Basis 365’s Cofounder Featured in New Small Business Accounting Survey
Money is the key to a successful small business. Yet, for many small business owners, understanding the best practices for their company’s finances is a difficult task.
Clutch, a leading B2B ratings and reviews firm, recently surveyed more than 300 small business owners to understand how they approach handling their company’s finances.
Rhett Molitor, cofounder of Basis 365 Accounting, spoke to Clutch about the data, providing expert analysis and industry context.
Small Businesses Should Keep Separate Bank Accounts
The survey found that over one-quarter (27%) of small business owners do not have a separate bank account for their business.
This choice can leave a business more vulnerable to accounting errors. It also makes it more difficult for small businesses to transition their accounting resources.
Molitor discussed the implications of not separating business and personal bank accounts:
“Later if [a business] realizes, ‘Okay, I need somebody to come in and do my accounting for me,’ it’s really hard to unwind whatever was going on in that account,” Molitor said. “It’ll make that transition more difficult and more expensive.”
Accounting errors caused by a lack of separated bank accounts can lead to more than just headaches and higher costs, though – it can also lead to trouble with authorities.
“If the IRS or anybody else needs to start looking at numbers, then it just gives them a reason to doubt what they’re seeing and look harder and, in many cases, find things that are being deducted or expensed that shouldn’t be.”
Ultimately, Molitor believes that all small businesses should make an effort to separate out their business’s finances.
“We do recommend if you have a small business, I don’t care how small, even if it’s not a business account, create a separate personal account and keep it separate.”
Track With the Accrual Method, But Consider Cash
The large majority of small businesses primarily use the accrual basis method to track their finances.
Molitor described how most small businesses have what he calls a “modified accrual.”
Both methods have their benefits, but the accrual basis is ultimately the better choice as a business grows.
“If you’re doing things like budgeting and forecasting or tracking metrics like your revenue, trending over time, you can’t do that on a cash basis,” said Molitor.
“When it’s a small business just starting, don’t worry too much about [the accrual basis]. Once you hit somewhere around the million mark, you need to start thinking about it. It’ll start to fail when you plan on a cash basis as you increase in size.”
However, businesses should also keep an eye on cash flow, even if they are tracking using the accrual method.
“When you’re doing certain types of accrual-based calculations, they sometimes don’t really tell you what cash is going to be…”
Small Businesses Shouldn’t Disregard Tax Help
Nearly one-third of small businesses (30%) believe they are overpaying their taxes, according to the survey. This is despite the fact that 93% of small businesses are confident or very confident in their tax preparation skills.
Many small businesses don’t have the knowledge to properly navigate the complex process of tax preparation.
“One of the problems with the tax industry is they bill by the hour,” Molitor explained. “A business owner doesn’t want to call their tax person to ask questions because they hate those hourly bills.”
Yet, these businesses may benefit from having a working relationship with a tax accountant, who can clarify issues before they become irreversible.
At the end of the day, though, small businesses may feel like they are overpaying their taxes simply because it’s all so overwhelming - not because they necessarily are overpaying.
“It could just be a general feeling that there’s too many [rules]. Things you don’t even know … you have to pay tax on. That can get annoying and overwhelming. As a small business owner, you learn the hard way and it’s not fun.”
Read Clutch’s full survey report: https://clutch.co/accounting/resources/small-business-accounting-tips-2018