“[I] met with several [bookkeepers] but never felt a connection. [I] didn’t feel like they really cared out my business the way I wanted them to. I figured my expectations were too high…then I met [Molly]. [She] didn’t make me feel bad about the mistakes I was making, [she] knew how [she] could help me clean things up, [she] explained it in a way I understood and most importantly, [they’ve] delivered. I never worry about my numbers anymore and this freedom creates space to focus on growing my business.”
The Grateful Death
“The willingness to personalize my needs and be flexible with those personalizations as my new business shifted and grew [has made MK Beyer & Associates the right fit for my needs]. Knowing my books are in good hands lets me concentrate on more critical issues of my business.”
Heather Zager, owner
MADE Apparel Services
Today we are going to talk about small businesses. What they are, why they fail, and how can they find success.
So what is a small business?
A small business as defined by the Small Business Administration is a privately owned enterprise with 500 or less employees. That is a pretty broad definition, so let’s break it down to get a picture of what MOST small businesses are.
- 81% of small business have no employees.
- 86.6% of non-employer firms are sole proprietors or single member LLCs (SMLLC)
- 14% of employer firms are sole proprietors or single member LLCs (SMLLC) not taxed as S-corporations
- More than 50% of small employer firms are S-corporations
Small businesses comprise:
- 99.9% of all firms
- 99.7% of all firms with paid employees
- Almost half of private sector employees and GDP
- And more than a third of private sector payroll and receipts
Before we move to the next topic, it is important to talk about how the pandemic changed the small business landscape.
The Small Business & Entrepreneurship Council estimates 29.7% of small businesses closed in 2020, up from an average of 7-9% yearly.
However, 4.4 million new businesses were started in 2020 – the highest on record to that point.
In 2021, that grew to 5.4 million.
And in the first 3 quarters of 2022 there have been 3.8 million small businesses started.
With all of that great news, what are we here to talk about?
One thing we hear often is how many small businesses fail. So let’s take a look at what the Small Business Administration reports on this front, which we will visit from the consistent data we had prior to the tumult of 2020, 2021, and 2022
Pre-pandemic, 32.4% of businesses failed in first two years, 51.1% failed by year 5, 63.4% by year 10, and only a quarter of all small businesses made it to year 15.
But there is some good news, according to SCORE, about 82% of the small businesses that do fail, do so because of cash flow problems. That means that a strong financial foundation can increase the likelihood of a business falling in that 25% long term success story!
So what is cash flow and why does it have such a strong impact on business success? In the simplest terms, cash flow is the net amount of cash and cash equivalents that transfer in and out of a business. The types of cash flows in a business are:
- Operations which are all transactions from all operational business activities
- Investing which includes capital expenditures (used to acquire, upgrade, or maintain physical assets like property, plants, buildings, technology, or equipment)
- Financing which is the measurement of the cash flowing between the business and its owners (equity) and creditors (debt)
Some of the easiest ways to successfully manage cash flows are:
- Build a budget – by building an operating budget and sticking to it, businesses are able to finance their own activities through profits. With MK Beyer & Associates, this is an ongoing process we work through with new clients with a goal to get them to operating budget and then help increase profits.
- Protect your credit – pay your bills on time, keep your net terms with vendors as low as possible, and do not delay payments. Follow the saying, “you can only get a loan when it looks like you don’t need one.” Watch cash flows so you can borrow money before you need it.
- Manage inventory well – inventory is a business asset – manage it as if it was cold, hard cash, because that is what it essentially is.
- Have a savings reserve – yes, this is hard and not always possible early on in a business, but having at least 3 months of expenses in savings can mean the difference between staying in business or closing up shop. Many of the businesses that failed in the pandemic did not have the reserve available to allow them time to pivot.
Many small businesses also seek financing to expand and strengthen financial health and create a reserve. And when you ask, ask for twice what you need! 75% of all small business applicants receive some of what they asked (less than 50% receive all of the financing asked for).
And do you know what a business needs to secure financing? Complete and accurate financial records that are created and maintained well and regularly by….
A great bookkeeper! Look for professionals offering proactive guidance and with a track record of success with clients. This will be a long term relationship, so personality fit is also very important.
And while all bookkeepers will help manage transactions, many do not focus on the additional aspects of business management that can affect cash flows.
As many of our clients are solopreneurs, small owner/operators, and partnerships looking to grow, MK Beyer & Associates helps our clients additionally by focusing on:
- Tracking their time – this helps identify where they are working outside of income generating activities and determines when the cost/benefit reaches a point where it is time to bring on new employees or outsource activities to consultants or contractors
- To think about the goals of their business – what is the biggest most exciting goal they can envision for the business? Is it realistic? If not, what would make it realistic? Do they want to stay an owner/operator or move into more of a CEO role? Do they want to sell the company at some point for profit or retirement? These goals help us guide them through the financial decisions they need to make to find success.
- And to help them work through some of the more emotional aspects of the financial process that brought them to us in the first place. Many clients come to us after years of not taking action on the financial health of their business due anxiety, shame, or fear.
These are some of the common things we hear in consultations and from our clients.
“I just freeze every time I look at my finances.”
This may be due to lack of understanding, lack of time to really focus on the work, or total lack of any sort of system or process. Many people who do not have a competency for bookkeeping and accounting procrastinate the work, which also adds to this anxiety.
“I am so ashamed of how bad it has gotten.”
This is where anxiety leads. When the finances are left for too long, they become a mess and make it hard to run a business. We also see many people who feel stupid because the business owners they know all seem to have a handle on understanding business financials, but they just cannot “get it.”
And, if both of these are left too long, we get to fear.
“I haven’t filed taxes in three years and I am scared to start now.”
Or, “I know I filed my taxes wrong and I am scared to amend them.”
Or, “I feel like going back and fixing things will put me on the radar for an audit.”
But the biggest we hear, “I am afraid I will have to close my business because I don’t know if I am actually making any money.”
We help guide our clients out of these deep and painful places through organization, accuracy, and compassion. Removing these stresses frees them to focus on doing what they love and finding success. The best way to remove fear is to feel through it and take action – and we are here to help.
We are happy to talk to all small business owners to determine their needs and how we can help or who we can best refer them to for help.
“Molly’s expertise in bookkeeping has helped my business become more financially organized, profitable and effective. MK Beyer Books has saved me money on taxes and little stress during tax time!”
Clyde McDade, LMT
Stress Relief Solutions, PLLC
“Molly Beyer of MK [Beyer] Books has been a huge blessing for my business, and for my own peace of mind in running it. She’s like a bookkeeping private detective, tracking down the anomalies and finding the answers to get your books looking pretty. She works at such a pace as to keep things moving efficiently without overwhelming her clients, taking it all one step at a time. She goes the extra mile to give her clients the knowledge base they need to feel confident moving forward on their own side of it (invoice troubleshooting, reconciliation training, etc). I highly recommend Molly and MK [Beyer] Books!”
Seattle Portrait Photographer
Whether a business is just getting started or has been operating for many years, proper financial record keeping is essential to the success of the business. So with the importance of having competent and experienced bookkeeping help, why do so many business owners insist on the DIY method? Let’s unravel some of the common myths.
Myth 1. YouTube can teach people everything they need to know about keeping their own books.
Yes, there are many resources available to help, but there is so much nuance to business financials that it is impossible to teach in a short video. Or even in multiple videos. While YouTube is a great place to find a workflow or process specific to a particular software or integration, many of the videos posted by actual professionals are geared toward other professionals with the background knowledge and training to use it. As practicing bookkeepers with degrees, certifications, and experience, we can attest that not all available videos on YouTube about bookkeeping have accurate or current information.
Myth 2. Commercial accounting software makes it so easy to set-up and manage the books that a professional is not needed.
Mass marketed bookkeeping softwares are made user friendly to allow savvy business owners to manage their own books, but without training and understanding of basic accounting, it is very difficult to correctly enter and categorize expenses to offer the best, and most accurate picture of a company’s financial position.
Sure, there are templates for charts of accounts to choose from and lots of questions asked to set-up an account, but each business is different and it is always better to at least have a professional set-up and train on the software. Remember that creating is cheaper than cleaning when it comes to financial record keeping.
Myth 3. Someone being good with numbers means they will be good at their accounting/bookkeeping.
We say it all the time, accounting and bookkeeping are as much craft as science and though there are some hard and fast rules, most of accounting is a gray area that requires knowledge and finesse. We may be good with scissors, but that doesn’t mean we should be cutting our own hair (…not that we haven’t tried to save some money – it is never worth the savings).
Myth 4. Their accountant handles their bookkeeping at tax time.
While an accountant, tax professional, or CPA may create some journal entries at tax time to make the books match the tax return, it is not actually bookkeeping. The process of bookkeeping involves categorization of each transaction as it happens so a business has a full, and current, picture of the financial health of the business.
As a side note, CPAs and accountants typically charge more per hour than bookkeepers and will have to do a significant amount of digging for information to handle this at tax time. That translates to a much greater expense and a much bigger headache than necessary at tax time. Bookkeepers work with the tax professional to make tax time as painless as possible for all involved.
Myth 5 . Google can tell them everything that can be counted as a business expense.
Yes, Google can bring a business owner to the IRS website or to any of the hundreds of articles and blogs on the subject and the documents that talk about legitimate business expenses, but the IRS does not always seem to speak the same English as the rest of us. And though there are many articles and blogs on this subject, they may contain inaccurate, incomplete, or out of date information. It is helpful to have a guide.
Because so many business owners go this alone, they include items in their expenses that are not legitimate. This means that their income statement through the year will show lower net income than what their taxes show when their tax person removes those items at the end of the year. This can cause issues with money management for the business, for making business decisions, and for things like health insurance marketplace as the two numbers will not match.
Myth 6. A business can save money by doing it themselves.
This is one of the most pervasive of the DIY bookkeeping myths and really is the encompassing myth for all of the rest. The truth of this is that typically DIY bookkeeping costs more. Some quick math can show a business owner how much they are losing – basically, how many hours they are spending monthly on bookkeeping multiplied by what they charge (or should charge) by the hour for their time generally equals more than monthly bookkeeping would cost them.
A quick way to test this myth is asking a couple of simple questions:
- How much is their time worth to their business as an hourly rate?
- How much of their time are they spending handling their bookkeeping tasks?
Say they determine their time to be worth $30/hour to their business – which is very low for most personal and professional services, but we will go with it. Then say they spend even five hours a week keeping their own books, that is $600/month they are costing their business in actual productivity loss. If you look at small business averages, most studies find that small business owners actually spend an average of 10 hours a week handling their books, that is $1,200 a month lost. This does not even account for the personal loss of their time, which is worth far more insanity and peace of mind.
If they take all of the hours that they spend on keeping their own books and re-allocate them to their personal life, they work to balance themselves. Most small business owners work well over 40 hours a week and may feel like they are married to their business. And if they are actually married, this may put a strain on their relationship with their spouse. If they are a parent, this may put strain on their relationship with their children. Or maybe they just wish they had a couple more hours a week to restore that old car, do some binge-watching on Netflix, get out on the boat, or read a book.
Additionally, if they think that their accountant can just handle this at the end of the year, refer back to myth #4.
DIY can cost them so much more in the long run – in both tangible and intangible ways.
As with the DIY craft and home projects many of us have started, and maybe completed, do-it-yourself bookkeeping generally ends up costing a business far more than if they hired a professional.
Even if you want to handle your own bookkeeping, having it properly set-up and getting trained on how to handle your specific books will help you avoid many of the DIY pitfalls!
Whether you are just starting your business or you have been in business for many years, proper financial record keeping is essential to your success. And frankly, it is the law. So with all of the do-it-yourself software out there, why should you hire someone to keep your books instead of saving money by doing it yourself?
In our own business, we focus on our strengths and seek expertise elsewhere. We may have more business law knowledge than many other bookkeepers, but we are not attorneys. We may be fairly technologically savvy, but we are not web page designers. We may be masters of spreadsheets, but our time is better spent on other tasks. Because of these things, we have an attorney, someone to handle our website, and we use industry-current software to serve our clients. That is just good business and is part of the cost of doing business. In the end, it saves us money and time – and that IS good business!
But don’t just take our word for it, answer for yourself. For each of the reasons to hire a bookkeeper below, ask yourself the related question and let your answers guide you to your best business self.
Your business needs you.
The time you spend working on your financials is time away from managing and growing your business. Your energy is best spent in finding new markets, building that addition, hiring new staff, creating more beautiful spaces.
Question to ask yourself:
How much time am I spending doing things that are not directly growing my business?
If the answer is anything more than a couple of hours a week, you need to hire a bookkeeper.
Do what you do best and hire out the rest.
How do you build your business to be a household name? By being the best at what you do. Whether you are fixing cars, making floral arrangements, mowing lawns, or providing legal services; being the best at what you do sets you apart. So do what you do best and let other experts do the same – and let them do it for you.
Question to ask yourself:
How much time am I wasting trying to figure out things I don’t fully understand?
Again, if the answer is more than a couple of hours a week, you need to hire a bookkeeper.
Now pause and answer this question in relation to reasons 1 and 2:
How much is my time worth to my business? What is that at an hourly rate?
Say you determine your time to be worth $30/hour (yes, this is low, but don’t we all sometimes undervalue ourselves!) to your business and you spend even five hours a week keeping your own books, that is $600/month you are costing your business in actual productivity loss. If you look at small business averages, most studies find that small business owners actually spend an average of 10 hours a week handling their books, that is $1,200 a month lost. This does not even account for the personal loss of your time, which is worth far more in sanity and peace of mind – which leads us to…
Find balance in your life.
If you take all of the hours that you spend on keeping your own books and re-allocate them to your personal life, you work to balance yourself. Most small business owners work well over 40 hours a week – yeah, I know, 40 hours is something you may not have seen for many years!
You may feel like you are married to your business. If you are actually married, this may put a strain on your relationship with your spouse. You may feel like you have to offer constant care to your business. If you are a parent, this may put strain on your relationship with your children. Or maybe you just wish you had a couple more hours a week to restore that old car, do some binge watching on Netflix, get out on the boat, or read a book.
Question to ask yourself:
How would I use an extra five hours every week?
There is no right or wrong answer, hire a bookkeeper and take that time back!
Get a “second opinion” of your business.
Most people don’t understand the depth of an income statement, let alone what to do with the information. And most people aren’t trained to (or just don’t have the time to) seek out patterns in numbers to use as decision-making tools. Having a trained expert not personally vested in your business to go through your financials can find places to save money and make money that you may never have thought of.
Question to ask yourself:
How much do I understand my financial statements and status?
Even if the answer is that you understand them a great deal, think of how much time and effort you are able to give to interpreting all of your financial data. Likely there are better things you can do with your time and likely there are things you will miss that your bookkeeper will not. Consider you keeping your own books as being given a cancer diagnosis by a nurse at the beginning of a routine check-up and having a bookkeeper as the second opinion of an oncologist.
Bills are getting delayed or missed. Invoices are going unpaid.
In other words, you’ve got problems. Maybe big problems. There are so many things to manage when you own a business that you have to prioritize your time. The tasks that are determined to be not as important get pushed down the priority list. So, to do the tasks that are frustrating or incredibly time-consuming. If bookkeeping is one of those things for you, it is easy to continue to push it off. And it is easy for it to go too far past okay.
Question to ask yourself:
How much have I cost my business because of mistakes, missed/late payments, or uncollected invoices?
Any amount is too high. If your answer is more than $0, you need to hire a bookkeeper
Tax season is stressful and expensive.
The right way to use your accountant: bring them your financial statements when requested (generally quarterly to pay estimated taxes) and let them tell you what your tax refund is each year.
The wrong way to use your accountant: give them a year’s worth of financial receipts at tax time and hope for the best. This will result in many questions back and forth, incomplete managerial data for your business, and a much higher bill (CPAs typically charge much more for the basic bookkeeping items they will need to process your return).
Question to ask yourself:
Do I want to save money and have a peaceful tax season before I get my nice tax refund?
I think most of us would answer, yes. Then you need to hire a bookkeeper.
Whether you are ready now, in six months, next year, or you needed help a while ago – We are ready to talk to you about how our skills can help you and your business.
*A special note on bookkeeping software: even though mass-marketed bookkeeping software is made user friendly to allow savvy business owners to manage their own books, without training and/or understanding of basic accounting, it is very difficult to correctly enter and categorize expenses to offer the best, and most accurate picture of a company’s financial position.