1. Poor reconciliation processesAccount reconciliation is one of the oldest accounting tools available to check for correct bookings and fraud. Sloppy books can have some drastic consequences, which can cripple your business if you’re not careful. Not regularly reconciling your accounts can lead to sloppy books and even allow errors to go undetected. This can make it difficult to present a clear financial picture of your business to potential investors or bankers. Although it’s uncommon, sloppy books can increase the risk of fraudulent transactions being hidden from you.
2. Not budgeting (or not keeping track of expenses)Budgeting for expenses is a simple way to keep your business on the right track. Planning a budget lets you determine in advance how much you’re able to spend for which expenses while achieving your goals. If you decide that planning a budget isn’t something your business needs at this point, at least consider the importance of keeping track of how much you’re spending and what you’re spending on. Even a growing business with healthy cash flow benefits from knowing where their money is going and what major expenditures they regularly face.
3. Losing track of cash flowYour business runs on cash, and running out of cash can bring what you’ve built to a speedy end. Even if you manage to avoid catastrophic consequences, losing track of your cash flow can lead to major inconveniences or inefficient use of capital. For example, if you can’t meet your obligations you may be forced to take on an investor or get a loan with unfavorable terms. Implementing a good financial system allows you to keep your fingers on the pulse of your cash flow. Knowing how much cash is going out (payables) and when you expect which payments (receivables) is critical to steering your cash flow well.
4. Mixing personal and business accountsEspecially in the early phases of starting a business, it’s not uncommon to mix personal and business accounts. Often, because so much of the founders’ personal time and resources are wrapped up in the business, it can be hard to know where to draw the lines. If personal and business accounts are mixed they should be separated as soon as possible. The best way to avoid this pitfall is to separate your personal and business accounts from day one of starting your business.
5. Poor borrowing practicesDepending on how you fund your business, debt may be part of the equation. However, using credit cards, loans, and lines of credit often lead to issues in early startups. These issues are mitigated by other sound business practices including:
- A solid budget and spending plan
- Well-tracked cash flow, to ensure you’re able to keep up with debt payments
- Sticking to a debt payoff plan