2019 Small Business Finance and HR Report

INTRODUCTION

When asked to describe what separates successful and unsuccessful entrepreneurs, Apple co-founder Steve Jobs said it boils down to one thing: Pure perseverance.


If small business owners don’t commit to their passion, learn from their setbacks and keep pushing forward, any momentum they’ve built can quickly peter out. The good news? Overcoming some of the hurdles they face — like how to innovate, deliver value, or make the world a better place — is often the reason they started their businesses in the first place. Their passion for solving these problems is what makes them who they are.


The bad news? Small business owners have other duties to juggle to make everything work. For example, taking care of payroll and HR sucks up almost 40 hours of bandwidth a month — a daunting number because over 40% of small business owners prefer to handle finances and accounting themselves.


To better understand how entrepreneurs manage their back office responsibilities, we surveyed more than 1000 small business owners and managers. We asked them which tasks they do themselves, which ones they outsource, and when they turn to software. We also took a deep look at how they work with accountants and other key advisors.


This report includes several sets of benchmark data, plus insights that small business owners and their advisors can use to make sure they’re on the right path. While entrepreneurs may enjoy blazing their own trail in many respects, we found that there are some well-traveled routes that often lead to more successful outcomes.

METHODOLOGY

In April 2019, we surveyed a panel of 1085 managers and owners of US small businesses with at least one employee. The panel used for this study was provided by Cint, and we conducted the survey online using SurveyMonkey. All respondents were selected randomly, but the sample size skewed slightly toward small businesses with more than five employees to ensure we received statistically significant results for larger small businesses.


Here is the distribution of small business owners we surveyed, broken down by employee count:

HIGH-LEVEL FINDINGS AND ANALYSIS

Entrepreneurs are often on a bit of an island when it comes to figuring out their finances and HR. Close to half of business owners and managers handle finances and accounting themselves, and 70 percent of small businesses take care of all their finances in house. Until a business reaches 50 employees, it’s also likely the owner will be responsible for its human resources function.


Despite everything they have on their plates, small business owners are generally confident that they’re performing back office tasks well. However, when asked about specific tasks (like having an updated employee handbook), their confidence wanes. It’s also clear that they make mistakes along the way. For example, 28% have been audited or have received a notice from the IRS.


With that said, software and external advisors can make a big difference for those who choose to use them. Payroll and accounting software are the most common apps that small businesses add to their back office. Using them tends to save time and help business owners feel more confident in their finances.


Entrepreneurs’ most-trusted advisor for business questions is most commonly their accountant. Accountants do a lot of things well for their small business clients, but there are also some opportunities to improve or add more value. For example, only 61% of business owners are completely satisfied with the breadth of services their accountant offers, and they usually don’t consider their accountant to be proactive. The upside? Small business owners who have the most faith in their accountant are more likely to expect a significant increase in 2019 revenue.


Take a closer look at some of our individual findings below, or read the report straight through to get a full picture of how small business owners handle their back office and what their choices can mean for their business:


Basic small business statistics

According to the SBA, about 20% of all small businesses fail to make it through their first year. Half of new businesses fail before their fifth year, and only one in three hang on for ten years or more.


While it’s easy to think of them as high-risk, upstart operations, our research into small businesses found that the success stories add up over time. For example, over 60% of companies that have employees have been around five or more years:

Because they’re beating the odds, it’s not surprising to discover that small business owners are generally optimistic about where things are headed. A quarter of them expect a significant increase in revenue in the coming year, and another 44% think this year will be better than last year. Only 4% think their revenue will decrease.

Few business owners expect their business to lose revenue, but larger businesses are much more likely to think they’ve figured out a winning formula. Sixty percent of owners and managers of 500+ employee companies expect to see a significant increase in revenue over the next year, compared to less than 20% of 1-20 employee companies.


The ratio of owners who expect significant increases in revenue grows consistently as companies grow larger.

While bigger businesses think they’ll do better this year, the relationship between the age of a business and a positive outlook was a little less clear. Overall, older businesses were actually a little less likely to expect significant increases in revenue than the rest of the panel:


Company Age Businesses who expect a significant increase in revenue Businesses who expect revenue to stay the same
7 or more years 20% 34%
0 to 6 years 28% 22%

A company’s age may not reveal much about how optimistic its owners are, but longevity often has an impact on the number of employees the company has. Businesses are generally twice as likely to have five or fewer employees during their first two years than they are during years three and beyond (68% vs. 34%).


After their third birthday, the smallest small businesses tend to stay small. But businesses which reach six or more employees by their third year have an increasing likelihood of gaining traction and growing into 100+ employee companies as time goes on. There was no clear explanation for this relationship, but it seems reasonable to suppose that owners of very small businesses in certain industries (like local professional services and retail) don’t intend for their business to scale up significantly over time.

Back office finance and software benchmarks

Many small business owners keep their accounting and finances close to their vest. Forty-one percent of owners and managers handle accounting and finance themselves, and another 30% do everything in house. Thirteen percent rely solely on an external accountant, and 17% use both internal and external accounting resources:

Given all the things they’re responsible for managing, it was surprising to see that only 30% of small business owners choose to use an accountant, but other research has been consistent with our findings. However, owners of larger small businesses were more likely to use an accountant. Fifty-six percent of owners with fewer than six employees do everything themselves, while only 31% of owners with six or more employees still do everything themselves.


A fair number of owners will hang onto the financial reins, no matter how big their company gets. The ratio of companies whose owners do everything themselves doesn’t change much as a company grows to 10 employees and beyond.


Unfortunately, 28% of small businesses have received an IRS notice or have been audited. That number goes up as businesses grow in size and number of employees. The increasing complexity of their business is probably why they’re more likely to make mistakes or omissions. Whatever the cause, there’s definitely increased risk that the DIY approach many small business owners take eventually gets them in over their heads on the finance side.


Back office software

The companies we surveyed were much more likely to use online software and services than the help of an outside advisor. In fact, most small businesses rely on some type of financial software or online service, starting with payroll and accounting software:

Software and service providers make a huge difference in the lives of small business owners. Using payroll as an example, we saw that small businesses spend an average of just over 18 hours a month making sure their staffers get paid.


When they do it themselves, only 43% of business owners are confident they do a good job of paying employees on time, and just 25% are confident they deduct and submit payroll taxes accurately. Seventy percent of payroll software users are confident about paying employees on time, and 50% are confident they do a good job deducting and submitting payroll taxes.

Small businesses and their accountant

Although only 30% of small business owners choose to work with an accountant, it appears that accountants are their most important advisor — and most business owners are very happy with the services they receive. To understand a little more about this relationship, we took a close look at how accountants and small business owners work together, then we dove into the factors that make some accountants “trusted advisors” in the eyes of their clients.


So, how strong is the accountant-small business relationship? We started out by looking at how often accountants and their clients talk. Around 34% of small businesses have little communication with their accountant outside of tax time, while 39% talk to their accountant once a month or more.

While there may not be a ton of communication between all small business owners and their accountant, 82% of them think their accountant knows their business either well or very well. Another 13% think their accountant’s knowledge of their business is adequate.


When it comes to the actual services accountants provide, small business owners expect their accountant to help them with tax-related matters and bookkeeping before anything else. However, there’s a good chance that many of their clients expect a higher level of service. Over 25% of small businesses said they expect their accountant to help with each of the following financial and advisory services:


  • Payroll (38%)

  • Accounts payable/accounts receivable (37%)

  • Financial projections (32%)

  • Cash flow (27%)

  • Choosing a business entity (26%)

  • Business consulting (25%)

A significant number also expect help with things like software recommendations, employee benefits, and HR:

Taken in aggregate, small businesses expect a lot from their accountant. However, only 61% of small business owners are totally satisfied with the range of services their accountant provides.


How small businesses feel about accountants

In addition to the range of services clients expect, we also looked at the words and traits they use to describe their accountant. In terms of the positive traits we asked them about, clients were most likely to think their accountant was reliable, friendly, responsive or communicative. Small business owners were less likely, however, to describe their accountants as being modern, tech savvy, or bringing insights to the table proactively:

There’s room for improvement among all the positive traits we looked at, but just because business owners didn’t select a particular trait to describe their accountant does not mean they chose a negative trait instead. Indeed, it was fairly rare for business owners to use negative terms to describe their accountant, and when asked unprompted what they would change about their accountant, the most common answer was “nothing.”


Despite all the positive feelings business owners have about their accountant, a fair number — 23% — said it was likely they would switch accountants within the next year. It doesn’t look like that many businesses actually make the switch, though. For example, we looked at businesses that had been open at least seven years, and only about 40% of them have switched accountants at some point in the past.


All the following are true of business owners who are thinking about switching accountants within the next year:


  • They speak to their accountant less frequently than non-switchers

  • They feel like their accountant doesn’t know them as well

  • They trust their accountant less

  • They are three times as likely to describe their accountant as “behind the times” and more than twice as likely to use the other negative terms we asked them about (uncommunicative, unresponsive, etc.).

  • They are more than 60% more likely to have been audited


What makes an accountant a trusted advisor?

In the accounting industry, the concept of being a “trusted advisor” has received a lot of attention over the past few years. More expansive views of the concept see being a trusted advisor as “the way of the future” and “how accounting firms will continue to prosper in the face of the technology shift.” This take on it suggests that being perceived as a trusted advisor is about effectively sharing as much wisdom as possible, being consultative, and having the empathy to make advice understood and actionable.


Other accountants think of trusted advisors in terms of running a better business by expanding their offerings, developing new revenue streams, and becoming more profitable. And from what we can tell, clients seem to think of a third way: whether or not you trust your accountant to get things right.


To get closer to a shared view that incorporates all three angles, we asked small business owners whether their accountant is a trusted advisor who can be relied on for a broad range of business advice, then followed up with a series of specific questions about their relationship.


Here’s what we found:

Generally, small business owners like their accountant. Fifty-three percent strongly agreed that their accountant is a trusted advisor, and another 33% agreed with the description.


Digging a little deeper, we found that accountants were the advisor that owners and managers trust most for advice relating to their business: 32% of small business owners said their accountant is the advisor they trust most, followed by family and friends (22%), their lawyer (16%), and their financial planner (9%). Insurance brokers and banker also got a few votes.


So what sets them apart? There were two big differences between trusted a trusted advisor and the average accountant:


  1. Trusted advisors offer a wider range of services

  2. Trusted advisors are seen as knowing their clients better than the average accountant does.


Doing more for their clients

On average, only 61% of small businesses are satisfied with the breadth of services their accountant offers. For small business owners who strongly agree their accountant is a trusted advisor, the number jumps to 88%.

Digging into the data, it’s not clear whether there’s a specific service that sets trusted advisors apart — just that small business owners have higher expectations about breadth of services when they work with a “trusted advisor.” They are 10-20% more likely to expect a trusted advisor to help with other financial tasks (like tax planning, cash flow, and forecasting) as well as back office tasks that draw on a set of skills accountants don’t traditionally cultivate (like HR and benefits).  


Businesses whose accountant is a trusted advisor are also 10-25% more likely to use software or online services for specific back office tasks. It’s not surprising that they’re 16% more likely to use accounting software, but they’re also at least 25% more likely to use time tracking software and online platforms for health and retirement benefits.


Higher software adoption rates mean it’s more likely that small business financial data is organized and readily accessible. As integrations between software providers multiply, it also means that getting all of a business’s financial data into the same place is getting easier. It’s even possible that software usage by small business owners improves their relationship with accountants by making them better clients.


Knowing their clients better

Being a trusted advisor also means having a stronger relationship with clients. In general, 53% of small business owners said their accountant knows them “very well,” but when a business owner describes them as a trusted advisor, that number jumps to 84%.

Offering a broader range of services and knowing clients well would seem to go hand in hand. The more an accountant is involved with a business, the more likely they are to know it well.


On a related note, accountants who have more frequent contact with their small business clients are more likely to be seen as trusted advisors. 47% of small businesses owners who work with a “trusted advisor” said they have contact with their accountant once a month or more. On average, only 39% of all small business owners talk to their accountant that often.


Small business owners also tend to give trusted advisors higher ratings (by a similar 10-20%) on almost all the positive traits we asked them about. They’re also generally less likely to use negative terms to describe their accountant:

In addition to improved perception, small businesses whose accountant is a trusted advisor have a better overall outlook for their business. They are 32% more likely to expect a significant increase in revenue over the next year.


How accountants bill their clients

In looking at the relationship between small business owners and accountants, we also looked at how their accountants bill:

No single method stood out, and there was no reason (when taken together with the rest of the survey data) to believe that one method was better in the eyes of small business owners — with one caveat.


Small business owners who consider their accountant a trusted advisor were a little more likely to have flat monthly billing. Since their accountants tend to provide a broader range of services on an ongoing basis, it’s not surprising that the clients of trusted advisors are more likely to be billed this way. But the correlation between billing style and improved perceptions of trusted advisors was weaker than some of the other factors we looked at, so it doesn’t appear that billing method actually drives those perceptions.

Choosing an accountant for the first time

Around 70% of small businesses don’t have an accountant, and more than half of those businesses rely entirely on their owner or manager to handle their finances. The rest (just shy of 30% overall) have one or more employees who are responsible for finances and accounting.


When asked unprompted why they don’t use an external accountant, small business owners offered a range of reasons, including the added cost, lack of trust, and feeling like they don’t need one for their business — often because they feel it’s too simple or small. No one reason stood out, and businesses who don’t use an accountant come in all shapes and sizes (in terms of number of employees):

Among businesses that don’t have an accountant, 65% think it’s likely they’ll start working with one in the next year. It looks like small business owners may not be likely to follow through on this intention, though. For example, 54% of business owners who said it’s likely they’ll start working with an accountant have already been doing things on their own for at least five years.


In open-ended responses, they tend to see the potential benefits of working with an accountant as:


  1. More time to focus on their business

  2. Saving money

  3. Reducing stress

When they do decide to look for an accountant, recommendations from other professional advisors are far and away the most important resource for small business owners. About 31% view online ratings and reviews or search results as the top resource, and 14% think friends and family are most important:

It’s also worth noting that small business owners who don’t have an accountant expect a slightly broader range of services from their accountant than those who already work with one. The expectation isn’t drastically different, but from payroll to HR to financial projections, they’re more likely to expect accountants will do more for their business than the average business owner does.

Small business HR practices

Outside of accounting and finance, human resources represent another big responsibility for small business owners — as well as a potential source of fines and liability. At 18 hours a month, the average small business spends about the same amount of time on HR. That's roughly the same about of time that they spend on payroll.


41% of small business owners choose to handle HR themselves — which is exactly the same proportion who handle their own finances.

While some small business owners prefer DIY finances no matter how large their business gets, they are much more likely to delegate HR to other employees as their business grows. Indeed, we saw a directly inverse relationship between the size of a business and the percentage of business owners who manage HR themselves:

By the time a business reaches 20 employees, there’s a roughly equal chance that HR is managed by the owner, an employee who also has other job duties, or a dedicated HR person. When a business reaches 50-100 employees, there’s a 55% chance it has one or more dedicated HR people.


On a related note, only 27% of small businesses use HR software — that’s the sixth highest rate of back-office software adoption behind payroll (60%), accounting (50%), expense tracking (35%), time tracking (31%), and benefits administration (28%).


In an interesting correlation, 96% of small business owners who use HR software see their accountant as a trusted advisor.


Are small businesses doing HR right?

We saw an interesting discrepancy between the perceptions and the reality when it came to small business HR. Overall, small businesses owners express a lot of confidence in their HR practices:

However, those same business owners are far less confident that they are performing specific HR tasks well. While some of the tasks we asked about are best practices (as opposed to legal requirements), it shows that things may not be going quite as well as small business owners think.

Because there are a number of fines and potential liabilities when a company falls out of compliance, small businesses may want to spend more time looking for outside help (or review) of their HR practices. It’s also worth remembering that HR is about more than just checking off a series of boxes. It will have to be the subject of another survey, but it's widely held that investing in building a strong culture can also pay big dividends.


If you have questions, want access to our data set for your own research, or are interested in co-presenting next year's report, please let us know: media@onpay.com.

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