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Avoid these 5 accounting mistakes!

Financial management of your company is pretty much your activity’s lifeline. Without it, you won’t get far! This being said, accounting and invoicing are frightening for a lot of future and young entrepreneurs. By looking into this beforehand, by training and by surrounding yourself with qualified professionals, you will avoid obstacles in the future that could cause you to lose time and money.

For once, we are going to share some bad habits with you. It will be your job to avoid these traps!

  1. Not estimating your budget

Even if this can be difficult, you should always financially project before deciding to start your business. It’s unavoidable! Defining your budget will allow you to evaluate your needs as well as your project’s viability. You need to ask yourself simple questions about the required funds to start your business and especially to maintain it.

To do so, think about:

  • Your professional financial obligations: rent for a possible office space, insurance, purchase of merchandise, subcontracting, salaries, etc.
  • And your personal financial obligations: loans, rent for your home, a specific budget for your personal/family expenses, etc.

This will enable you to see the minimum income needed to cover your expenses (both personal and professional).

This prediction (link in French) will allow you to set a goal and a deadline to try out your entrepreneurial project.

  1. Not having a cash flow

A company’s first few years can be a hard time financially speaking. Starting a profitable business takes time. It’s completely normal! It’s highly recommended that you plan to have sufficient cash flow to be able to get by until your company takes off. Keep at least three months of expenses to one side. Without this safety blanket, you will probably feel stressed out if contracts don’t keep rolling in, feel obliged to accept certain collaborations, and put yourself in a difficult situation.

  1. Not handling your income properly

Having cash flow is what will help you stay afloat! Having unpaid invoices or the wrong billing system can put your business at risk.

Here are some good practices shared by established entrepreneurs:

  • If you have experience in your field and a specific organisation system, favour packages over hourly rates to ensure you have a healthy and reassuring cash flow.
  • Send your invoices/quotes after having spoken to your client face to face.
  • Favour having multiple clients rather than just the one! Keep in mind that a client that brings in 30% of your turnover can put you at risk because it means you are too dependent on them.
  • Opt for a recovery plan in case of unpaid invoices: there are automatic recovery tools available: Leanpay (link in French), for example.
  • Reach out to the justice of the peace for any unpaid invoices for 15,000 € or less, or the presiding judge of your district court (Diekirch or Luxembourg) depending on the debtor’s address for unpaid invoices over 15,000 €. Favour payments before the work is returned (or even before the work is started if that’s possible in your line of work) and advance fees.
  1. Don’t get help/advice

Being a good entrepreneur is also knowing whom to surround yourself with. If you choose to be a freelancer, you can easily do your own accounting. However, if you don’t feel comfortable taking this on, ask for help from a professional.

Here are some tips to help you choose the right accountant:

  • Look at Google reviews (while keeping an open mind, of course!) and ask other entrepreneurs who they work with.
  • Make sure to work with an accountant who is used to working with your type of company/industry.
  • Look into the accounting company’s invoicing system carefully. Pay close attention to the small print and hidden costs. For example, if you write to your accountant to ask a question, will their answer be invoiced? Yes, this happens! So make sure you find out about everything before signing with them. This can be said for all service providers.
  • Choosing an accountant is also about trust and how you feel about them. It’s up to you to forge your opinion. To do so, you can even meet up with more than one accountant before coming to a decision.

Another helpful tip: you can read our article on questions to ask your accountant.

  1. Not learning how to manage a company

You don’t need to be an accountant or a judge to start your company. But it’s highly recommended that you find out as much as possible about managing a company to follow accounting rules depending on your status. Here are some things you need to know how to do:

  • How VAT works: VAT needs to be paid when your turnover reaches a certain level. Make sure that you keep it in an account! You can also ask to be exempt from paying VAT if your turnover is under a certain amount.
  • Understanding a balance sheet, knowing how to read and interpret the results.
  • Understanding and following specific indicators:
  • Turnover: your turnover enables you to plan how much you will need to sell throughout the year, it can be calculated without VAT as follows: turnover (VAT free) = sales price (VAT free) x sold items.
  • Profit: a lot of companies mix up turnover and profit. To work out your profit, you need to take your income (VAT free) and subtract your company’s expenses. If the turnover is higher than the expenses, then you have made a profit, if not you are working at a loss.
  • Cash flow: what is left on your account after all expenses. So, what is available to your company. Of course, you can opt to use your profit to invest. Use it how you see fit!
  • Late payments: you need to keep a close eye on all your late payments to enforce the right recovery plan. Be careful, depending on your business model, cumulating late payments may put your business in jeopardy… For example, if you pay for merchandise from a supplier at the time of delivery and your clients who are supposed to pay upon purchase have failed to do so, the situation can quickly turn south for you.
  • Customer debt: following the same logic, you need to keep an eye on customer debt, in other words, unpaid invoices.

Set up a routine to follow and keep your invoices and all necessary elements for your accounts. Having a healthy administrative system is something you learn and can be beneficial, believe us, we have over 15 years of experience helping entrepreneurs!

You can also train with the House of Training, for example, to demystify the topic that can seem frightening but is crucial! We also have an online module devoted to business plans which can teach you about its use according to your needs and will help you to create it every step of the way.

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