5 Accounting Mistakes That Business Owners Make
As a business owner, you’re constantly shifting gears. One moment you’re brainstorming new product ideas, and the next you’re handling customer service or interviewing a job candidate. With so much on your plate, it’s easy for certain tasks—like accounting—to fall through the cracks.
Unfortunately, even small accounting errors can snowball into bigger problems, affecting everything from cash flow to decision-making. To help you stay ahead, 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. 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 setting up subaccounts, 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 not so much that your cash is tied up 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 helps you maintain optimal stock levels while minimizing 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 maybe 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. But 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 keeps expectations aligned and 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. Just 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 – Working With Profit Margin and Sales Mix
Making a sale is great, but many business owners don’t consider the amount of profit per sale, and the mix of products and services they can offer.
Profit margin is defined as (profit / sales), or the amount of profit generated on each dollar of sales. Assume that a sporting goods retailer earns $4 on a children’s baseball glove priced at $20, and a $45 profit on a $300 adult catcher’s mask. Here are the profit margins:
- Children’s baseball glove: ($4 / $20), or 20%
- Adult catcher’s mask: ($45 / $300), or 15%
The retailer earns more revenue (sales) on the catcher’s mask, but selling the baseball glove generates a 5% higher profit. While the catcher’s mask brings in far more revenue, the cost to purchase and sell the masks is much higher than the baseball gloves.
Now, consider a business that sells dozens or even hundreds of products. Sales mix is the percentage of total sales generated by each individual product. If a business focuses its marketing efforts on products that produce a higher profit margin, company profits will increase.
Finally, look for software products that can help you save time and generate accurate information. Form Pros provide intuitive forms that ask the right questions to quickly generate documents for you at a fraction of the cost of hiring a lawyer.
Form Pros offers expertly customized business and tax forms, including Form W-2, Form W-4, and 1099-NEC forms. Use Form Pros to save time and to grow your business.