Five Common Mistakes Startup Founders Make
The path towards building successful startups is filled with graveyards of mistakes and failures.
We all know that. It takes a lot of hard work to get your ideas out there, market them, build your process, set your finance, etc. - basically being a founder involves utilizing all your rockstar experience, skills, and connections. Not many entrepreneurs have the prior experience to deal with the pressure, and while some mistakes are necessary for business growth, others are better off avoided. In this entry, we would like to share important insights we observed from founders and clients we’ve worked with. Here are some grave mistakes startup founders often make:
1. Creating an organizational structure based on short-term thinking
A startup during the starting phase doesn't really have a complicated organizational structure, in fact, it might only consist of you or 3 other people. In this scenario, going lean and wearing multiple hats are the norm. Eventually, as your startup grows, you need to hire new members. Roles and authority will be delegated and structure might seem to grow organically. This is very common but not something you should be lax about.
A good team can only be as effective as the structure supporting it. Adopting a big picture approach when designing your structure is important for the success of your startup. It must support the current business strategy and be adaptive enough for growth and the changing demands of the market. Your structure will significantly evolve over time, but avoiding short-term thinking will get you further ahead.
2. Thinking that accounting and finance can be done after funding
In the early stages, a lot of founders put less importance to finance and accounting and they usually just hire somebody to “clean it up” weeks before an investor comes in. This is a big no no. Finance is the lifeblood of any business and if you are not able to fix it in the first instance, expect that you will have a lot of explaining to do.
The orderliness of your finances is a reflection of how trustworthy you are of your prospect investors’ money. A lot of startups failed to get funding because investors got turned off by the “chaos” inside their books. The common scenarios include: personal expenses booked as company expense; corporate credit cards used in booking personal stuff; missed tax filings with glaring tax penalties and surcharges; and erratic classification and reporting of financial accounts tantamount to window-dressing (i.e., deliberate attempt to make the numbers look good when they actually are not).
You don’t want to experience this, right? Then, you should hire a suitable finance and accounting firm such as Olos Consulting Group now!
3. Not knowing the difference between revenue that must be recognized vs. the value of the customer contract
In revenue recognition, always remember this - do not count your chickens before they hatch.
Let’s say you closed a $1,000,000 customer contract for your seed-stage SaaS startup. That sure is a great feat as a startup founder! But what if that contract runs for 24 months? Are you going to report the entire $1,000,000 as your revenue for the month or only a portion? Assuming there are no sales taxes, the answer is $41,667 ($1,000,000 divided by 24 months).
We’ve seen a lot of founders make the mistake of reporting such $1,000,000 as their revenue to their investors. While it is true that the value of the contract is $1,000,000, only the earned portion will be recognized as revenue for that period.
4. Not Paying Attention To Accounting Documentation
Unless you’re in the same industry as us, bookkeeping and accounting is not really the core of your business. With everything else already piled on your plate, keeping tabs on your receipts, and invoices might be the least of your priorities. That’s unfortunate, but many startup founders do neglect their financial recording process. This is a common and grave mistake that should be avoided.
Improper recordkeeping and reporting of financial transactions put the business at risk of instability and making bad financial decisions. Moreover, you might need those paperworks and receipts for tax purposes. Without proper supporting documents, you might miss significant deductions and pay more tax that you would have otherwise invested to your business.
5. Hiring An Accountant To "Clean Up The Mess" Before Tax Deadline
When tax season comes, a lot of startup clients scramble to hire accountants to ‘’clean up the mess’’. If not having a good accounting system is a mistake, cramming your tax preparation is the cherry on top of that. Naturally, the less time you have, the more likely errors will be made. Worse case scenario, with the tight deadline and organizing involved, it might be too late to ‘’clean up” before the tax filing deadline. This could lead to disastrous costs for the startup such as missing deductions, higher risk of audit, delay in refund or incurring penalties. The bottomline is, startup owners should not wait until the last minute to hire a tax professional. If hiring a full-time CPA is too much for your business right now, some accounting businesses in the Philippines offer Outsourced Accounting Services for your needs. Need our help? Olos Consulting Group provides Outsourced Accounting Services for emerging startups in Southeast Asia and Tax Compliance Services in the Philippines.
Send us an email at info@olosconsultinggroup.com to book a 1-hour free consultation.