5 Accounting Mistakes That Business Owners Make
As a business owner, you’re constantly shifting gears. At one moment, you might be brainstorming new product ideas; at the next, you’re handling customer service or interviewing a job candidate. With so many responsibilities competing for your attention, it’s no surprise that accounting mistakes can easily slip through the cracks.
Over time, even small errors can snowball into bigger issues. As a result, they may affect everything from cash flow to key business decisions. To help you avoid those consequences and keep your finances on solid ground, here are five common accounting mistakes business owners make—and how you can avoid them.
#1 – Neglecting the Chart of Accounts
A well-organized chart of accounts is the foundation of accurate financial reporting. It lists each account along with a brief description and forms the structure behind your financial statements. However, many business owners fail to update their chart of accounts as their operations evolve.
Let’s say you run a sporting goods manufacturing company with three product lines: baseball, football, and hiking gear. In order to track each line’s performance, your chart of accounts should include specific subaccounts.
For example, if your general revenue account is #6000, break it down like this:
- #6100 – Revenue: Baseball
- #6200 – Revenue: Football
- #6300 – Revenue: Hiking
By doing this, you can generate detailed profit and loss reports by product line—giving you clearer insights and helping you make better business decisions.
#2 – Poor Inventory Planning
Managing inventory is a constant balancing act. You need enough stock to meet customer demand—but at the same time, you don’t want to tie up too much cash in unsold goods. Every unit sitting on a shelf represents money you can’t use elsewhere until it’s sold.
To stay in control, decide on a reasonable amount of inventory to keep on hand at the end of each month. Many businesses base this on a percentage of monthly sales—10% is a common benchmark.
Use this simple formula to guide your purchases:
Beginning Inventory + Purchases – Sales = Ending Inventory
Let’s break it down with an example:
A sporting goods retailer starts the month with 700 baseball bats in stock and expects to sell 2,000 bats. To maintain an ending inventory of 200 bats (10% of expected sales), they’ll need to purchase:
2,000 (sales) + 200 (ending inventory) – 700 (beginning inventory) = 1,500 bats purchased
This approach not only helps you maintain optimal stock levels but also minimizes how much cash you tie up in inventory.
#3 – Failing to Forecast Cash Flow
Cash flow is the lifeblood of your business. If you run out of cash, your only options may be selling equity (giving up ownership) or taking on debt—with added costs like interest and repayment terms.
To stay ahead, build a monthly cash flow rollforward using this formula:
Beginning Cash + Cash Inflows – Cash Outflows = Ending Cash
Your inflows typically come from customer payments, while outflows include expenses like inventory, payroll, rent, and other operating costs. Since each month’s ending balance becomes the starting point for the next, it’s important to keep this forecast updated.
Example:
Let’s say you start April with $10,000 in the bank. You expect $25,000 in customer payments and plan to spend $28,000 on payroll, inventory, and bills. Your projected ending cash balance would be:
$10,000 + $25,000 – $28,000 = $7,000
This tells you that you’ll have $7,000 left heading into May—enough to stay afloat, but perhaps not enough for unexpected expenses. If that number were negative, you’d need to act fast to close the gap.
By reviewing your cash flow regularly, you can spot shortfalls early—and take action before they become serious problems. If your forecast shows a potential cash crunch, consider tightening your collection process (which we’ll cover next).
#4 – Lacking a Formal Collections Policy
You put in the work to deliver quality products or services—so you deserve to be paid on time. However, without a clear collections policy, overdue invoices can pile up and hurt your cash flow.
Start by establishing a formal process for handling late payments. For example:
- Email reminders at 30 days past due
- Phone calls at 60 days
- Consider pausing future work or deliveries at 90 days
Clear communication not only keeps expectations aligned but also encourages faster payment.
Another smart move? Request a deposit upfront for custom work or large orders. Most customers are familiar with paying deposits—it’s a standard practice. Simply explain that the deposit helps cover your initial costs, so when the job is done, the remaining balance is smaller and easier to collect.
Having this structure in place not only improves cash flow but also makes your business appear more professional and reliable.
#5 – Ignoring Profit Margins and Sales Mix
Making a sale is important—but understanding how much profit that sale generates is even more critical. Many business owners overlook profit margins and the impact of their sales mix on overall profitability.
Profit margin is calculated as:
Profit ÷ Sales Price = Profit Margin
Here’s a quick example, consider a sporting goods retailer that earns:
- $4 profit on a $20 children’s baseball glove → 4 ÷ 20 = 20% margin
- $45 profit on a $300 adult catcher’s mask → 45 ÷ 300 = 15% margin
While the catcher’s mask brings in more revenue, the glove actually has a higher margin—meaning it’s more profitable per dollar sold. In other words, the cost to purchase and sell the mask eats more into profits.
Now zoom out to your entire product or service lineup. Sales mix refers to the percentage of total sales each item contributes. If your marketing efforts focus on high-margin products, your overall profit can grow—even if total revenue stays the same.
Tracking this data regularly helps you make smarter decisions about pricing, promotion, and inventory. Many accounting or POS systems can help you run these reports easily, so that you can stay focused on what’s driving the most value.
Take the Next Step Towards Smarter Accounting
Running a business means juggling a lot of moving parts—but fortunately, your accounting process doesn’t have to be one of them. The right tools can save you time, reduce costly mistakes, and give you the insights you need to grow confidently.
FormPros makes it easy to stay on top of your business documentation. Our platform lets you quickly create, customize, and download a wide range of essential tax and business forms—all online and without the hefty price tag of hiring a lawyer.
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