For Consumer Packaged Goods (CPG) businesses, effective accounting is crucial for understanding financial health, making informed decisions, and ensuring sustainable growth. However, several common accounting mistakes can hinder the success of CPG businesses. In this article, we will explore these mistakes and emphasize the importance of accurate and timely accounting.

1. Revenue Recognition Errors

One of the primary accounting mistakes made by CPG businesses is using the cash basis accounting method instead of accrual. With the cash basis, revenue is only recorded when cash is received, which may not accurately represent the actual sales performance. Additionally, misclassifying promotions, giveaways, and discounts can inflate revenue figures, leading to inaccurate financial reporting. Properly tagging and categorizing these transactions in accounting software, such as QuickBooks or Xero, can help address this issue.

2. Inventory and Cost of Goods Sold (COGS) Mismanagement

Effective inventory management is critical for CPG businesses due to the perishable nature of many products. Unfortunately, many business owners struggle to keep track of their stock levels accurately. Failing to update the value of each SKU and not employing dedicated inventory management solutions can lead to inefficiencies and unnecessary costs. Adopting inventory management tools like Fiddle.io, DEAR, CIN7, or Stock and Buy can significantly improve accuracy and reduce wastage.

3. Deductions Misallocation

CPG businesses often face deductions from retailers and distributors, such as chargebacks, slotting fees, and promotions. Properly estimating and allocating these deductions to the correct accounting categories is essential for accurate financial reporting. Neglecting this can lead to distorted profitability analysis and challenges in expense management. Implementing accruals for deductions and categorizing them correctly in financial statements can resolve this issue.

4. Cash Flow Misunderstanding

Cash flow management is crucial for sustaining CPG businesses. Many founders mistakenly use their profit and loss statement as their cash flow statement, leading to confusion about actual cash availability. To better understand cash flow, founders need a separate weekly cash flow sheet that tracks incoming and outgoing funds. Calculating the Cash Conversion Cycle (CCC) can further aid in optimizing cash flow. CCC = Days of Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payables Outstanding (DPO). Proper management of cash flow can prevent financial crises and support growth.

5. Timeliness of Reporting

CPG businesses often struggle to provide timely financial reports. Late reports hinder decision-making processes, goal setting, and budgeting. Staying up-to-date with financial reporting allows founders to analyze historical data, set future goals, hold themselves accountable, and make informed decisions based on current cash flow status.

The Importance of a Professional Bookkeeper for CPG Businesses

To avoid the above accounting mistakes, CPG businesses need a competent bookkeeper. A proficient bookkeeper can ensure accurate and timely financial records, providing founders with valuable insights into their business’s performance. With historical data available, CPG owners can identify trends, assess financial health, and set future goals more effectively. At Unloop, we specialize in accounting for inventory based CPG Brands starting at $399/month. Click here to learn more about how we can help.