The Financial Pitfalls Startups Should Avoid
Business finance pitfalls
Here are ten financial pitfalls that all startups should avoid.
1. Payroll software
During the early days of a startup there will be many responsibilities on founders and the team they put together to grow the business. Amongst these is payroll. It’s not very exciting and it isn’t linked to the activities that can drive revenue but it’s an absolutely essential part of operations.
Using payroll software can keep payroll mistakes at bay. The right software allows employees to input the majority of information themselves while also securing information.
2. Tax credits
There are loads of benefits to claiming R&D Tax Credits and completing this process effectively can be transformative to a startup. Not only does it unlock cash for a company to reinvest, but it also provides the UK with a pool of innovation that has a positive impact on the economy.
The value of R&D Tax Credits will be calculated based on a company’s R&D spending. To perform this calculation, qualifying expenditure needs to be identified across your business and then ‘enhanced’ by the relevant rate.
By not making use of these tax credits, startups are giving up on the opportunity to access a source of no strings cash. This, especially for a startup is a huge mistake, because (as all founders know) capital is hard to come by.
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3. Tax filing
Tax filings can be challenging for a startup. Throughout the financial year, it’s important that whoever is going to prepare the tax submissions for the business are well supported and have the expertise to carry out the HMRC submissions. Prioritising communication and information can avoid end of year stress.
The timing of when a company closes its books can make tax preparation easier. Some companies choose to close their books more than once annually, making the process more streamlined.
Whatever the process is for closing a company’s books, having a closing schedule in place can help to avoid end of year errors.
Operating a business without proper bookkeeping in place is not just poor practice but also quickly becomes unmanageable. Unfortunately, it’s a common financial pitfall for businesses.
For a founder, putting off accounting work can be an attractive thought, especially if there’s more pressing work to be done. However, unless bookkeeping is kept up to date, it can be easy to lose track, leading to a situation where hours are wasted trying to interrogate the numbers and make sense of piles of documents.
When it comes to a smooth end of year, bookkeeping is really important. Bookkeeping can be broken down into daily, weekly, monthly and annual tasks. By making bookkeeping discrete and part of the normal functioning of a startup’s business activities, it becomes more manageable.
5. Founder loans and commingling money
Commingling personal and business funds can be the death of a startup. It’s a widespread business challenge ensuring that clear and firm boundaries are established between personal finances and the startup’s assets.
There are a number of risks and issues with this, including:
If audited, there’ll likely be increased scrutiny from HMRC
When raising capital, lending banks will struggle to determine creditworthiness
Accurate valuations will be tricky to complete, if not impossible.
Multiple owners increase the risk of embezzlement or improper use of funds
Commingling funds can be messy when it comes to filing taxes. It may also unnecessarily increase tax liability to the individual. Creating firm boundaries between personal and business funds is important and will set the startup off on the right track.
So, there we have it - the common financial pitfalls experienced by startups. If you’d like to learn more about navigating business pitfalls and moving into a period of high growth, partnering with experienced professional advisors is the answer.
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