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Where small businesses go wrong at tax time

April 17 marks a date that very few US small businesses look forward to — the 2012 tax deadline. Many of these businesses are scurrying to get their financials in order shuffling through paper, checking old emails for receipts, and thinking about how next year things will be different. Others are relying on their accountant to clean up their mess.

As the infographic above shows we recently ran a survey across more than 500 accountants in the US and asked them what are some of the pitfalls that small businesses get into around tax time.

The number one mistake that small businesses make is not having ongoing insight into their finances throughout the year. So here we are, days away from the tax deadline, and there are tons of small businesses spending hours upon hours getting their finances in order. But why?

Talk to any small business and they’ll likely tell you that doing their accounting ranks just above doing the laundry. A lot of the distaste for accounting comes from poorly designed software that doesn’t “think like a small business thinks”.

The second biggest mistake according to accountants was that small businesses only talk to their accountant at tax time. Almost a quarter of the accountants we surveyed think that contact with a small business should be weekly. Yes, that’s 52 times a year. But that contact doesn’t have to be in the flesh.

With online accounting software, much of the bookkeeping work can be automated and/or done remotely. For the accountant each of those client contact touch-points can be as simple as a comment or note attached to a certain piece of financial data. For the small business owner it’s possible to immediately view the comment or note on their iPad over Sunday brunch. The result is key business decisions get made long before tax time.

A whopping 71% of accountants believe that having real-time access into their small business client’s financials would enable them to provide better advice. And better advice throughout the year leads to better results at tax time.

 

Read more about Accountants, United States

 

3 comments

Nick Bird
11 April 2012 #

I really like these comments Jamie. I couldn’t agree more that small businesses really need more contact points with their accountants/advisers. This was emphasized in your last blog post when you stated that one reason small businesses fail is because they don’t have good contacts to get the right advice.

I think Xero’s platform allows for financial advisers to come in and provide the accounting work as well as provide great financial advice on operations, process flows, taxes, investments, and financial planning. (because it’s a lot easier and faster then it used to be, thus reducing the cost) These better services can be offered and small businesses can afford them because of the overall cost of accounting has come down greatly due to the business model in place that Xero has set up.

I’ve found with my own clients that I’m able to provide ongoing advice because I contact them at least once a month. This allows me to review their statements with them if needed and answer any questions they have. They are usually very quick meetings, but to have a conversation with someone knowledgeable in a field for a few minutes each month is priceless (at least it is for me with anything outside of finance)

Brenford
6 June 2012 #

Jamie

I can’t help but think that part of the reason why small businesses, especially micro businesses (home businesses) struggle to keep on top of their accounts / tax is that they do most of their business on the internet. Typically, the hard proof required to support each transaction is an email and rather than printing emails, which is time consuming, the business owner prefers to do other tasks. Eventually the time comes when they have to go back, find the emails and print them.

Another problem is that accounting software are not designed to “think like a small business”.

Keeping in touch regularly with clients can help but the client’s have to do the spade work.

I don’t think there’s an easy solution and that there will always be a scurrying by small business owners near filing time to get their paperwork in order.

Jamie Sutherland
7 June 2012 #

Thanks for the comment Brenford.

What you are alluding to (spade work) is exactly what Xero eliminates. We connect to over 5,000 bank feeds across the USA. Once you’ve authorized your bank, all the transactions through your bank account will automatically appear in Xero every day. From there it is just a matter of reconciling those transactions with what is in Xero. Over time, Xero gets smarter and will automatically suggest how to code them. All you need to do is click ok.

The reconciliation can be done in minutes as opposed to the hours and hours required when you try and pull all this info together at the end of the month.

Here is a great video that explains it well: http://blog.xero.com/2008/12/bank-reconciliation

That is just one feature of many in Xero that help automate and alleviate the need for spade work.

Jamie

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