One of the most important factors for continued viability for a startup in Africa, as well as other areas of the world, is excellent accounting practices. Great accounting practices depend on excellent bookkeeping. Startups should decide in their earliest stages how to approach bookkeeping and ensure that they continue to keep their books up to date. Bookkeeping allows companies to balance incoming and outgoing funds quickly and to analyze where they may be spending money unnecessarily. Even with a proactive approach to bookkeeping, mistakes are common. Following are some of the most common mistakes made by African startups and entrepreneurs in other countries around the world:
- Not creating or following a filing system. Companies need to quickly find purchase invoices and other financial documents. In a company’s early stages, it may seem easy to keep track of these documents without a set system, but this approach will quickly become overwhelming. For purchase invoices, entrepreneurs should keep paid and unpaid documents separate in order to avoid missing payments, and they should remain diligent about immediately moving the invoice to the paid folder after payment. Orders should be filed alphabetically according to the supplier’s name and then arranged by date so that people can quickly find any document.
- Not having a separate bank account. Individuals in the early stages of a startup frequently use their own account and only create a business account later on down the line. However, this approach can complicate taxes and makes it impossible to access a comprehensive financial record. As soon as an entrepreneur creates a name, a separate business account should be created in order to keep better track of money coming in and out of a business. In this way, accounting professionals can check the account against the company’s books to ensure that no discrepancies go unnoticed. Such discrepancies can have a range of consequences down the line.
- Not keeping all purchase receipts. For larger purchases, it makes sense for business owners to keep this record. However, small purchases can also add up over time, and a failure to save these receipts can make accounting very difficult. Even when business owners account for these expenses on their books, they must still save the receipts to back up their books should an external or internal audit become necessary. Mistakes happen in bookkeeping, but saving your receipts means that discrepancies can be verified and corrected. Again, these receipts should be filed away according to a specific system, whether by date, company name, or both.
- Not instituting a system of checks and balances. A system of checks and balances helps to protect companies against theft and fraud. Larger corporations almost always have these sorts of systems in place, but small businesses owners sometimes remain unsure of how to implement them effectively. Multiple sets of eyes should look at a company’s finances and bookkeeping practices so that errors can be recognized quickly. Businesses that accept cash remain especially vulnerable to theft and fraud, making it especially important for these companies to create a system that verifies the amount of money received, recorded, and then deposited into a bank account. Daily reports can help flag discrepancies before they become irreconcilable.
- Not keeping all books up to date. When companies begin putting off their bookkeeping and believing that they will catch up later, they run into major issues. Companies need to remain diligent about entering information on the books immediately. This measure allows entrepreneurs to keep better track of potential issues and gives them more time to respond to problems. For example, imagine a situation in which several invoices come in on a Monday, but the company has not yet received some expected payments. When the books are up to date, a business owner knows to hold off on paying some of the bills until income is received. If the books are not regularly updated, a business owner risks overdrawing the account.
- Not taking the time to analyze financials. Bookkeeping is important because it creates a complete record of a company’s financial situation. Making this information useful requires analysis. Startups may feel like they do not have the time or resources necessary to complete such analyses, but this approach results in blind leadership. Through regular analysis, entrepreneurs have the information and feedback they need to help the company grow. This information shows which products or services generate the most money and reveals potential areas for cutting costs. Historical analyses also play an important role in creating budgets and financial forecasts, which can be used to attract new investors.
- Not investing in a consultant about bookkeeping. Few entrepreneurs have the accounting background necessary to create a flawless bookkeeping system from scratch. Typically, investing in a consultation will end up saving you money in the long run. When companies wait until they encounter problems to ask for help, they will ultimately pay more, as that professional sorts through practices to uncover the root of the issue. In the early stages of a company, a consultation will ensure that the business owner has adopted best practices and is set up for success. The consultation also builds a professional relationship should additional consulting be needed in the future.