Running a startup in the UK is already a hurdle, and its pains keep growing along the journey of scaling up your business. You can face numerous challenges related to funding, production, work culture, etc. One major area that often gets neglected as a business grows is accounting.
However, you may put your business in challenging situations without proper accounting measures in practice. It includes running out of cash, paying penalties, and difficulty attracting potential investors.
This blog post shares some common accounting challenges for new businesses and solutions to overcome them.
Table of contents
- What is accounting for startups?
- What are the common accounting challenges for startups?
Accounting for startups refers to how you record and manage your financial transactions. It includes various tasks related to tracking, analysing, and reporting your financial activities and projecting your finances using financial statements. Your company’s accounting equation usually comprises three main entities: assets, liabilities, and owner’s equity.
Assets = Liabilities + Owners’ equity
The assets of your startup are the resources, equipment, and cash your business owns, whereas your liabilities are debts and taxes you owe. When you deduct your liabilities from your assets, what’s left is the owner’s equity. The accounting equation remains balanced if your financial records are accurate for all your transactions. It means the left side of the equation equals the right side.
Well, worry not, as these days, bookkeeping is mainly managed on accounting software for startups, like Xero or Quickbooks, which means the equation is always balanced.
One question that most businesses ask in their initial years is: What are the problems and challenges startups face? While numerous issues can arise while running a startup, we will share your accounting-related challenges here.
Most startups suffer from financial crises due to uncertain business requirements, low income, and higher startup costs. A company with steady cash flow represents its proper financial health as it has sufficient funds to operate the business until the growth stages. To ensure healthy cash flow in your startup, you must stay on top of your finances.
Additionally, you can maximise the revenues by immediately invoicing your customers for every sale and following up on your accounts receivables. Expense management is vital for your business and can be done in multiple ways, such as lowering inventory costs and business debts.
For most businesses, one of the biggest accounting challenges is to keep up with the financial disclosures required by the government. It is challenging to stay on top of your reporting requirements and ensure you document every financial information accurately.
This, in turn, can hamper your business financial statements, which include your cash flow and income statements and the balance sheet. These statements are essential to keep track of your business cash in and out and can help you get funds.
As a startup, you can often have difficulty optimising your accounts receivables. If your clients are late or not paying at all, you will obviously be in trouble shortly. To handle such challenges, you must establish a habit of diligently monitoring all your accounts receivables. It includes sending customers invoices on time, following up on all your unpaid invoices, and charging customers late fees. You can also use billing software to automatically send your customer invoices, reminders, and follow-ups.
Tax laws change occasionally, which can be a common concern for startups and your accounting teams. Additionally, tax liabilities can lead to financial crises in business if not done correctly. Therefore, you must keep track of changing tax laws, prepare tax returns accurately, and claim your tax deductions. Above that, ensure you file tax returns on time and pay your taxes correctly before the deadline.
If your startup works with employees, you must compensate them for their services in a timely manner. This requires proper payroll management in your business, where you maintain employee payroll records accurately.
It helps you identify the type of employees, their working hours, wages earned, payroll taxes, and other employee financial data. This ensures you stay compliant with the UK’s labor laws and other regulatory requirements.
Every business in the UK needs to follow multiple regulatory requirements. These regulations can greatly impact your company, even leading to shutting down business or facing legal consequences. Therefore, you must always remain updated with the changing regulatory requirements or seek professional advice to avoid penalties and other consequences.
Besides the changing regulatory requirements and tax laws, keeping up with the evolving technology can be a challenge for startups. For example, you can utilise cloud-based accounting software to gain access to your financial information from anywhere at any time.
However, this requires technical expertise and knowledge, which may otherwise result in data breaches, cyber crimes, etc. Moreover, if you aren’t an expert with accounting software, keeping comprehensive financial records may be challenging, which leads to other accounting complexities.
Established businesses usually have a rich track record of their historical business performance, which helps draft your financial projections. However, the scenario differs for startups, making the process difficult.
Here, you don’t have your expenses or performance data yet. Therefore, you can use the current financial statements and external market data to complete your financial projections. This requires a lot of research and market study, which can be time-consuming and difficult for startups to follow. In such cases, you can hire a certified accountant in the UK.
One of the biggest challenges after startups started using digital platforms for accounting is securing financial data. If you aren’t putting sufficient protection on your systems, blocking unnecessary access to vital data, and learning ways to prevent cyber attacks, chances of data breaching increase, leading to loss of money and legal consequences.
There are multiple challenges of accounting in 2024, including cash flow management, accurate financial records, ensuring tax compliance and regulatory requirements, financial forecasting, payroll management, expense management, automating accounting systems, and securing financial data.
You can improve your performance in accounting by staying updated with cutting-edge technology, knowing the industry regulations, sharpening your accounting basics, critical thinking, data analytics, adapting quickly to changes, and gaining hands-on experience.
Accounting is essential for all businesses, irrespective of their scale. However, startups may face multiple accounting challenges that lead to severe consequences like penalties and legal investigations. If this gets tiring or takes up your vital time from core business activities, hire an accountant in your company. They have the right skills and knowledge to help your startup survive in any condition and stay compliant with regulatory requirements.