Editor’s note: the following post was written by Nir Dremer, CEO and Co-founder of CapitalOS, a leading embedded spend management platform — all from a single API call. Learn more about CapitalOS on their website.
Whether you’re a SaaS platform designed for field technicians, restaurants, or even TV production companies, your customers are likely under-resourced when it comes to managing their financial operations. They are prime candidates for adopting tools and automation to help them run their businesses more efficiently. A critical part of running a business efficiently is understanding and managing total business expenses, or “money-out.”
For most businesses, money-out comes from payroll and business expenses, which include everything from fuel to paying key suppliers.
Top 3 Money-Out Pain Points for Businesses
Small business owners do not start businesses because they’re passionate about (or even good at) running books, processing payroll, and reconciling expenses. They want to focus on what they do best: styling hair, teaching yoga, running a cafe, or renovating homes.
Most small business owners are scrappy and wear many hats all day long, playing a key role in sales, operations, accounting, legal, marketing, and more. In fact, 66% of business owners even handle bookkeeping themselves. As a result, many business owners lose precious time in handling mundane tasks instead of focusing on where they can drive meaningful business impact.
1. Managing cash flow is hard and time-consuming
- 84% of small business owners spend 3-8 hours/week on cash flow management.
- 43% of small business owners say cash flow is a problem for their business. 65% moved money around at the last minute to meet payroll obligations.
- Late payments are one of the leading causes of cash flow problems for small businesses.
2. Lack of real-time data and low financial literacy hampers strategic decision-making
- In a survey, 45% of small business owners stated they’ve lost at least $10,000 in profits due to low financial literacy, and 13% believe they’ve missed out on $500,000 or more.
- In one case study, a food vendor shared that he achieved a 30% revenue boost by tapping into his customer’s geographic data. However, most small businesses either don’t have time or access to useful real-time data that could empower them to make business improvements.
3. Money-out data is prone to errors and susceptible to fraud
- 71% of small businesses stated they still use pen and paper or spreadsheets to manage some aspects of their finances — leaving them vulnerable to human error.
- Over 87% of Americans believe their paychecks are accurate, but a study by Ernst & Young (EY) found that payroll errors are common.
- Most small businesses (38%) operate with just two to five employees. Thus, they will not likely use corporate expense cards or automated reimbursement systems. Instead, they rely on employee honesty and manual processes to track expenses and reimbursements. This can lead to intentional reimbursement fraud or even honest reimbursement errors.
How SaaS Platforms Can Make a Difference to Small Business Owners
SaaS platforms are designed to be the operating system for small businesses. They have the unique opportunity to alleviate significant pain points, increase efficiency, and help their customers grow their businesses.
With embedded solutions such as Gusto Embedded for payroll and CapitalOS for spend management, platforms can launch their payroll and spend management offerings within weeks. They can delegate infrastructure work to technical experts and focus on creating value-added services that aim to improve customer experience by 10x.
The following are just a few examples of value-added features that SaaS providers might be able to offer businesses.
1. Saving Time with Custom Workflows
Most small businesses must comply with the IRS and a slew of regulations, which is often time-consuming. By embedding payroll and spending, platforms can help their business customers save hours/week.
Additionally, vertical SaaS platforms can create customized industry-specific workflows. For example, SaaS platforms for spas or beauty salons might be better able to create automation features for aggregating and paying out tips to estheticians. A trucking and logistics SaaS platform can offer a more efficient way for trucking companies to provide expense cards to their drivers, with different spending rules for items such as gas vs. food.
2. P&L and Financial Reporting Automation
A big part of running a small business efficiently is having a simple snapshot of the business performance and upcoming liabilities. Helping business owners anticipate cash shortages, manage expenditures, and ensure that the company can meet its financial obligations plays a huge role in helping businesses succeed.
Additionally, automated reporting reduces the risks associated with manual data entry and calculations. This accuracy ensures that financial statements are reliable, crucial for making sound business decisions.
3. Proactive Business Recommendations
Platforms can leverage their industry expertise to offer more proactive recommendations on hourly rates, pricing, and team workload improvements based on the in-depth spend information being created.
According to McKinsey & Co., pricing is one of the most impactful levers for driving a business’ operating margins. An effective pricing strategy can deliver a 2 to 7 percent increase in return on sales.
4. Effective Underwriting Tools for Small Businesses
Payroll payment performance is a valuable data source for credit underwriting. As a platform, the more data points collected on the business’ performance, the more accurate the underwriting becomes. This, in turn, allows companies to access attractive offers they cannot get anywhere else.
How SaaS Platforms Can Minimize Their Costs and Complexity
Building the functionality to handle payroll and spend is extremely hard and involves compliance, risk, underwriting, state licenses, and much more. Building such features is practically out of reach for most platforms.
Build vs. Buy
Gusto Embedded & CapitalOS change that paradigm by providing embedded spend management and payroll solutions that drastically reduce the effort, cost of development, and time-to-market. For example, building basic spend management functionality would require assembling a team and at least one year of development. It would also require hiring underwriting, risk, and compliance experts. Similarly, building payroll functionality in-house can take years of development and would require the assistance of compliance and risk management experts.
In addition to the upfront cost, building payroll or expense management features in-house requires staying current on tax laws, labor regulations, and compliance.
According to the IRS, more than 40% of businesses get fined an average of $845 each year due to late or incorrect payroll tax filings. This is one less thing small businesses have to worry about when they leverage payroll and spend management partners. See Gusto’s blog post on “The 7 Most Common Payroll Mistakes Small Businesses Make” to avoid incurring unnecessary fees or penalties.
By leveraging embedded partners such as CapitalOS or Gusto, SaaS providers can:
- Save 1-2 years of upfront engineering work.
- Leverage best-in-class solutions and tools that would otherwise take additional years of development and iteration.
- Leverage domain expertise and focus engineering efforts toward industry-specific differentiators.
- Delegate risk, compliance, and underwriting
Example: HappyHome Leverages Gusto and CapitalOS for Enhanced Payroll and Spend Management
Background
Let’s say you run a home services company called HappyHome, a vertical SaaS platform designed for home and commercial service businesses, such as HVAC, plumbing, and electrical services. The platform offers comprehensive tools for managing scheduling, dispatching, invoicing, and customer relationships. However, third-party providers manage payroll and business expenses.
The Challenges
Service businesses like yours face complex payroll and expense management issues that are leading business owners to spend hours every week:
- Varied employment types (full-time, part-time, contractors) with commission-based and hourly compensation structures
- Compliance with federal, state & local regulations
- Tracking and managing business expenses, such as fuel and the ad-hoc Home Depot visit
- Accurately reporting taxes and leveraging itemized tax deductions
To solve this problem, HappyHome could build in-house or partner with embedded payroll and spend management solutions.
Developing in-house payroll and expense-tracking solutions would require substantial resources, including significant upfront investments, ongoing maintenance, and financial regulations and compliance expertise. Instead, HappyHome decides to partner with Gusto and CapitalOS to launch a financial dashboard for its customers that includes the full money-out picture.
How CapitalOS and Gusto Embedded work together
By partnering with Gusto & CapitalOS, within weeks, HappyHome customers can:
- Automatically track commissions and team members’ hourly reporting. Virtually eliminate human data entry, materially reducing the number of intentional and unintentional errors. For example, a technician is on-site for a job and historically relied on manual data entry to log hours. With HappyHomes, the technician’s phone now automatically detects when he is on-site, and the pay calculation is automated.
- Leverage HappyHome expense cards with automated receipt collection and expense reporting.
- Reduce the number of hours spent each month calculating salaries, reimbursements, tips, and bonuses.
- Set spend controls (e.g., turning cards off on Sundays when the business is closed), and allow business owners to confidently delegate spending.
HappyHome can provide its customers with simple tools that allow them to run their businesses more efficiently. For example, Elite HVAC Services, a customer of HappyHome, is now able to view the following critical information in almost real time:
- Year-to-date and monthly revenue
- Year-to-date and monthly payroll expenses
- Year-to-date non-payroll business expenses
- Monthly anticipated business expenses
- Average outflows per month
Outcome
Significantly reduced payroll processing time and administrative workload, allowing business owners to focus more on business growth and customer service. The real-time expense tracking and detailed financial insights help business owners optimize spending and improve cash flow management.
Conclusion
By embedding Gusto and CapitalOS into its platform, HappyHome offers a superior solution to business owners, helping them optimize for their business success.
While the example above is hypothetical, there’s a clear value in leveraging embedded financial tools within a vSaaS platform to offer unique synergies and a more complete product suite without extensive development timelines or compliance concerns.
