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Reporting Issues Small Businesses Are Dealing With

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Even pre-COVID, small business owners faced a variety of financial reporting issues they need CPAs' help with. Acuity's Matthew May reviews the latest pain points --which include sales tax and creating the right tech stack -- in depth and explains how accountants can make themselves indispensable.

Aug 31st 2021
COO Acuity
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As CPAs, when we think about our clients and small businesses facing tax and financial reporting issues, we typically have a hard time articulating value to our clients and prospects. I think we can group our contributions into three major areas:

1. Compliance (Painkillers)

2. Making Business Decisions (Moving the Needle)

3. Choosing Accounting Tech Stacks (Process Improvement)

In this article, I'll go more in depth into each area to explain the exact issues small business clients face, as well as how we, as CPAs, can help.

1. Compliance (Painkillers) 

With regard to compliance, when we think about small businesses in particular, their number one challenge is making sure they’re in compliance – following the rules, if you will. There are a couple of big areas in which CPAs really contribute to keeping people compliant.

Income Tax

The first one is staying in compliance with all of your federal and state income tax guidelines. Tax CPAs have been helping with this for years while ensuring that their clients stay up to date on any changes. Unfortunately, a lot of tax content focuses on deductions (so that is what clients ask about), and, to be candid, with technology tools now tracking all the inflows and outflows of cash (if your software is set up correctly), it is no longer a value add from accountants. 

The best CPAs focus more specifically on tax credits, getting to the dollar-for-dollar reductions of tax liability. Also, identifying tax credits requires us to be proactive and understand how to help our clients. One of the best examples is the research and development credit. Many people in the technology industry can take advantage of this credit not only at the federal level, but in many states. As CPAs, we can make a huge client impact by identifying relevant tax credits during our workflow. 

Sales Tax 

Even pre-COVID, several states were facing huge budgeting issues and economic pressure. Because of this, one of the levers states are increasingly pulling to raise money is sales tax. They are both increasing sales tax rates and casting a wider net on what is taxable. Economic pressures have caused unprecedented efforts by states charging sales tax in several areas that they never have before, which is now widely affecting most businesses.

Looking forward, I think the biggest compliance issue many industries will face over the next decade is sales tax, not income tax. Luckily, CPAs are beginning to dive in, ensuring that their clients focus on sales tax compliance.

This should not be a surprise. Even examining trends in transaction data over the last decade shows that sales tax compliance, because of its complexity, is one of the top escrow holdbacks for people selling their business. This is for a variety of reasons. For starters, the rules are very complex, there is a relatively low compliance rate, and companies are plainly unaware that some of these rules now apply to them.

One thing is certain, CPAs are going to have to constantly reevaluate how they help their clients relieve the sales tax pain point.

2. Making Business Decisions (Moving the Needle)

After people have complied with regulations, companies turn to CPAs to get better insight into their business. 

Some CPAs are too quick to default to moving their clients to GAAP-based financial statements even in advance of them being required to get a financial statement audit. While a GAAP conversion is a fine answer for those that are REQUIRED to have GAAP, it is rarely helpful or insightful to a client before that.

Revenue Recognition

More and more, client accounting service groups are slowly moving clients away from the cash basis towards GAAP accounting as their clients need it. Take deferred revenue, for instance. Many technology companies that sell one- and three-year licenses see a very distorted story in a cash basis profit and loss. Enter their CPA to help them defer revenue and move to a better-matched P&L that amortizes that revenue over the period that they incur the costs. Now the client has a more meaningful and actionable financial statement that makes sense to them and helps them understand their profitability. 

Situational 

There’s a huge category of business decisions CPAs can help clients with that can be labeled as “situational.” These are not necessarily overly complex decisions to CPAs, but they happen infrequently in most business owners’ lives.

A couple of examples might be obtaining a line of credit, going through with the sale of a business, and raising money or some kind of fundraising effort. When small business owners are going through and making these types of situational decisions, one of the difficulties that they’ll face is that they may only do that once or twice in their career. Yet, the advantage that CPAs have is that they’re going through this every year with various clients. Someone is always selling a business, someone is always needing a line of credit, and someone is always raising money in a CPA’s world.

This goes to show a really underutilized asset of CPAs. It doesn’t help that we are bad at marketing ourselves. CPAs need to remember that we just get more at bats – more exposure, from a volume perspective, to these kinds of decisions in how business owners think. CPAs can be really helpful to people, not only in the business decisions themselves, but also in presenting financial information to people, how to talk about a business in these situations, and how business owners can learn from other people’s mistakes.

It’s not that CPAs are smarter than their clients, but rather, it’s that they’ve been witness to more mistakes and outcomes to steer people in the right direction. A great example of this recently is all of the programs that the government issued in response to the coronavirus, and the economic impact of the PPP and the ERC. When business owners were dealing with this, CPAs were racking their brains, thinking about all of the ins and outs of each of the economic relief programs that were initiated for different industries.

Not only have CPAs thought about the business side of it, but they have to deal with the reporting side of it. How do you put it on your financial statements? How do you report that to people? When making business decisions in these situational areas – these one or two-time career decisions – we can help our clients.

3. Choosing Tech Stack (Process Improvement)

There is very little discussion about how to give your clients something beyond compliance and helping them make more money making good business decisions. That may need to change post-COVID as priorities seem to be shifting, but accountants can give their clients something that is becoming increasingly important. We can give them their time back. 

People, process and technology are the three interrelated components of the financial reporting process. To focus on reducing your client's “people” time (giving them time back) you can focus your advice on the other two areas. If you can fundamentally reduce an entrepreneur's pain in accounting, that’s a win – and the place you can do that most effectively is through technology selection and implementation. Good technology choices influence which processes we can put in place and allow us to effectively reduce an entrepreneur's time in the back office processes in their business. 

As a business owner, going at the technology stack evaluation effort alone is just a daunting process. The number of accounting technologies today is unprecedented. It used to be that there were one or two tools to choose from. I referred back to one of my favorite tech blogs when thinking through the sheer volume and even its name, "147 Cloud Accounting Software Apps: The Big List," is enough to scare away any client (and some CPAs). 

Accountants are uniquely exposed to the tech stack apps that are the most efficient for their clients. They’ve used the tools, they’ve heard feedback, they understand the intricacies of how the tools can work really well together, and they can be incredible resources toward helping build that tech stack. With more and more automation, choosing the right software is quickly becoming one of the most impactful assists an accountant can give to a small business owner. These technologies have a recurring pervasive impact – daily, weekly, monthly – on some of the small business owners out there. 

By capitalizing on your in-depth knowledge of accounting software, tax rules and business development, you can give your clients more of their time back and establish yourself as indispensible to their small business.

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