Accounting is a critical element when launching a successful business venture. Unfortunately, it’s also an area where startups tend to make mistakes. Here are some common (and avoidable) errors that entrepreneurs should watch out for.

Failing to track expenses

Starting a new business is exciting — and it’s natural to focus on generating revenue and building business relationships. But it’s essential to keep detailed records of expenses, including receipts and invoices. This will help you properly allocate costs, price products and services, assess and improve financial performance, and claim tax deductions.

Forgetting to reconcile accounts

Reconciling accounts involves comparing your records to your bank and credit card statements to identify and correct any discrepancies. Account reconciliation ensures that your business pays close attention to its expenses and available cash. It can also help to prevent and detect fraud by third parties and employees.
Commingling personal and business expenses

When you own a business, you need to keep personal and business matters separate for financial reporting, tax and legal purposes. In addition to maintaining a distinct workspace for your business, you should have different bank and credit card accounts. This will avoid confusion and make it easier to track business expenses. It also will facilitate budgeting and forecasting.

Incorrectly classifying workers

How much control do you exercise over the people who work for your business? Are your workers an integral part of your operations? Misclassifying employees as independent contractors can have serious legal and financial consequences. Make sure you understand the differences between employees vs. contractors and categorize them appropriately. If you don’t follow the rules, the IRS, the U.S. Department of Labor and a state tax agency might challenge the status of your workers.

Not budgeting for taxes

Since many startups run at a loss, at least initially, some owners forget to set aside money for taxes. This can lead to cash shortages and other financial difficulties when tax time rolls around. Failure to make timely federal and state tax payments can result in penalty and interest charges. And don’t forget about payroll, sales and property tax obligations, too.

Failing to set up a formal accounting system

Entrepreneurs must select and consistently follow an accounting method based on their business needs. Many fledgling businesses start off using cash- or tax-basis accounting, then graduate to accrual-basis reporting as they mature. But lenders, franchisors and investors sometimes require accrual-basis financial reporting from the get-go.

It also pays to invest upfront in simple internal controls — such as locks on file cabinets, regular software updates, network backups and antivirus programs — to help prevent theft and fraud. Startups with valuable intellectual property, such as patents, secret recipes and proprietary software, should consider protecting these assets by requiring employees and contractors to sign noncompete agreements, implementing network security policies and filing appropriate legal protections. Additional internal control measures can be implemented as your business matures.

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When companies report financial results, they often rely on estimates made by management. Examples include the allowance for doubtful accounts, warranty obligations, costs of pending litigation, goodwill impairment and the fair values of acquired intangible assets. How do auditors evaluate whether amounts reported on the financial statements for these items seem reasonable?

Inquiry and testing

Accounting estimates may be based on subjective or objective information (or both) and involve a level of measurement uncertainty. External auditors evaluate accounting estimates as part of their standard audit procedures.

For instance, they may inquire about the underlying assumptions (or inputs) that were used to make estimates to determine whether the inputs seem complete, accurate and relevant. Estimates based on objective inputs, such as published interest rates or percentages observed in previous reporting periods, are generally less susceptible to bias than those based on speculative, unobservable inputs. This is especially true if management lacks experience making similar estimates in the past.

Whenever possible, auditors try to recreate management’s estimate using the same assumptions (or their own). If an auditor’s estimate differs substantially from what’s reported on the financial statements, the auditor will ask management to explain the discrepancy. In some cases, an independent specialist, such an appraiser or engineer, may be called in to estimate complex items.

Auditors also may compare past estimates to what happened after the financial statement date. The outcome of an estimate is often different from management’s preliminary estimate. Possible explanations include errors, unforeseeable subsequent events and management bias. If management’s estimates are consistently similar to what happened later, it adds credibility to management’s prior estimates. But if significant differences are found, the auditor may be more skeptical of management’s current estimates, necessitating the use of additional audit procedures.

Gray area in accounting

Accounting estimates and fair value measurements involve a high degree of subjectivity and judgment and may be susceptible to misstatement. In today’s uncertain market conditions, predicting metrics that underlie accounting estimates can be particularly challenging. Therefore, they require more auditor focus today than in more-stable prior accounting periods. Be prepared to provide comprehensive documentation to support your estimates during the upcoming audit season.

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CPA firms do more than audits and tax returns. They can also help you with everyday accounting-related tasks, such as bookkeeping, budgeting, payroll and sales tax filings. Should your organization outsource its accounting needs? Here are five potential advantages to consider when evaluating this decision.

1. Professional advice. Outsourcing to an experienced CPA firm provides access to professional guidance related to tax, legal and financial matters. This makes it easier to remain compliant with rules and regulations and avoid costly mistakes due to a lack of knowledge or errors in interpreting complex regulations.

By engaging a third-party firm, there’s a second set of eyes on your company’s books. This can provide peace of mind that your books accurately reflect the performance of your business. Additionally, a CPA can help streamline your accounting processes and help record complex transactions correctly.

2. Scalability. As your financial situation evolves, you can dial up (or down) the services provided by your CPA. For example, a start-up that outsources its accounting needs wouldn’t need to worry about outgrowing its bookkeeper over time — or training that individual to take on more advanced accounting and tax needs. Likewise, if you embark on a major financial project — such as a launching a new product, building a new factory or merging with a strategic buyer — your CPA has the expertise on-hand to help you achieve the best possible outcome from a financial and tax perspective.

Outsourcing can also be a viable temporary solution if you unexpectedly lose your CFO. This can provide breathing room while you search for a qualified replacement in today’s tight labor market.

3. Cost savings. Outsourcing can save you money on payroll taxes and insurance costs associated with hiring an in-house accountant. Further, CPAs enjoy economies of scale regarding software usage and purchases, so they likely can provide accounting services cheaper than your firm can by working alone or relying on independent service providers for each task.

4. Efficiency. When you transfer accounting functions to your CPA, your management team has more time for core marketing, product development and other activities. It also frees up resources for higher-value tasks that can increase cash flow and optimize efficiency within the organization, such as negotiating with prospects or building deeper relationships with existing clients.

5. Enhanced confidence with stakeholders. A CPA firm’s involvement can instill confidence in lenders and investors if you intend to borrow money or solicit investment capital. It shows that your firm is committed to maintaining accurate business records and has access to the expertise needed to address complex issues.

Contact us if you’re considering outsourcing your daily accounting tasks, either permanently or temporarily. We can tailor a cost-effective service plan that works for your current and future business needs.

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Almost 40 years after its launch, QuickBooks® remains the leading accounting software program for small and medium-sized businesses. If you decide to use QuickBooks for your bookkeeping needs, you may have questions about implementation and using it to run your operations. Here are answers to some basic frequently asked questions (FAQs) to help you get started.

What is QuickBooks?

It’s a robust accounting software that businesses can use to manage their accounting. Businesses use QuickBooks for many critical accounting tasks, such as recording expenses, creating invoices, tracking sales, producing reports, administering payroll and maximizing tax deductions.

Is QuickBooks easy to use?

Even for those unfamiliar with accounting software, QuickBooks is easy to use. It includes step-by-step instructions to help users begin using the software and guidance to help get the most out of it.

Setup time varies depending on your organization’s size, complexity and maturity. However, once setup is completed, QuickBooks may offer a scalable solution that can streamline your accounting processes and support your business at every stage of its development.

Are there different versions of QuickBooks?

There are versions for new businesses, established small and medium-sized businesses, and freelancers. QuickBooks also provides dedicated solutions for certain industry niches, including churches, construction, legal, nonprofits, restaurants and retail.

How do I access QuickBooks?

It’s available online or by purchasing off-the-shelf desktop software. The online version requires a minimal monthly fee, whereas the desktop version involves a larger annual fee. There’s also a mobile app that’s available for both iOS and Android devices.

Does QuickBooks provide user support?

QuickBooks’ website offers customer support. Users can find answers to common questions and troubleshoot problems with an advisor on the site. There are also online tutorials and user guides. If you’re unable to find answers on the website, however, we can provide answers — or arrange an in-depth training session for your staff.

Can my accountant help me use QuickBooks?

This software isn’t a substitute for your CPA, rather it can facilitate the working relationship between in-house and external accountants. With QuickBooks, we’ll have direct online access to your organization’s books. Plus, we can send requests for information and documents through the platform. Contact us with any additional questions you have about QuickBooks and other accounting software solutions.

For years, there was talk of converging U.S. Generally Accepted Accounting Principles (GAAP) with the International Financial Reporting Standards (IFRS). While the formal convergence project lost steam about a decade ago, Financial Accounting Standards Board (FASB) Chair Richard Jones assured stakeholders at a recent Financial Accounting Foundation meeting that convergence discussions are still regularly taking place behind the scenes.

Working together

Multinational companies have routinely asked for converged solutions for U.S. and international accounting rules. They often complain that it’s expensive to implement two sets of rules. Plus, it’s difficult to compare companies that follow different accounting standards, and convergence would improve comparability globally. The FASB’s website says, “More comparable standards have the potential to reduce costs for both users and preparers of financial statements and make worldwide capital markets more efficient.”

Most countries around the world, including member states of the European Union, have adopted IFRS. And they’ve been increasingly pressuring U.S. accounting regulators to use global accounting standards.

In 2007, the Securities and Exchange Commission (SEC) allowed foreign companies to report under IFRS without reconciliation to U.S. GAAP. A year later, the SEC floated the idea of adopting IFRS as the primary financial reporting regime for U.S. companies. Then the financial crisis hit, and U.S. interest in IFRS waned.

In 2012, the SEC released a much-awaited report on IFRS in the United States. However, the report described the challenges of adopting IFRS, rather than making recommendations on whether international accounting standards should be used for domestic companies.

Current projects

A decade later, informal meetings continue between U.S. and international accounting rulemaking bodies. FASB Chair Jones and his counterpart on the International Accounting Standards Board (IASB) meet quarterly to discuss ways to improve the quality of accounting standards used around the world and reduce differences among those standards.

Jones provided two specific examples of convergence projects currently in the works: rate regulation and government grants. The IASB proposed Exposure Draft No. 2021-1, Regulatory Assets and Regulatory Liabilities, last year to replace International Financial Reporting Standard (IFRS) 14, Regulatory Deferral Accounts. Meanwhile, the FASB published Invitation-to-Comment (ITC) No. 2022-002, Accounting for Government Grants by Business Entities: Potential Incorporation of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, into Generally Accepted Accounting Principles, in June 2022. The FASB is currently considering comment letters it received on the ITC.

Minimizing differences, maximizing value

While there might never be a one-size-fits-all global financial reporting solution, many businesses operate in more than one country. So, it’s beneficial for the standard-setting bodies to align the rules as much as possible. Doing so improves comparability and lowers compliance costs. Contact us for help implementing the appropriate standards based on where you do business.