Bookkeeping: Outsource or DIY?

By now, the realities of entrepreneurial life are sinking in. There’s a lot to do. Money is tight. And every day you ask yourself, which tasks can I do myself to reduce costs? Bookkeeping is one of those tasks that always makes the list.

But, instead of asking, “What is it going to cost me to get my books done properly?” You should be asking, “What is the cost of bad bookkeeping?”

So, let’s start with why good bookkeeping is so very important.

• Knowledge is power. Good bookkeeping makes your financial records possible to decipher. It puts you in a position to proactively manage your business. You’ll have the information you need to make better and more informed decisions, and you can be strategic in how you spend your money. For example, reducing the amount you spend on rent that way you have money to launch new features or run more advertising campaigns.
• Avoid problems. Good bookkeeping ensures you avoid late fees, fines & penalties (aka, wasteful spend) and are up-to-date with all government agencies (think sales and payroll taxes).This is gold for investors — they’ll want to know that your business is operating in accordance with local, state, and federal regulations before turning over a check.
• Give confidence: Investors will not expect you to be a financial accounting wizard, but they will expect you to have a healthy appreciation for financial management skills. They will expect you to know which levers affect revenue (price vs. quantity) and cost (fixed vs. variable, cash vs. non-cash) and that you are in control of your spend. Anything less and you’ll send the message that neither you nor your business are a good investment.

Can you handle the books yourself?

If hearing terms like accrual basis accounting, prepaid insurance and generally accepted accounting principles (GAAP) make your head hurt and your eyes roll, then hire a bookkeeper now! It’s that simple.

What’s the difference between a bookkeeper and accountant?

It’s important to note the difference between a bookkeeper and an accountant. Simply put, think construction worker vs. architect.

Bookkeeper: Is the equivalent of a construction worker executing on an architect’s design.

A bookkeeper handles the day-to-day upkeep on your finances. S/he makes sure that your financial records accurately reflect the state of your business. Bookkeepers record and categorize expenses for business purposes and tax purposes, reconcile your bank accounts, make sure all checks have been paid, invoices submitted, and cash collected.

Accountant: Is like the Architect who creates the blueprint for the overall structure.

An accountant prepares taxes and financial statements. The right accountant can become a trusted advisor. S/he helps you look at the big picture by turning your financial data into useful information and helping you with longer term tax planning. An accountant can also help with networking and personal tax planning if you are still a majority owner in your business.

Both serve important roles, and you may want to hire either one or both to help you run your business as it grows.

Where should I start?

It’s unlikely that you need a full-time bookkeeper in the beginning. In fact, you can probably stick to outsourcing for quite some time.

Hire a bookkeeper for a few hours to:

1) Create a solid bookkeeping system,

2) Set up your chart of account, and

3) Teach you the basics.

At this stage in your business, you’ll most likely be recording the same handful of transactions every month. The bookkeeper can then come in quarterly or semi-annually to check your work.

There are many benefits to this approach. Here are a few:

1) Your records will be in good order. They will be accounted for with an eye towards producing financial information that is useful for you as the owner, your investors, or your lenders. You’ll be ready for tax time.

Most importantly, you will avoid your CPA having to do clean up work at a rate of $250 — $350 per hour (vs. your bookkeeper who charges around $20 — $50 per hour).

2) If you are new to the finance side of business, a good bookkeeper can get you up the learning curve quickly.

3) When you are ready to outsource bookkeeping, you already will have a relationship in place and the transition will be seamless.

Who’s the right bookkeeper for you?

Not all bookkeepers are created equal. Don’t settle for the lowest bidder. Focus on relevant experience. Look for someone experienced in your specific industry, as bookkeeping practices vary across industries.

For example, in the tech start-up world, your bookkeeper should be well versed in how to account for software.

Ask people in your industry for names or referrals. Interview three bookkeepers to find the one that’s right for you. If you have an accountant who handles your business taxes, ask them to interview your bookkeeper.

Final thoughts

Outsourcing the bookkeeping function is not a license to ignore your finances. You still have to review your finances. At this early stage, you will be the best person to catch mistakes, such as over-billing, or anticipate cash flow challenges.

If you’re an early-stage start-up, start getting your feet wet NOW! It’s easier to learn and manage the numbers when there are only a few of them.

Originally published at facingthenumbers.com on April 1, 2016.