A Steep Learning Curve

A business degree is unnecessary to become an entrepreneur, but it would help to possess some financial acumen to avoid costly pitfalls. To stay profitable, start-ups should be mindful to prepare for and overcome the following accounting challenges that confront small businesses:

1. Poor Bookkeeping Habits. Start-ups that experience financial struggles often lack a good system to track income or neglect to balance their accounts. Find the right software or spread sheet template to record transactions to accurately balance your books, or if feasible, hire a bookkeeper. It’s important to find a method, stick with it, and continually review your books.

2. No Accounting Analysis. Entrepreneurs who fail to interpret their finances will ultimately fail to thrive. Bookkeeping alone won’t monitor growth and success. Knowing what your balance sheet and income statement mean is the key to understanding the direction a business is headed. So, start-ups need input from an accountant or at least some online research into how to analyze the books.

3. Ignoring Cash Flow. A new business owner who doesn’t understand that cash is king may get in trouble fast. Without a sense for cash flow, the numbers will be a confusing mess. For example, the books show income earned, but the account won’t receive cash until 30 days later. Properly maintained financial statements should distinguish between money due versus paid, or you won’t see an accurate picture of the business.

4. Too Much Debt. The adage, “It takes money to make money,” is popular because it’s true. New start-ups face steep expenses, and if entrepreneurs turn to credit cards, then it’s easy to get underwater. The challenge is to incur the right amount of debt to support your business without the debt becoming an overbearing liability. So, be conservative, watch interest rates, and look for alternative sources of debt like small business loans or an investor.

5. Inappropriate Resource Allocation. When you’re getting off the ground, it’s hard to manage your resources. Whether it’s time or materials, you have no base of comparison to guide you since everything is just starting up. How can you plan ahead? Instead of flailing in the dark, work with others who do have experience like a mentor or business coach. Get help to develop a solid strategy to follow so that you can allocate according to plan.

An Ounce Of Prevention

As an entrepreneur, if you stay mindful of the challenges you’ll face when starting your own business, then you’ll be better prepared to confront and overcome them. Much comes from finding the right resources and using proper tools. Also, many of the issues facing start-ups come as a surprise to the entrepreneur, but may be well-known to a seasoned small business owner, so learning before they arise might even mitigate those.