Small business tax accounting is a mess and everyone knows it. Here are two examples:
- The IRS has long known that small business record-keeping is so bad that if all of the tax returns of small businesses that sponsor 401(k) plans were audited, more than half of the 401(k) plans could be disqualified.
- At a recent CPA convention, a speaker noted that he had not yet heard of a single firm that could meet the IRS requirements to qualify for the small business health insurance tax credit (SHOP).
Instead of addressing the real problem, accountants tend to focus on addressing the symptoms – deficiency notices, penalties, complaints and lawsuits. Accountants know that small business and nonprofit bookkeeping is a mess but that these clients are not willing to pay an accountant to fix the problem just to satisfy the government or their bank. We continue to operate in a state of denial or ignorance of the impact of our sloppy work.
Meanwhile, hidden from view, overall business performance suffers and potential tax liability risks multiply.
What is the solution? How could small business owners be convinced that it in their best interest to keep better records? The answer may simply be in demonstrating that better accounting is directly linked to improved performance and increased profits. As soon as business managers view accurate data as a tool to their success the resistance evaporates and accurate accounting becomes a core part of the organization’s mission. Even one person businesses routine gain transformational insights simply by having more reliable information about the details of their own operations.
Examples that illustrate this point are everywhere. One unprofitable retail firm came to me for help in late 2012. I suspected internal theft but the owner did not. Within months of upgrading their record keeping system the store swung back into profitability and continues to improve with better inventory management, pricing policy and purchase management almost a year later.
Another business performed services for online insurance agencies. It relied on data provided by third-party Internet service providers but was having trouble reaching the performance levels of earlier periods. By adding an additional layer of management review of data we quickly discovered that they were not receiving credit for some of the business they processed.
This past week I concluded a bookkeeping project for 2015 where it was clear that misleading online banking procedures and reporting has cost the business owner some money. Yet we don’t know how much money is missing or unaccounted for without additional accounting procedures.
How could better information and internal performance data improve your results? As soon as this possibility becomes clear then the steps to improve record keeping and management reporting will follow naturally. Accountants who take the extra time to show clients how to transition the accounting function from an expense to an investment in future profitability are doing their clients an enormous service. Tomorrow’s cloud-based small business accounting systems lend themselves to this role while allowing efficient data analysis and cross-platform application to extract maximum value with minimal effort.
Over the past year I’ve taken additional training in QuickBooks, Xero and FreshBooks designed to help small business owners get better value for the time and money they spend on their accounting. I hope to implement that training with some resulting “success stories” in a future bog post.