Do not neglect the bookkeeping and accounts
The first accounting error often made by start-up companies is to neglect bookkeeping and accounting altogether. Developing the business activities is always the main priority for the directors so there is a danger that nothing is done in respect of bookkeeping. Adequate accounting records are however required by law.
This may be a problem for two reasons. Firstly, a backlog of work can build up which is later difficult to catch up with as information and documents may be lost. Secondly, the accounting books and records are not only required by law but are also important to give the directors an insight into the financial health of the company and to take the right decisions.
If the accounting records are in good order the directors can work out how profitable the business is likely to be in its opening years. They can also make forecasts of the cash flow for the weeks and months ahead. This is important in making decisions on borrowing and asset purchases.
Many businesses fail in their opening years because they simply run out of money. They become insolvent even though they may be potentially profitable. This can be prevented if management decisions are backed up by accurate financial information provided by well-kept books and records. The management should consult an agent about installing suitable accounting systems. The essential bookkeeping work should be done by a designated staff member or by an accountant.
Bank statements are important
A company must have a separate bank account but once this is set up some start-ups do not make use of the information received from the bank. The online or paper bank statements should be reviewed for accuracy and reconciled to the books and records to ensure that everything is in order. The directors should remember that the bank balance shown by the bank statement is not necessarily an accurate reflection of the financial position because there could be large liabilities in the pipeline.
The bank information should be seen as an integral part of the books and records of the business and used accordingly. This is another piece of information that helps the management to arrive at correct financial decisions. All information sent by the bank should be retained for future reference.
Recording purchase and sales invoices
Invoices and receipts for goods, assets and services purchased and for expenses should all be retained and the amounts should be recorded correctly. When the invoices are paid, this should be recorded appropriately. Failure to do this leads to a situation where the business does not know what needs to be paid, and therefore cannot correctly assess the cash requirements to keep going.
Invoices for sales made should also be correctly recorded in the same way. The business should make sure that outstanding debts are collected. The failure to collect money owing to a business is another factor that can lead to business failure in the early years.
Early action required
The directors should take action on bookkeeping as soon as the company is formed. An adviser should be consulted on appropriate accounting systems and a person should be designated to look after the bookkeeping. The agent used to set up the company could give advice on the best way forward.
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