Starting a new business is an exciting time. You’ve got an incredible idea, and you’re ready to transform it into a thriving business. But before you dive into building your product and generating sales, it’s crucial to establish a solid finance function to support your growth. Based on years of experience, here are the top financial mistakes we’ve seen early-stage startup founders make and how to avoid them.
1. Failing to Register for GST/HST
One of the first steps after incorporation should be registering for a GST/HST number. Many startups delay this, not realizing that you’ll need to charge HST on your sales and remit it to the government. You can also claim back GST/HST paid on expenses incurred. It becomes difficult to claim back GST/HST paid on expenses incurred before you registered, so it’s important to register as soon as possible. We’ve seen many companies miss out on thousands of dollars in potential HST refunds simply due to registering for GST/HST late.
To register, simply log into your ‘My Business Account’ with the CRA. If you don’t have a CRA ‘My Business Account’, you should create one for correspondence with the CRA. Once you are in your ‘My Business Account’, you can find and and follow the instructions to get your HST number. It’s a straightforward process and will save you from potential headaches and missed refunds.
2. Mixing Personal and Business Expenses
Opening a separate business bank account is crucial. Mixing personal and business finances creates confusion and complicates bookkeeping. Founders often make the mistake of using their personal accounts for business transactions, which leads to issues when trying to track business expenses accurately. Similarly, using a personal credit card for business expenses can lead to difficulties in distinguishing between personal and business expenses. It’s better to get a corporate credit card to keep things separate at the outset.
We’ve seen many early-stage companies where founders must muddle through their personal credit cards and bank statements to try and figure out what was business related and what was personal during tax season, or before a capital raise. This exercise always results in founders missing some expenses, meaning they are paying more corporate taxes (or carrying fewer tax losses forward). Additionally, the founders will never be reimbursed for the expenses in the future if an opportunity arises to do so.
Many of our clients either get a corporate credit card through their business banking provider or utilize Float. Float is a great option to get a business credit card. It also helps manage those annoying receipts.
3. Not Implementing an Accounting System
Relying on Excel or Google Sheets instead of a proper accounting system is a frequent error. An accounting system is essential for keeping track of your income, expenses, and overall financial health. There are plenty of user-friendly options out there like QuickBooks Online, Xero, or Wave. Pick one that suits your needs and budget. It’ll make understanding your financial position, raising capital, and filing taxes (including GST/HST) significantly easier.
Ensure you put some thought into your chart of accounts setup. A chart of accounts is an organized list of all the financial accounts a company uses to record its financial transactions, including categories for assets, liabilities, income, and expenses. A well-structured chart of accounts can give you increased visibility into your business, as we outlined in our article “How to Create Greater Revenue Visibility Using Your Chart of Accounts“.
4. Lack of a Reliable Payroll System
If you have employees, you need a payroll registration number and a reliable payroll system. This ensures everyone gets paid on time and all deductions are correctly handled. It also allows you to track how much people were paid so that you can easily meet your year-end tax reporting requirements. We typically see companies use Wagepoint, QBO payroll, Humi, Deel, or Rippling as their early-stage payroll system.
Whatever payroll system you use, make sure that you are remitting payroll deductions on time. Some payroll systems, such as Wagepoint, will automatically make government remittances, whereas other systems will calculate the amount that must be remitted but will require you to manually make the remittance to the CRA. We’ve seen a lot of companies end up with significant tax bills (including penalties and interest) for not remitting payroll taxes on time.
5. Inconsistent Bookkeeping Practices
Skipping regular bookkeeping is a mistake that can lead to confusion and chaos. Regularly tracking revenue and expenses, including maintaining receipts, is essential for maintaining accurate financial records. Founders often wait until tax season or investor meetings to organize their books, which results in a lack of financial clarity and an inability to create a reliable budget.
Startup businesses typically take one of the following approaches to meet their bookkeeping needs:
- Do it yourself: Assuming you have the time and inclination to go it alone, just be sure you keep your receipts and enter your expenses into your accounting system. Many of the more popular accounting systems, such as QuickBooks Online and Xero, give you the ability to link your bank account and credit card to your accounting system. This will make the “do-it-yourself” option a little bit easier.
- Outsource your bookkeeping: If you find that you have way too much on your plate and don’t want to add bookkeeping to your ever growing list of roles and responsibilities, working with an outsourced accounting firm, like BrightIron could be an option. We’ve outlined some tell tale signs that it’s time to outsource your Bookkeeping in a previous article.
- Hire an in-house bookkeeper: If your business has grown to a big enough size, it may make sense to hire an in-house bookkeeper to tackle the job.
6. Ignoring Budgeting and Financial Projections
Operating without a budget or financial projections is a common oversight. Without a clear financial plan, managing cash flow and making informed investment decisions becomes difficult. Create financial projections for the next year or two. You can do this in Excel or Google Sheets. It doesn’t have to be an overly complex budget, but you should have one to help manage your cash flow and make informed decisions about spending and investments. Knowing where your money is going and where you want it to go is crucial for your startup’s success. You could even enter your budget into your accounting system to do regular budget vs. actual reporting easily.
Cash flow forecasting needs to be a core component of the financial projections. In other words, don’t just forecast your income statement and not your cash flows. They aren’t always the same as cash flows will be affected by working capital items such as accounts receivable, inventory, accounts payable, loan payments, etc.
7. Missing Tax Filings
Not filing sales taxes (GST/HST), payroll remittances, and income taxes on time can result in penalties and interest charges. Many startups fail to keep track of these deadlines, leading to unnecessary expenses. Failing to file your taxes may also impact your ability to get your SRED refund (if applicable) as the CRA normally checks to ensure that there aren’t long overdue returns and/or amounts owing.
8. Not setting up Basic Financial Processes
A mistake that most startups make is not setting up basic financial processes from the start. This means having a process to keep track of receipts, paying vendors on time, and invoicing promptly. It’s easy to create a simple process to ensure that there is a good flow of information and documentation to enable your bookkeeping to be accurate and to ensure you can meet your compliance and information needs.
For example, for vendor invoices received and receipts, you can either take a picture and upload it to a shared finance folder or use an application such as Expensify or Dext. QBO can also be used to take pictures of receipts. Once you have your receipts and invoices in one place, whoever performs your bookkeeping can easily access the receipts and attach it to your expenses in your accounting system.
Avoiding these common financial mistakes will help you build a solid foundation for your startup. By taking these steps early on, you’ll save yourself from future headaches and position your business for sustainable growth. These steps will not only help you manage your day-to-day finances but also prepare you for future opportunities and challenges. If you need assistance or want to ensure your financial setup is done right, don’t hesitate to reach out. As a team of seasoned professionals in Bookkeeping, Controller, Fractional CFO services, and HR services, we’re here to help you navigate the financial landscape and set your startup on the path to success.
Setting up your finance function might not be the most glamorous part of launching a startup, but it’s crucial for your success. By taking the time now to establish a solid financial foundation, you’ll save yourself from future headaches and position your business for sustainable growth. These steps will not only help you manage your day-to-day finances but also prepare you for future opportunities and challenges. BrightIron can assist if you need help or want to ensure your financial setup is done right. We’re here to help you navigate the financial landscape and set your startup on the path to success.