As tax time approaches, many small businesses learn painful lessons about record-keeping and accounting best practices that, if adhered to throughout the year, could avoid major headaches in the run-up to the filing deadline.
Twenty-six percent of the respondents cited as the most common reason that small business owners make mistakes in their tax preparation a lack of ongoing insight into their companies’ financial situation.
“The number one reason why accountants believe that small businesses may make mistakes is because they’re just not in tune” with the day-to-day finances of the company, explained Jamie Sutherland, Xero’s president of U.S. operations.
Small business owners typically “set out for passion [for] a product or service,” Sutherland said. “They don’t desire to be an accountant.”
Small business leaders, by virtue of their own interests and the operational limitations of a small staff, often treat the nuts and bolts of the financials as an afterthought.
“The biggest challenge that small businesses face is simply that the owners typically work in the business and not on the business, and for many that means only diving into their finances during tax time,” Simon Gray, managing partner of Gray Consulting, said in a statement.
Xero, founded in 2006 with global headquarters in New Zealand and a partner network of 3,300 accounting firms, offers a suite of Web-based accounting software options geared for small businesses, targeting those with fewer than 100 employees. Xero’s software presents a small business with a continuously updated view of its financial picture, a real-time visualization that serves as the company’s chief selling point.
Xero’s software taps into an array of feeds from banks and other financial institutions, and compiles pertinent data such as payment information and customer statuses. By consolidating that information into a single dashboard, and extending access to mobile platforms, Xero positions its offering as an SMB-friendly alternative to traditional desktop accounting applications.
Not only does the automatic importing of financial information reduce what can be time-consuming data entry work, it combines disparate groups of financial data into an aggregated view that aims to address a key pain point that SMBs face when pulling together their finances in preparation for tax time.
“Most of the time it’s out of sync,” Sutherland said of siloed desktop accounting programs. “In the world of online accounting,” he said, “you’re able to connect to banks, connect to payment systems and keep this information up to date.”
In Xero’s survey, conducted by IBOPE Zogby International, the respondents expressed concern that many small business owners only take the time to meet with their accountant at tax time. Indeed, 18 percent of the accountants polled identified these infrequent meetings as the biggest mistake that small businesses make with regard to their tax situations.
Forty-seven percent of the respondents advised small businesses to connect with their accountant once a month to ensure that they don’t overlook any financial red flags, while 22 percent said they should communicate every week, and 19 percent advised quarterly collaborations.
“I think we know that a lot of the collaboration happens around tax time,” Sutherland said. Meeting more frequently, he added, “not only alleviates a lot of the headaches around tax time, but enables you to take advantage of certain deductions.”
Frequent communication with an accountant throughout the year, along with diligent record keeping on the part of the SMB, can pay dividends come tax time.
“At the end of the day you’re gong to put money back in your pocket if you’re tracking expenses,” Sutherland said.
Xero’s accounting software is designed to facilitate closer collaboration between small businesses and their accountants by providing permission-based remote access to the SMB’s finances, enabling financial professionals to more quickly identify and address potential problems. Seventy-one percent of the accountants surveyed said that they could provide their clients with better advice if they had a real-time view of their finances.
The accountants also warned about audit flags. Forty-five percent of the respondents said that the conflation of business and personal expenses is the biggest mistake that small businesses make that can trigger an audit. Twenty-six percent said that audits are most likely to occur as a result of an SMB claiming excessive deductions to income.
Nearly three in 10 (29 percent) said that expenses related to the home office are the most commonly overlooked deduction, while 24 percent said that small businesses most often omit deductions associated with hiring new employees.
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects for more than four years, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. You can find Kenneth on LinkedIn.
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