In 1997, 23.6 million nonfarm business entities filed U.S. tax returns (source: IRS). By weeding out the hobbies and tax dodges, the SBA estimates there are between 13 and 16 million businesses in the United State. All but 15,000 have fewer than 500 employees, and only about a third, 5.4 million, have employees. Even so, this group employs 53% of the private nonfarm work force and accounts for 51% of the private gross domestic product (source: SBA, 8/98).

The small business sector spends a considerable amount of time and money on financial matters. Last year we reported on the McKinsey/BAI 1997 study that showed the average annual financial services expenditures of 5.6 million U.S. small businesses was $14,000. After removing insurance, the average was $7,700 (OBR 9/97).

But this only counts the money paid to financial services companies. It ignores the significant internal costs associated with financial management such as accounting, bookkeeping, payroll, treasury, and so on. With the Web, banks have an opportunity to compete not just for the traditional financial products, but also for the entire financial operations of the business.

Let’s take a look at the financial services costs of a very real business: ours. We have a database of several thousand past, current, and hopefully future clients. Much to the chagrin of my marketing manager, we still manage the customer database, invoicing, and accounts receivables, with Microsoft Word, Excel, and Money. It’s cobbled together, but it works (sort of). We’ve considered a move to QuickBooks and Access, but we’re holding out for something Web-based that works better with our telecommuting work force.

As a service business, we use cash-based accounting. Incoming payments are a mix of checks and credit cards with the occasional annoying wire transfer, no cash. Not including financing costs and tax prep, our out-of-pocket banking expenses are just $4,200 per year, 85% of that going towards credit card processing (see table). That’s less than 15% of our total $28,800 annual “financial expense.” It’s the internal costs that hurt the bottom line.

What about those internal costs? Could they really be reduced? Not entirely, but we think at least 50%, or $12,000 annually, could be eliminated through Web-based automation. The bottom line: a bank, software company, or Web-based business delivering a reliable customer and financial management program could charge us up to $1,000 per month and we’d be ahead.

If you are a bank trying to win our business, don’t waste time demonstrating how you can lower our banking costs. They are not material. Tell us how you can streamline our routine office paperwork and bookkeeping; become our Virtual CFO. When you’ve built that, we’re buying at (206) 517-5021.