9 common accounting mistakes of fast-growing startups – and how to avoid them

Many startup founders become engrossed in their work and overlook the importance of prioritising their accounting processes. Without a strong accounting system and disciplined governance, you can’t accurately assess your business performance or plan for future grow and expansion. One of the most common ways for these mistakes to be discovered is during the due diligence process in the event of a capital raise or exit event, in which case the stress experienced while trying to rectify them in a high-pressure environment will be significant – not to mention the potential adverse impact on the startup’s valuation. Therefore, be very aware of the following common accounting mistakes we see in startups and how you can avoid them.

Excel isn’t a long-term solution

If you’re using spreadsheets and manually entering data, there’s a high chance it could be riddled with errors. You also have issues of not being able to track entries or integrate the spreadsheet with other applications. There are many benefits to using accounting software but ultimately, it’s more accurate and advanced.

Why is this important? Accounting software allows you to grow. It’s scalable, gives you access to real-time data in one place, provides a complete audit trail, it’s automated and makes reporting easier.

Tip: Many entrepreneurs attempt to manage their bookkeeping and accounting tasks when they could be focussing on the business. Take advantage of the software and technology available – you could be missing out on valuable opportunities to streamline processes and put time back in your diary.

Cash basis reporting can be risky

There are drawbacks to using cash basis accounting. Given the uneven nature of tracking the transactions, you’re not accurately recording all revenue and expenses as they’re incurred. If you’re dealing with multiple vendors, it’s critical to record all transactions at the time they’re incurred – even before cash is received or paid. This will help give you a complete view of all projected cash inflows and outflows and put you in a better position to understand the true performance of the business.

Why is this important? Cash basis accounting provides a short-term picture. Given the fluctuations of when cash inflows and outflows are recorded, you get a limited view of your overall financials. This can affect investor confidence and their understanding of your future profit or burn rate.

Tip: While the cash basis method is simple to use, if you have plans to grow it’s smart to implement a system that will grow with you. Investors want to get a feel of the long-term trends, risks and if your operations can handle a higher level of debt.

Wrong revenue recognition is bad for your valuation

How you measure, record and report on your reoccurring revenue will shape how people perceive your business’s performance. Contracts that require up-front payments, i.e. subscription based services, should be recognised as revenue when it’s earned, not when it’s received. So, if a customer signs up for a $12,000 annual subscription then $1,000 of revenue should be accounted for each month.

Why is this important? It shows your true profit margin in real time. By recognising a steady balance of revenue, you build your financial credibility. Given that this is an important factor to determine value, it can affect your ability to attract investors.

Tip: There are software tools that can track your revenue automatically and generate reports in real-time. It’s worth talking to your Accountant to find out what options you have to properly record recurring revenue.

Incorrect payroll set up will cost you

Payroll problems are one of the most common mistakes we see in startups’ accounts. It’s your responsibility to ensure your business complies with income tax, superannuation and payroll tax regulations. A big part of this means getting everything set up correctly from the start and regularly reviewing your processes and staff entitlements. A few questions to ask yourself:

  • Is super being paid on time? If you don’t pay an employee’s super on time, you’re liable for the super guarantee charge (SGC), even if you make the payment later.
  • Are you paying the correct withholding rate? Check your calculations for collecting (PAYG) withholding amounts for all employees including casual workers and contractors.
  • Can you tell the difference between an employee and contractor? Ensure you have categorised your workers correctly and are meeting your tax and super obligations for each.
  • Are you up-to-date with all JobKeeper requirements? During the first phase of the JobKeeper (to end of September 2020), all eligible employees should receive at least $1,500 (before tax) per JobKeeper fortnight period. Check that you’re using the right wage categories in your payroll system and capturing sick pay and leave entitlements at the correct rate.

If you’re not meeting the requirements above, you’re at risk of heavy penalties.

Tip: If you’re using multiple systems to manage leave and pay staff, look into a single system solution to help you lower the risk of mistakes. Choosing the best solution for your business will depend on whether you want to outsource the payroll function or use cloud-based software.

Super note: On 6 March 2020 the government introduced a super guarantee (SG) amnesty to allow employers to disclose and pay previously unpaid super guarantee charge (SGC). If you want to participate you need to apply by 7 September 2020.

Be disciplined with your accounts payable

A lot of startups don’t have a clear process for managing their accounts payable. Without a stable approach to tracking your billing cycles, your profit & loss statement (P&L) and balance sheets will be inaccurate and there can also be issues associated with duplicate invoices.

Why is this important? A disciplined approach to accounts payable will minimise the chances of having inaccurate balance sheets and P&L statements. These show the financial health of your business and can be analysed to determine key performance indicators. This gives investors the whole picture of your business’s profitability and value and whether the operation is viable.

Tip: Make time to do a comparison each month of your balance sheet and carefully view all account balances at the end of reporting. Regularly review that you’ve off set debit and credit for all entries. If you don’t do this, your total liabilities can be under-represented.

Don’t be a serial late lodger – get your BAS right

The ATO issues Business Activity Statements (BAS) either monthly or quarterly, so businesses can report and pay their tax liabilities. They can include a number of different payments such as Goods and services tax (GST), Pay as you go (PAYG) tax withheld, Income Tax Instalments and Fringe benefits tax (FBT) instalment.

Why is this important? If you don’t have good record keeping practices and don’t lodge and pay your BAS on time, the ATO may charge you with late payment penalties. If you implement a system that helps prepare your BAS in time, it can be a positive for your business. You gain greater control of your finances if you’re more prepared and confident in meeting your tax obligations.

Tip: Avoid surprises by tracking your likely liabilities weekly and estimating your BAS as if it was due. To make it easier to lodge your BAS, put aside money in another bank account for GST as you receive it. When reporting your BAS, check that each invoice has only been entered once and all expenses and sales have been listed against the correct tax period.

Track & manage your R&D  expenses

To qualify for the R&D tax offset, all expenses need to be accurately collected and documented. Using spreadsheets and self-administered timesheets can be a very manual process and can lead to errors as well as missed reimbursements. Without transparency and sufficient data, you can expose yourself to audits and reputational questions.

Tip: Adding tags or a tracking code to each R&D activity i.e. research, product development or testing, will make it easier to account for expenses and give you complete transparency. You can also set up codes or keywords based on teams, projects or location. Set up a coding system that can be re-used each year and become part of your standard business operations.

Don’t ignore your compliance obligations

It can be hard to keep up with all your compliance responsibilities when you’re busy trying to run and grow your business. Activities that need to be reported to governing bodies, such as ASIC, have certain expectations and criteria. Businesses are expected to keep up-to-date financial records that are accurate and that explain each transaction.

Why is this important? If you fail to comply with any of your regulatory requirements, you’ll receive a warning letter that you’re in breach and be asked to correct the default or lodge any outstanding reports.

Tip: Try to simplify your compliance management and look at workflows or tools that can help you clean up any mismatched data across systems. Regularly review and update shareholder information and report changes within 28 days. Set up a system that can help with email reminders or has debt alert capabilities, so you stay ahead of any trigger dates.

ESS reporting should be a priority

Why is this important? Most startups don’t have the financial capacity to offer top-tier wages and ESS can help keep attract and retail talent by making up the difference.

Tip: After establishing your ESS, ensure you report annually to ATO, keep your share register updated and include employee shares/options in the payroll tax return. This will help you avoid large unexpected payroll tax liability.

9 common accounting mistakes of fast-growing startups – and how to avoid them

Nick Kenny

Nick is a Director in our Business Advisory division with a wealth of experience on how to use accounting systems to drive business efficiencies. Supporting clients across a range of sectors, he's expertise includes review of legacy systems, providing advice on new technology systems, virtual CFO applications and conversion of accounting and business software to cloud based programs.

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