Seasoned entrepreneurs know there a few painful mistakes you can make when starting a business. If you are starting a business, it’s most likely you haven’t put much thought into you plan on exiting. And its no wonder, there are countless decisions to make as you get started, which could range from applying for a business license, setting up a website, or developing a prototype. However, it’s important to remember that if you ever plan to bring on investors to expand or to even sell your business, how you run it from the start is just as important.
Luckily, it’s not difficult to get started the right way. Consider these four tips that most start-up entrepreneurs overlook.
1. Prepare Your General Ledger
Whether you are a seasoned entrepreneur or it is your first start up, setting up your accounting books may seem tedious and bland. Many start ups will really on off the shelf accounting software, which provide templates and general guidelines for you to get started. While these are ok and completely acceptable for most start ups, if you want a true understanding of the financials of your company and to be able to provide the evidence of the value you have built, you may want to give your start up careful consideration. Hiring a professional to help get you started may be a little pricey, but it could greatly benefit you in the long run.
2. Keep Business and Play Separate
It is perfectly acceptable for entrepreneurs to pay for various expenses with company funds, provided those expenses meet the generally acceptable accounting standards (GAAP). However, far too many entrepreneurs use company funds for personal use and then try to justify it with liberal interpretations of the GAAP or by improperly reporting the expense.
Doing this can open you up to a great deal of liability and get you in hot water with the IRS. It will be difficult to separate these expenses when valuing your company in the future. From the beginning, it is best to just keep all business and personal expenses separate.
3. Report all revenues
It is not difficult, and for many it’s extremely enticing, to skim money from the business at the start, especially if most of your business is done in cash. Not only will this get you in trouble with the IRS, but you would be actively lowering the value of your business in the long run. Proving value and growth will be difficult if you are not reporting real numbers from your business.
4. Keep careful records and receipts
It would seem reporting all of your revenue just means handing over more of your hard-earned money to Uncle Sam. This isn’t necessarily true. If you fully understand what you can expense and, more importantly, keep all records of your activity (this helps with due diligence of potential buyers and investors along with audits), you can work down your taxable income without hurting the value of your company.
It’s not uncommon for investors looking to invest in a small business to meet an entrepreneur whose only proof of success and value was a shoebox full of money. Some would even stress that the company was paying auto expenses, personal utilities, or even groceries and that investors should consider those expenses as part of the value of the company.
The problem is that most of these entrepreneurs couldn’t prove those expenses because of poor book keeping, and as a result the company loses valuation and leverage during negotiations. Most entrepreneurs are not thinking about an exit when they are in startup stages of a business. If you plan to divest or grow your company through investment, how you run your business before you start is something you can’t overlook.