One of the biggest mistakes small business owners make is not talking enough with their accountants, according to a new survey.
The survey, by the small business accounting software developer Xero, polled a group of accountants, some of whom use the software and some who don’t. When asked what is the most common mistake small business owners make when it comes to their finances, 32 percent said it was only talking to their accountant during tax time (up from 25 percent last year and 18 percent in 2012), 20 percent said it was a lack of understanding when it comes to their tax obligations (up from 18 percent in 2013 and 13 percent in 2012), and 20 percent said it was not having real-time insight into their finances (up from 13 percent in 2013 and down from 26 percent in 2012).
Another 12 percent said the biggest mistake of small business owners was neglecting to set up a cash flow forecast (down from 13 percent in 2013 and 17 percent in 2012), 8 percent said it was not linking their financials to business goals (down from 11 percent in 2013 and 15 percent in 2012), and 4 percent said it was having little knowledge of their customer payments and debt (down from 8 percent last year and 5 percent in 2012).
When asked whether having a real-time view into their client’s finances would enable them to provide better financial advice for their customers, 75 percent of the accountants surveyed said yes, up from 72 percent in 2013 and 71 percent in 2012.
Asked how business has been for their small business clients this year compared to last year, 29 percent of the accountants said it was better or busier than last year, 18 percent said it was worse or slower than last year, and 31 percent said it was the same. Another 21 percent of the survey respondents said they did not have any small business clients, while 1 percent were unsure how to respond.
Online Accounting Services
Xero predicts that every accountant will offer online accounting services by 2018. “There’s a trend everywhere in software around moving to the cloud because it creates better products,” said Peter Karpas, the recently appointed CEO of Xero North America, the San Francisco-based division of the New Zealand-based company. “It isn’t that people are moving to the cloud just to move to the cloud. People are moving to the cloud because it provides superior experiences and a better way to work and it helps them to grow their businesses more profitably.”
When asked if they plan to provide online accounting services to their clients this year, 55 percent of the respondents said yes (compared to 43 percent last year and 32 percent in 2012), 35 percent said no (compared to 45 percent in 2013 and 45 percent in 2012), and 11 percent were unsure (compared to 13 percent in 2013 and 23 percent in 2012).
“The big news item here is that 55 percent of the accountants we surveyed are going to offer online accounting services in 2014, and that’s up from 32 percent when we started the survey, so clearly it’s a strong move to the cloud,” said Xero U.S. president Jamie Sutherland. “The accounting industry tends to be a bit of a laggard when it comes to new solutions and new software, but we’re now seeing a more rapid shift, which is what we expected when we set out on this journey building Xero.”
Accountants are starting to realize the benefits of moving to online software, Sutherland noted, and clients are coming into the fold.
Asked what percentage of their clients use online accounting services, 5 percent of accountants said that 100 percent of their clients were using them (up from 3 percent last year and 4 percent in 2012), while 20 percent said that between 75 and 99 percent of their clients are using such services (up from 7 percent in 2013 and 8 percent in 2012), and 24 percent said that between 50 and 74 percent of their clients are using online accounting services (up from 16 percent in 2013 and 15 percent in 2012).
Asked what percentage of small business clients use at least one cloud-based app (such as Gmail, Office365, Google Docs, FreshBooks, DropBox, Box, Evernote, etc.) in their businesses, 5 percent said that 100 percent of their clients are using cloud-based apps, 12 percent said that between 80 and 99 percent are using them. Fifteen percent said that between 60 and 79 percent are using them, 15 percent said that between 40 and 59 percent are using cloud-based apps, 10 percent said that between 20 and 39 percent are using them, and 7 percent said that between 1 and 19 percent are using at least one cloud-based app. Another 8 percent of the survey respondents said that none of their clients use online applications in their business, 21 percent said they do not have any small business clients, and 8 percent were not sure how to respond.
Constant Contact with Clients
Constant contact between accountants and their small business clients was found to be a key imperative, with 44 percent of the accountants polled saying small business owners should be in touch with their financial advisor at least once a month (up from 19 percent last year and 22 percent in 2012), while 21 percent of the survey respondents saying it should be once a week.
Asked when small businesses should start preparing for tax season, 27 percent of the accountants surveyed said prior to the end of the calendar year (up from 20 percent in 2013), while 16 percent said they only need to do it during tax-filing season from January to April (up from 10 percent in 2013). However, 55 percent of the survey respondents said small businesses should be preparing for tax season all year long.
“Communication with the client should be a year-round activity,” said Sutherland. “Forty-four percent say once a month is ideal and 55 percent say that clients should be preparing for their taxes all year long. So this isn’t just a one-time conversation with an accountant. It can go on throughout the year.”
He noted that Xero has been architected to make it easier to deliver reports on the fly from real-time information so accountants can have a closer relationship with clients.
“One of the other big findings was around how small businesses can work with their accountant to avoid some of the pitfalls around deductions,” said Sutherland. “Working with an accountant to make sure you’re taking correct deductions from your financials will alleviate the possibility of an audit, so 75 percent of our survey respondents said that faulty deductions are causing audits.”
When asked how many billable hours per month do they estimate saving if their client’s files are up to date and correctly reconciled daily, 3 percent of the accountants said it was under an hour, 20 percent said between one and five hours, 35 percent said between five and 10 hours, 19 percent said between 10 and 20 hours, 12 percent said more than 20 hours, and 12 percent were unsure.
“Having real-time information and client files up to date on a regular basis saves time,” said Sutherland. “Not only is the software better and helping our accounting partners land new clients because they’re in the cloud, there’s also a cost savings. Over 30 percent said they would save 10 hours a month or more just by having client files up to date, and that happens in our software automatically. That adds up. You extrapolate that across the year, and it’s meaningful dollars for any size firm.”
Asked about what is the most common mistake that businesses make that could trigger an audit by the IRS, 36 percent cited excessive deductions to income, 14 percent said it was misidentifying their workforce (as in employee vs. independent contractor), 9 percent said it was with home office deductions, and 35 percent it was mixing business and personal expenses in deductions.
“The thing that comes up frequently is around mixing personal and business deductions,” said Sutherland. “There’s a gray line there. If you’re going on vacation and some of your expenses are for business and some are personal, you need to be clear about exactly what is business related.”
When asked what is the biggest mistake small business owners make, 38 percent of the respondents said it was not keeping their financial records up-to-date, 22 percent said it was not budgeting and forecasting financials annually, 22 percent said it was not meeting with an accounting professional regularly, 6 percent said it was misclassification of employees (such as claiming full-time employees as part time), 4 percent said it was incorrectly filing their small business (for example, as a C Corp as opposed to an S Corp or LLC), 3 percent said it was not incorporating their business, and 1 percent said it was mixing personal with business items.
The most overlooked deductions for small businesses, according to the accountants surveyed, include out-of-pocket expenses and depreciation. Asked about what is the most commonly overlooked deduction for small business owners, 29 percent cited out-of-pocket expenses, 30 percent named depreciation, 16 percent indicated automobile expenses (such as gas, parking and tolls), 7 percent said it was expenses associated with hiring new employees, and 10 percent said it was office improvements.
Not all of the accountants surveyed were actually using Xero. When asked whether or not they or their clients used Xero, only 28 percent said yes, while 67 percent said no and another 5 percent were unsure.
Accountants were also asked to name the strangest items their clients have tried to write off, and 42 percent said it was a family or personal vacation disguised as a business trip, 28 percent said it was an animal or pet, and 26 percent cited pet supplies or veterinarian expenses. Other attempted write-offs included a face lift, coded as Repairs & Maintenance (under cosmetic surgery), as well as tractors, a robot and bail money.
“It’s always fun to see in the survey the very creative deductions,” said Karpas. “The goal is to get all of the deductions that you deserve while not getting audited, getting everything that you deserve and doing it in a completely legal way. A lot of people miss deductions that they deserve, and therefore they’re paying more to the IRS than they need to. Then at the same time, when they do get audited, it’s for these false deductions.”