august2022 - 20

FEATURE
TIPS TO HELP YOUR SMALL BUSINESS CLIENTS
THRIVE DURING HIGH INFLATION
By David Axler
THE PANDEMIC, THE Great Resignation, and the subsequent shift to remote work has spurred
an upsurge in new business formations. During 2021, a record-breaking 5.4 million new business
applications were filed, according to U.S. Census Bureau data. However, many new entrepreneurs
are navigating an environment of higher inflation, shrinking profit margins, suboptimal business
bookkeeping practices, and financial uncertainty that could put their companies at risk.
Recently announced findings from a survey of
1,200 small business owners conducted by Wave
revealed some troubling signs for small business
owners. Let's take a closer look at the key findings
of this survey - and what it could mean for CPAs
and their clients.
SMALL BUSINESS OWNERS ARE
SHORT ON CASH
Our survey found that a majority of respondents
(57%) say they have less than $5,000 in cash reserves.
Nearly half of respondents (48%) said that they
would not be able to pivot to alternative revenue
streams if financial difficulties arise. Among the
52% of entrepreneurs who said they could generate
extra revenue, 54% said they would turn to a
side hustle, and 24% said they would try a digital
revenue stream.
Takeaways for CPAs: Talk to your clients early
and often about their overall financial stability.
Encourage them to set up an emergency savings
account with at least three months' worth of
expenses. You also may want to encourage your
clients to diversify their base of business income
where possible. Are they relying too much on one
big client or a single product or service? What if that
large client decides to end receiving services, or if
consumer preferences for that product change as
consumers cut back on discretionary spending in
case of rising prices or recession?
Some small business owners may feel like after
the stress and disruptions of the last two years,
they can survive anything. But it's good practice
to remind your clients to be prepared for possible
financial challenges that could lie ahead. Help your
clients build financial resilience, and they will benefit
from your guidance during these uncertain times.
SMALL BUSINESS OWNERS NEED TO
PROFESSIONALIZE THEIR FINANCES
One of the common mistakes that small business
owners make is not running their business like a
real, professional, well-organized entity that is
separate from their personal financial life. When
business owners get complacent with their finances,
it can not only cost them dearly at tax time, but
also prohibit them from making informed decisions
impacting the day-to-day operations and sometimes
survival of their business. It's important to know
where you stand on a daily basis.
Our survey found that small business owners
are making a variety of rookie mistakes with their
business finances:
* 26% of small business owners admit to not paying
themselves a salary.
* 35% confess to blurring the lines between personal
and business accounts.
* Only 48% of microbusinesses (with less than 10
employees) have a small business bank account.
* 13% of respondents are still using drawers or
shoeboxes to keep track of receipts.
Takeaways for CPAs: Use this opportunity to
talk with your clients about the importance and
benefits of making their business legitimate in the
eyes of the tax authorities. Consider if setting up an
LLC or other legal business entity is right for their
business. An important first step is recommending
that they open a business bank account and begin
the process of building business credit. Remind them
to keep their business and personal expenses rigidly
separate, and show them how it can save them time
(and money) during tax season.
Help your clients recognize how being disorganized,
using shortcuts, and bending the rules can
ultimately cost them more money in the long run.
Especially during times of high inflation, when
every dollar counts, it's crucial for your clients
to understand the value and peace of mind that
comes from doing business in a more organized,
well-structured way.
NEW PAYMENT APP TAX RULES ARE AN
UNPLEASANT SURPRISE
Fifty-one percent of the business owners we surveyed
accept payments through third parties, such
as payment apps like PayPal or Venmo. However,
20 AUGUST 2022 ■ www.CPAPracticeAdvisor.com
nearly one in four (24%) respondents were not
aware that the IRS is increasing its requirements for
reporting business income that flows through these
popular mobile payment apps. Ten percent of respondents
plan to transition away from digital payments
platforms because of the new tax regulations.
Takeaways for CPAs: Tax reporting of peer-topeer
(P2P) mobile payment app business income
is a hot topic that is a cause of concern for many
small business owners, especially solopreneurs
and gig workers who might not have been rigorous
about tracking and reporting all their income
and expenses.
Be ready to explain to your clients that they need
to raise 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
they use to pay their friends for last night's dinner
and drinks. This is another reason to encourage the
separation of business and personal finances.
SMALL BUSINESS OWNERS NEED TO GET
PROACTIVE ABOUT IMPROVING CASH FLOW
Especially during times of high inflation and
economic uncertainty, it's important for small businesses
to improve their cash flow: get paid faster,
keep track of outstanding receivables, and make sure
they have enough cash on hand. According to our
survey, there are some signs of positive momentum:
23% of respondents plan to use bookkeeping software
for the first time this year and 15% say they will
embed payments digitally to get paid faster.
Takeaways for CPAs: Have a Cash Flow 101
conversation with your clients. Especially during
high inflation, when a business's expenses might
be increasing faster than its income, it's crucial for
the business to keep cash coming 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 keep your CPA practice thriving - with repeat
business, referrals, and a healthier base of business
for years to come. ■
David Axler is VP/GM, Banking and Books at Wave.

http://www.CPAPracticeAdvisor.com

august2022

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