Make” to integrate systems seamlessly.  We often have clients come to us with a tangled web of back office accounting, payroll, AP and AR systems.  Our tech team generally will try to create a scalable solution using one of these “connector” systems with the client.   

For most small businesses generating under $25M in revenue, solutions such as Quickbooks Online or Xero are appropriate. Under this threshold, ERPs are usually not needed as the return on investment may not be appropriate.  

4. Prevent excessive spending on data entry

Manual data entry can be time consuming and often leads to errors. Some small businesses and startups hire data entry clerks to key in every bill or invoice they receive to their office.  To simplify your accounting procedures and processes, utilize automation tools. For example, there are multiple systems that can automate the process to scan a bill directly to the approver and link to your accounting system (such as Ramp).

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Many accounting software options include features like bank and credit card feeds that automatically bring in transaction data. These feeds are tremendously helpful, but we always are quick to point out that these are not a magic bullet. 

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While automation is crucial, it shouldn't sacrifice meaningful reporting, the need for accounting adjustments and entries and full balance sheet reconciliations, monthly. 

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In fact, small businesses are legally required to maintain accurate books and records under Internal Revenue Code 6001. Early on, it is easy to “wing it” and try to skimp on accounting & bookkeeping but the nightmares you’ll face later are rarely worth it and always more expensive.  Invest in data automation and an expert accounting team, whether internal or external, as early as you can. 

5. Prevent underestimation of project costs

Accurate project costing is essential for businesses involved in projects or manufacturing. Without a clear understanding of project or unit costs, there is a risk of overestimating profitability or making incorrect decisions, especially when it comes to hiring. 

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We often recommend investing in project costing systems or software customized to your business requirements.  These project costing systems provide in-depth insights into project expenses, labor costs, and return on investment. Through costs tracking, you can identify opportunities to save on labor or material costs or change pricing strategies, which would result in improving the overall profitability.  Project costing in Excel seems simple but often leads to errors, especially when you are at scale.  

6. Prioritize expertise and experience in tax consulting

With new legislation being introduced in the last year such as the Corporate Transparency Act, it is important you have a strong tax team in the background.  While staying in compliance with all tax regulations is the first step, as you grow, we cannot emphasize the importance of tax reduction and tax management strategies.  For most businesses, taxes are the largest expenses in the business.  Add up your income taxes, payroll taxes, local property taxes, excise taxes, sales taxes and even franchise taxes, and you’ll quickly see a large portion of your bottom line is going to taxes.  Work with an experienced tax strategist who can navigate the landscape and ensure you pay the least amount of tax legally allowable. 

Key takeaways to avoid common accounting mistakes

Accounting mistakes can significantly impact your business's financial health and tax optimization efforts. Invest in the accounting, financial management and tax functions as you would with any other key business function or process and look for the return on investment in the terms of tax savings, time savings and the ability to make more informed decisions.  

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By avoiding these common mistakes and embracing best practices, your journey towards scaling your business and optimizing the financial processes will be well underway. 

Avoid the biggest accounting mistake: manual expense management

Ramp provides 5-in-1 software that offers corporate cards, accounts payable, expense management, reporting, and accounting in one centralized platform. Ramp's automated expense management software is built into your corporate card, reimbursements, and more so you can avoid manual tasks like receipt collection, reconciliation, and transaction coding.

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