The Right Bookkeeper Can Actually Lower Your Cost of Doing Business
There are those business owners who like to do their own bookkeeping. There are others who find a friend or family member who is willing to help out for awhile. There are still others who keep meticulous file folders for each month of the year with their invoices and receipts. Some create magnificent, or some will admit, not so magnificent, spreadsheets to track their annual income and expenses. In most of these situations, there is a reliance on their accountant or tax preparer to create or verify the accuracy of their financial statements when tax time rolls around.
None of these methods are wrong; however, they may be costing you more than you think when you take into consideration that you are giving a significant, time-consuming responsibility to a high priced individual at a time when they are the busiest (high demand, high priority = premium price). Not only will you pay a premium price for this service; but, you may not get the level of attention that is required to ensure your books are completely accurate. There will be a high level overview; but, is anyone really looking at things at a transactional level for you? This is why many accountants include verbiage in their engagement letters that may state something to the effect of:
“Our engagement does not include any procedures designed to detect errors, fraud, or theft.”
Tax returns filed using incomplete or inaccurate financial statements can result in additional fees due to late fees, penalties, interest and possibly the cost of amending your incorrect returns.
An actual example of this was a service company that was getting ready to put their business up for sale. The business broker initially told them that their business was not sellable due to low margins; however, he felt that the financial statements were not painting an accurate picture. A bookkeeper was hired to take a look and found that there were significant errors, including 14 years of payroll taxes that were incorrectly recorded resulting in those expenses being duplicated on their income statements. This falsely lowered their profit and meant that they underpaid their taxes for several years. Thankfully they were business owners with integrity and they wanted to do the right thing; but, even if they had wanted to sweep it under the rug, they would have had no choice but to amend several years of returns since tax returns are surely going to be a requested item by any business buyer. Tax returns that don’t match the financial statements would certainly raise a red flag, and rightfully so. All of this came at a time when showing good cash flow is crucial and now they had to fork out a ton of cash in unpaid taxes, late fees, interest and penalties plus the cost of amending their returns.
How can a bookkeeper lower my cost of doing business?
- Verification and Guided Data Entry: Bookkeepers have a process for closing out the books on a regular basis, usually monthly or quarterly, that includes tying all numbers back to a verifiable source like a bank, credit card, or loan statement (called reconciliation). If they have enough experience, they know that the closing process doesn’t just stop at reconciliation. A quick overview to ensure income and expenses are in the correct categories and that recurring income and expenses are classified consistently each month should also be a part of this process. Another great tool for verification is looking at an income statement by month for several months to see if there are any glaring differences that could point to an error. These steps, done regularly by an experienced bookkeeper, will help you avoid the example that was illustrated earlier. I assure you, your accountant is not doing this, (and probably doesn’t want to) even once a year.
- Extensive Experience with Your Accounting Software: Outsourcing bookkeeping versus hiring a bookkeeper in-house has its advantages. One of those is that if the firm uses your accounting software, they use it all day every day and they have likely used it across many different businesses and industries. This means they have a thorough knowledge of how to streamline processes and make them more efficient, how to troubleshoot when something isn’t working right and how to leverage third party apps that integrate with your software to eliminate duplicate efforts (like tracking something in QuickBooks and in a spreadsheet) and insufficient data. Time is money, so efficiency is important. Your accountant most likely only uses the software to look at reports and maybe occasionally enter a few journal entries. They are less likely to be in a position to tell you how to streamline your bookkeeping process.
- Become paperless: Are you running out of space for all of those bankers boxes that hold years and years of old invoices and receipts? If your bookkeeper is up on technology, they should have a proven and effective method for helping you become paperless. Start thinking about all the ways you can utilize that space the boxes are taking up to generate more revenue for your business (or at least save on storage costs). Your accountant will thank you too when you are no longer bringing them a file folder five inches thick with paper!
- Proven strategy for reducing expenses: Has your accountant given you a proven and effective strategy for evaluating your expenses and reducing your costs? Probably not. They may give you broad advice but that is not the same as sitting down with you and going through line by line. A good bookkeeper can and should be doing this for you. This is much easier to do by the way if your bookkeeping is clean and up-to-date. Even if your accountant would do this with you line-by-line, would you be willing to pay their fees to do so?
- Proven strategy for increasing cash on hand: Not every bookkeeper is equipped for this one; but, if you have a bookkeeper who is, NEVER let them go! I love this passage from the book Profit First by Mike Michalowicz:If you follow your accountant’s directions explicitly, this is what is expected of you when you review your accounting system to figure out how much cash you have- once you have reconciled all accounts for accuracy, reviewed your profit and loss and cash flow statements and then tie the numbers into your balance sheet. Next you’ll run the critical metrics, such as your OCR (operating cash ratio), inventory turn, and both the current ratio and quick ratio. Then you’ll tie those into your KPI (Key performance indicators) and then you will know the health of your business. Oh, and before I forget, do that every week. Then you will have a clear understanding of where your business is. So says the accountant.
A good bookkeeper will bridge the gap between accountant and business owner. Not only do they understand what the accountant is saying; but, they will actually do it for you if that is what you want. The best part is they will probably charge you less to do it than the accountant charged you to share this little nugget of information.
- Ability to give you critical information for meeting your goals: Want to increase revenue 50% next year?
- How many additional sales transactions is that? Your bookkeeper can answer that by determining the average revenue per transaction.
- How many new customers is that? Your bookkeeper can answer that by determining the average spend per customer.
- Do we have the capacity? Your bookkeeper can answer that by calculating things like the revenue per employee or the cost per employee.
- What is it costing you to do your own books? If you can’t answer that you should hire a good bookkeeper 🙂 who can calculate how much revenue you produce for each hour spent on revenue generating activities (by the way, there are apps that help you track how you spend your time). Take that revenue times the hours you spend on your bookkeeping each month and add any late fees, penalties or interest you incur for not keeping up with it. You probably should also add the extra time your accountant spends each year tidying things up a bit, if necessary. This is what it is costing you to do your own books.
Hopefully you are beginning to see the tremendous value that a good bookkeeper (by good I mean experienced professional with a thorough understanding of accounting) can bring to your business and most likely for less than an accountant or CPA firm would charge. The best part is that they will work in tandem with your accountant giving you the best of both worlds synergistically and help you bridge the gap between what your accountant needs to properly advise you and what you are currently willing and/or able to give them.