11 Accounting Mistakes That Cost Small Businesses Significant Growth

11 accounting mistakes to watch out for

Stay aware of the following avoidable financial accounting mistakes: 

1. Failing to hire an experienced finance professional

Even experienced accountants and bookkeepers make mistakes — but they’re finance professionals, and chances are, you aren’t. Even if you are, is it really worth the extra time investment to manage your business’s books on your own? Hiring a professional minimizes the potential for errors in areas such as tracking expenses, paying vendors on time, reconciling bank accounts and running payroll.

Are you confident you’re handling employees’ tax withholdings properly? Are you tracking all financial transactions, regardless of size? Just a few mistakes in these areas can cost you more than you’re saving by not hiring help. 

Here are a few options for obtaining professional financial assistance: 

• Bookkeepers: Consider hiring a bookkeeper licensed by the National Association of Certified Public Bookkeepers. They typically record your business’s financial transactions using the best accounting software.
• Certified public accountants (CPAs): Consider hiring a CPA to assist with tax planning and help you spot trends (and avoid mistakes) as you manage your books. To verify that a potential hire is a CPA, check their license in the AICPA database.
• Freelance financial professionals: If you can’t afford a full-time, in-house financial professional, consider hiring a freelance bookkeeper or accountant who works remotely. This route is relatively easy, thanks to the wide selection of sites that match employers with qualified freelancers. 

Arham Ullah, CEO of Tangent Consulting, recommends matching financial assistance to your current business size. “If you are just starting to break even, even a part-time accountant can do,” Ullah explained. “If you work as a full-time CEO with other employees, get a CFO if you bring more than a million dollars, and sign up with a CFO agency.”

2. Not tracking business costs accurately

If you’re not keeping accurate records, your accounting and bookkeeping become much less effective. When that happens, you leave your business vulnerable to lost income, late payments on crucial bills and missed financial insights. This situation sets you up for major headaches come tax season and can create problems that slow your business’s growth.

It’s not just errors you make while entering transaction data into a spreadsheet or failing to note that you paid a bill. Inaccurate financial tracking ultimately costs your business money and undermines your ability to plan for the months ahead.

It’s essential for your accounting system — whether it’s just you and a spreadsheet or a bookkeeper — to track every transaction so you can accurately gauge your business’s financial health.

While it’s ideal to have a financial professional handle your books, an integrated accounting system can help you or your bookkeeper do the job more efficiently. Accounting software tracks all your financial transactions. It records every time you pay bills, deposit or withdraw money, or send an invoice.

3. Mixing personal finances with business accounts

Small business owners often blur the line between personal and business finances. It’s understandable, especially when a business is just beginning to find its footing. You go to Costco or Walmart to pick up some office supplies and, because you’re already there, get a few items for your home.

But it goes beyond combining business and personal items on a single receipt. Many small business owners don’t open a dedicated business bank account. Using one account for both personal and business purposes can cause the following problems:

• Difficulty sorting personal and business transactions 
• Significant issues when filing taxes 
• Missed tax deductions
• Problems when you apply for a business loan or line of credit

If you’ve been using your business and personal bank accounts interchangeably, break that habit. Open a separate business bank account. You’ll likely get some incentives to do so from the bank where you have your personal account. If you’re shopping and in a bind, always separate business and personal purchases so you can set aside business receipts.

4. Inefficiently managing billing

Cash flow is essential to keeping a business running from day to day. Efficient billing and invoicing ensure you have the funds to cover expenses, payroll and other essential costs.

Businesses that fall behind on invoicing or don’t stay on top of their accounts receivable can run into serious cash flow problems. Late invoices and slow-paying customers can leave a business scrambling to cover payroll, rent or other critical expenses. Ullah pointed out that poor billing practices can also cause delays in paying employees and vendors, a pattern that can quickly damage a company’s reputation and day-to-day operations.

“Always try to collect money from your customers quickly,” Ullah advised. If you are selling services or products to a business, get a credit-term agreement and enforce the fines in case of late payment.”

Late payments don’t just cause temporary delays; they can threaten the entire business. According to the 2024 Small Business Credit Survey (SBCS), 51 percent of firms reported uneven cash flow as a major financial challenge. This can make it harder to cover operating expenses and raises the risk of failure due to insufficient funds for payroll, rent and inventory.

Because the stakes are high, improve your billing process by sending invoices immediately after you’ve fulfilled your part of the transaction. Using accounting or invoicing software can streamline the process and help you collect unpaid invoices more efficiently.

5. Not properly planning for tax season

DIY tax software may seem like a money-saving solution for small businesses, especially when trying to avoid the cost of an accountant. But while doing your own taxes might work for individuals with a simple return, it’s rarely a good idea for small business owners. Business and payroll tax issues can be complex, and incorrect filings can be costly.

Ensure your business uses an accounting system that seamlessly tracks company expenses, payroll and other fundamental components of your profit and loss statement to minimize tax errors and oversights.

6. Failing to classify employees properly

Most small businesses rely on employees or hire freelancers to conduct essential work. Classifying these workers correctly is crucial, as mistakes can lead to lawsuits and tax penalties.

If a small business owner misclassifies an employee, federal and state governments miss out on payroll taxes. According to the U.S. Department of Labor, the penalties for this mistake could be substantial: 

• Business owners may be responsible for payroll, Social Security, unemployment and Medicare taxes for misclassified employees. 
• The business may also face penalties and lawsuits if workers aren’t reimbursed or provided benefits as required by the Fair Labor Standards Act.

To avoid misclassifying employees, you must determine whether they are employees or contractors based on their jobs, their pay and their relationship with your company. 

If a worker puts in full-time hours, receives a salary and gets health benefits, they are likely an employee. If they’re paid per project and receive no benefits, they should probably be classified as a contractor.

Once you’ve made that determination, ensure the worker completes the correct payroll form for their classification. A contractor completes a W-9 form, while a full-time employee fills out a W-4 form. 

If you make a mistake but can prove to the IRS that you have a “reasonable basis” claim, you may qualify for relief. You need to prove one of the following to be eligible:

• You reasonably relied on a tax-related court case or ruling by the IRS to make your classification determination.
• Your business was audited by the IRS when the employees in question were treated similarly to independent contractors, and the IRS didn’t reclassify the workers.
• You treated your workers as independent contractors because the rest of the industry does so, and you can prove that.
• You relied on the advice of a lawyer or accountant who knows about your business.

7. Going paperless without a backup

The last thing a small business owner wants to experience is a tax audit. But if you must go through one, the more documentation you have, the better. 

In a digital age where everything lives in the cloud or on an app, it’s understandable that people don’t keep paperwork for a few weeks, let alone seven years. However, the IRS will expect specific records during an audit. “Always keep a paper trail of money/assets going out or coming into your business,” Ullah cautioned. “And always save the receipts, especially of major expenses, income or ownership papers.”

A good rule of thumb is to save the following documents for at least seven years:

• Business tax returns
• Payroll tax records
• Current employee information
• Business ownership records
• Accountant records
• Records from operations

8. Overstating cash flow

Cash flow is one of the most important financial indicators for any business, but many small business owners overestimate their available funds. This can make it difficult to manage operations, pay employees and vendors, or fund key purchases.

One common cause of overstated cash flow is accidentally duplicating income. Rachel Barnett, owner of Gentle Frog Bookkeeping, explained that this often happens when a business owner creates a sales record, like an invoice or sales receipt, that isn’t properly matched with the transaction downloaded from the bank.

“Sometimes, the business owner doesn’t even realize a sales record is being created,” Barnett explained. “This can happen when a third-party app is used and automatically creates the sales record.” To avoid this issue, Barnett recommends reviewing your workflow for recording sales transactions, even writing it out if needed, to understand how income is tracked from sale to deposit. 

Another common error is misclassifying deposits as income when they aren’t. “At the end of each month, I recommend reviewing every transaction labeled as income to catch anything that doesn’t relate to a product or service sold,” Barnett said.

9. Tracking income and expenses incorrectly

If you’re not keeping close tabs on your income and expenses, it’s easy to report the wrong numbers at tax time — and that can lead to trouble. Many business owners also forget to track smaller purchases or don’t record expenses accurately, which can inflate taxable income and increase how much they owe at the end of the year.

Suzette Flemming, owner of Flemming Business Services, recommends creating a well-structured chart of accounts with clearly named and defined categories. “Many businesses use names on the chart of accounts that do not make sense to them, or accounts that have very similar names,” Flemming explained. “These two things really make categorizing transactions difficult, and that leads to reports that do not give accurate information.”

Flemming noted that unclear categories don’t just affect your reports; they can also lead to poor business decisions and incorrect tax filings, including sales, payroll and income taxes. To avoid confusion, she likes to export the chart of accounts into Excel and add a column for definitions and a column for examples, so everyone handling the books has a shared reference.

10. Forgetting to pay invoices

When vendors send invoices for services rendered, they likely have a due date within 30 to 60 days. If you don’t stay on top of your accounts payable process, it’s easy to overlook due dates and pay your invoices late. This can lead to late fees and damage your vendor relationships.

11. Missing the signs of fraud

Some business owners want to handle all accounting tasks personally, while others make the mistake of outsourcing everything. You should never put yourself in a position where you don’t know what’s happening with your business finances. Failing to track your finances could cause you to miss the signs of fraud. 

Small business accounting best practices

Several accounting best practices can help small businesses stay organized and financially healthy. These include using strong security measures, clearly defining employee roles, and standardizing accounting processes. We asked a few experts to share their top recommendations, from using job costing to better understand your true costs to reviewing reports more consistently.

Standardize accounting processes.

Flemming emphasized the importance of having clear, consistent procedures for your accounting team or bookkeeper. 

“This includes how and when transactions are entered, when accounts are reconciled, and reports prepared,” Flemming explained. “Reports and underlying transactions should be reviewed no less than quarterly. AI has its place but should not be relied upon to categorize transactions or review the books or accuracy.” 

Use secure passwords and two-step authentication.

Flemming also stressed the importance of using strong security measures to protect sensitive financial data, especially in accounting software and banking systems.

“Accounting software, bank accounts, credit card accounts and loan accounts should be protected with passwords and two-step authentication,” Flemming advised. “Not everyone needs access [or] full access. For security, all software and accounts should be logged out if the employee is away from the computer for more than a few minutes.” 

Using tools like multifactor authentication and setting clear user permissions can go a long way in protecting your business from fraud, data breaches and internal mishandling.

Clearly define employee roles.

It’s important to clearly define each employee’s responsibilities, especially when it comes to financial tasks. “Know who is responsible for what,” Flemming advised. “Clearly defined roles will make processes and resolving issues much easier.”

Flemming gave examples of the kinds of questions business owners should ask:

• Is the owner responsible for preparing and remitting payment for sales tax?
• Is the bookkeeper responsible for payroll, payroll taxes and payroll reports? 
• Who is responsible for paying the bills? 
• Is there an approval process?

Clarifying roles like these helps prevent confusion, improve accountability and ensure key financial tasks don’t fall through the cracks.

Reconcile all accounts monthly and address any discrepancies.

Barnett recommends reconciling all accounts, including checking, savings, credit cards and loans, at least once a month. This practice helps you spot errors early and ensures your books reflect accurate, up-to-date financial information.

“What often happens is that if you reconcile the account but leave errors in the register, it creates a domino effect that impacts the two main financial statements: the profit & loss and the balance sheet,” Barnett explained. “Some of these mistakes are quick fixes, others take longer. But if they were corrected during reconciliation, cleanup would be faster, and business owners would start to see which of their habits are causing the problems.”

Schedule time with someone who enjoys reviewing accounting records.

Barnett encourages small business owners to occasionally check in with someone who genuinely enjoys reviewing accounting records — not just to find mistakes, but to improve workflows and spot opportunities.

“It’s like taking your car in for an inspection at the same time as an oil change, even if it seems to be running fine,” Barnett said. “It’s not about catching mistakes; it’s about optimizing the process with help from someone who understands accounting in your industry.”

Barnett recommends framing these check-ins in a positive light. “A nice way to frame this is: ‘Let’s review your records to improve your workflow,’ rather than, ‘Let’s find what you did wrong.'”

Be aware of how much your product or service costs.

While job costing isn’t necessary for every business, Flemming recommends it for companies that build or manufacture products, outsource labor or resell services.

“A business needs to know how much their product or service costs in order to be able to properly price the end product,” Flemming explained.

Flemming acknowledged that job costing can be time-consuming and often depends on gathering input from managers, employees and subcontractors. “But without knowing the underlying costs, the amount charged to the client is a guess and may or may not be enough to keep the business profitable,” Flemming said. 

Understanding your costs upfront helps ensure you’re pricing your services strategically, not just guessing and hoping for the best.

Danielle Bauter contributed to this article.