Tips to Help Your Small Business Clients Thrive During High Inflation

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By David Axeler.

The pandemic, the Great Resignation and the subsequent shift to remote working have spurred an upsurge in new business training. In 2021, a record 5.4 million new business applications were filed, according to United States Census Bureau The data. However, many new entrepreneurs navigate an environment of higher inflation, declining profit margins, suboptimal accounting practices, and financial uncertainty that could put their business at risk.

Recently announced results from a survey my company conducted of 1,200 small business owners revealed some worrying signs for small business owners. Let’s take a closer look at the key findings of this survey – and what they could mean for CPAs and their clients.

Small business owners lack cash

Our survey revealed that a majority of respondents (57%) say they have less than $5,000 in cash reserves. Almost half of respondents (48%) said they would not be able to turn to other sources of income in the event of financial difficulties. Of the 52% of entrepreneurs who said they could generate additional income, 54% said they would turn to a side hustle and 24% said they would try a digital income stream.

Points to remember for CPAs: Talk to your clients early and often about their overall financial stability. Encourage them to create an emergency savings account with at least 3 months of expenses. You may also want to encourage your clients to diversify their business income base wherever possible. Are they relying too heavily on one big customer or one product or service? What if that big customer decides to stop receiving services, or if consumer preferences for that product change as consumers reduce discretionary spending in the face of a price hike or recession?

Some small business owners may feel like after the stresses and disruptions of the past two years, they can survive anything. But it’s good to remind your clients to be prepared for any financial challenges that may lie in wait. Help your clients build their financial resilience and they will benefit from your guidance in these uncertain times.

Small business owners need to professionalize their finances

One of the common mistakes small business owners make is not running their business as a real, professional, well-organized entity separate from their personal financial life. When business owners become complacent with their finances, it can not only cost them dearly at tax time, but also prevent them from making informed decisions that impact day-to-day operations and sometimes the survival of their business. It is important to know where you are on a daily basis.

Our survey found that small business owners make a variety of rookie mistakes with their business finances:

  • 26% of small business owners admit to not paying themselves a salary
  • 35% admit to blurring the lines between personal and professional accounts
  • Only 48% of micro businesses (less than 10 employees) have a small business bank account
  • 13% of respondents still use drawers or shoeboxes to keep track of receipts

Points to remember for CPAs: Take this opportunity to discuss with your clients the importance and benefits of making their business legitimate in the eyes of the tax authorities. Determine if forming an LLC or other legal business entity is right for their business. An important first step is to recommend that they open a business bank account and begin the process of building business credit. Remind them to keep their business and personal expenses strictly separate, and show them how it can save them time (and money) during tax season.

Help your customers recognize how being disorganized, using shortcuts, and bending the rules can cost them more money in the long run. Especially in times of high inflation, when every dollar counts, it’s critical that your customers understand the value and peace of mind that comes from conducting business in a more organized and well-structured manner.

The new tax rules for payment apps are a bad surprise

Fifty-one percent of business owners we surveyed accept payments through third parties, such as payment apps like PayPal or Venmo. However, nearly one in four respondents (24%) were unaware that the IRS was increasing its requirements for reporting business income that passes through these popular mobile payment apps. Ten percent of respondents plan to move away from digital payment platforms due to new tax regulations.

Points to remember for CPAs: Peer to Peer (P2P) mobile payment app business income tax reporting is a hot topic of concern for many small business owners, especially individual entrepreneurs and gig workers who may not have – have not been rigorous in tracking and reporting all of their income and expenses. .

Be prepared to explain to your clients that they need to up their game on tracking and reporting any business income that goes through third-party payment processors or P2P apps, even if it’s the same app which they use to pay their friends for last night’s dinner and drinks. This is another reason to encourage the separation of professional and personal finances.

Small Business Owners Need to Be Proactive to Improve Cash Flow

Especially in times of high inflation and economic uncertainty, it’s important for small businesses to improve their cash flow: get paid faster, track outstanding receivables, and ensure they have enough cash on hand. According to our survey, there are some signs of positive momentum: 23% of respondents plan to use accounting software for the first time this year and 15% say they will integrate payments digitally to get paid faster.

Points to remember for CPAs: Have a Cash Flow 101 conversation with your customers. Especially in times of high inflation, when a company’s expenses can grow faster than its revenues, it’s crucial for the company to keep cashing in. Discuss cash management strategies and the benefits of remaining financially vigilant. Times of high inflation are an opportunity for CPAs to reach out to their clients and offer professional advice to keep them on track for long-term success. Financially resilient clients will help your CPA practice prosper – with repeat business, referrals, and a healthier business base for years to come.

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David Axler is Vice President/General Manager, Banking and Books at Vague.

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