Your Margins Are Lying to You—And This Is Why
Accrual Accounting Is the Key to Accurate Gross Margins
If you’re making business decisions based on your gross margins, but you’re not using accrual accounting, you might be operating on bad data.
Here’s why:
Your Cost of Goods Sold (COGS) and revenue need to be aligned properly in your accounting records. If they’re not, your margins are misleading—and misleading margins can lead to disastrous financial decisions.
The Problem: Your COGS and Revenue Aren’t Aligned
Understanding your business’s profitability means understanding your gross margin. But that margin only tells the truth if revenue and expenses are matched correctly.
Here’s the issue:
Revenue shows what you earned.
COGS shows what it cost to earn it.
But if these aren’t recorded in the same period, your margins are inaccurate. Imagine you sell a product in March but don’t record the cost of that product until April. Your March profit looks artificially high, while April’s seems lower than reality. This mismatch distorts your financial reports.
The Consequences of Misaligned Accounting
When your revenue and COGS aren’t properly matched, it can create serious problems:
➡ Overstated Profits: Your income statements may reflect inflated earnings that don’t truly exist.
➡ Misleading Reports: Since your gross margin is inaccurate, financial forecasts and performance evaluations suffer.
➡ Bad Decisions: If you think you’re more profitable than you actually are, you might overspend, underprice, or fail to correct financial inefficiencies.
The Fix: Accrual Accounting
The solution? Implement proper accrual accounting practices. Here’s how:
👉 Match COGS to Revenue in the Same Period – Don’t “lump” costs into random months. If you sell a product in March, the cost associated with that product needs to be recorded in March too.
👉 Keep COGS Tied to Specific Revenue Streams – If your business sells multiple products or services, ensure costs are allocated to the correct revenue source. This prevents skewed profitability insights.
👉 Regularly Review Inventory and Expenses – Conduct monthly or quarterly checks to ensure COGS is accurately reported. If you spot mismatches, correct them to maintain accurate financial reporting.
The Bottom Line
Clean accounting leads to accurate margins, which leads to smarter decisions. If you’re not using accrual accounting, your financial reports may be painting a false picture of your profitability.
Don’t let bad data sink your business. Fix your accounting, align your COGS and revenue, and start making financial decisions based on reality—not guesswork.
