The most important question many business owners ask.
We find ourselves working with small business owners, asking what precisely a bookkeeper does and why hiring one is worth the cost. Many will often do the work themselves at first out of necessity. As time passes, the work becomes more consuming and complex, and they begin to worry they are not doing it correctly. After all, shouldn’t all these numbers be communicating something? Often, the frustration grows, and bookkeeping gets regulated to another item on the to-do list. Today, we are looking at bookkeeping as a practice and how, when properly executed, it can determine success or failure for many businesses.
What is bookkeeping?
Bookkeeping is often defined as the act or process of recording or tracking financial transactions related to a business. This is an ongoing & active process. Bookkeepers can record all daily activities such as receipts, invoices, bills, & other activities. They prepare financial reports monthly to summarize the activities for the month. They can also be responsible for different tasks, such as processing payroll. Bookkeeping does not require a specific degree or certification. However, most bookkeepers will have a background in accounting. This education allows them to understand how to apply double-entry accounting while documenting transactions properly.
Are bookkeeping and accounting the same thing?
No. Bookkeeping is essentially the first step of accounting. Accounting includes additional entries and analytics that are not considered when recording and preparing transactions. A bookkeeper will provide the reports, but an accountant can read these reports for trends and give insight into your business performance. Accountants may decide to adjust the books & allocate costs in several ways to reflect the costs in a specific time more accurately. An example would be making entries for depreciation and amortization or allocating the annual expenses of software over twelve months.
Do bookkeepers prepare tax returns?
No. Tax preparation is a specific field of accounting. Many can relate to this compared to other career paths—for example, an artist who produces canvases but specializes in watercolor. The artist has a basic knowledge of many art forms from studying art, but they have the proper skill set and more experience in watercolor as a medium. Another example might be attorneys. They are educated in broad facets of the law but will pick one area to have in-depth knowledge of, such as family law or criminal law. Similarly, accountants will often select a specific area to focus on.
An accountant can choose several paths: tax, audit, or controller. Public accountants often focus on tax preparation and strategic planning. A bookkeeper only provides the necessary reports to the tax preparer to begin the work. In other words, the end of the bookkeeping cycle is the beginning of work for the tax accountant. Bookkeepers with some experience in tax may be able to provide general information and answers but cannot give a professional opinion.
How does hiring a bookkeeper benefit my business if they do not prepare the tax return?
There are several reasons why bookkeepers are crucial to success. An excellent bookkeeper puts a workflow in place to allow the recording of transactions to maintain a regular rhythm. This eliminates the need to “catch up” or locate receipts or invoices in the future. When the bookkeeper records transactions daily or weekly, it allows the business owner to view items such as cash flows, profit margins, & percentage of expenses in real-time versus at the end of the year. This allows the owner to understand their price points and costs associated with specific projects and analyze their labor and materials. Looking at reports monthly gives the owner the information needed to make crucial decisions that will determine the future success of their business. If a price point for a service is too low and the owner is spending more on materials and labor than they are charging, an owner may not know it was unprofitable until the end of the year. Even more commonly, the income and expenses for the entire year are summed together, making it challenging to identify which area was the problem.
Another benefit comes at the end of the year when tax preparation begins. Instead of needing to sort and hunt a year’s worth of receipts and statements, all items are completed and ready for the tax preparer. Many businesses may not realize it, but part of their tax bill is typically the time spent compiling books for the year if none have been prepared. As most business returns need an income statement and balance sheet entered, the books are necessary to complete the return. The books have already been reported, or the tax preparer creates them from scratch. As a tax preparer’s goal is to file a return, they prepare books to reach ending balances…not analyze the individual income and expenses to confirm if the business is sustainable.
Bookkeepers contribute to the business in many other ways. Their work can correspond with a budget review, comparing the planned budget against current expenses and income. They can also assist with payroll-related compliance and reporting. If a bookkeeper has specific knowledge of the software, they can create custom reporting based on the business owner's particular needs. Once familiar with the business transactions, the bookkeeper can also provide a layer of oversight to identify unusual transactions that may be fraudulent or concerning.
In many ways, ongoing bookkeeping provides peace of mind to the owner by ensuring that all records are kept up to date and reviewed consistently.
The cost of hiring a bookkeeper is variable. What should I consider when determining
the right price point for my business?
Bookkeeping prices are variable based on the time needed to complete the work monthly. The factors typically considered are below:
Amount of bank accounts and credit cards with business transactions
The number of transactions that will need to be recorded monthly & associated reconciliations
The total revenue for the business annually
The complexity of accounting entries that may be required
The cost of software & various integrations needed to work with a point-of-sale software or e-commerce site
The request for additional services such as accounts payable (recording and paying bills) & accounts receivable (recording invoices and receiving payments on invoices). These options may be only available from accounting-based firms.
The need for sales tax recording or management
The desire to meet with the bookkeeper and the preparation required
Considering all these factors, how long would it take to complete each month? If a price is meager, for example, $150 per month, it would indicate that the reporting may be quarterly or annually, and communication with the bookkeeper will be limited. That price is often too low for a bookkeeper to perform the work monthly unless an individual can maintain a trim level of transactions with minimal effort. An individual is usually priced affordably, but the trade-off is that when the individual is out of the office (for vacation or illness), the work will halt during that period. Hiring a team or a firm to perform the job will eliminate that issue for the most part. However, a team will have higher costs for completing the monthly work. Pricing can range between $500-$2500 per month on average for a small business using an outsourcing firm. This is still valuable because hiring a staff bookkeeper requires a higher annual salary.
Initially, a $500 monthly fee will be an investment, as the business will similarly invest in software, assets, and contract labor. However, as the business grows, this fee will add exponential value to the company. With continued growth and revenue, the monthly fee becomes a small portion of the monthly expenses.
Here are some tips to keep bookkeeping costs low:
Minimize the number of bank accounts and credit cards in use
Avoid using personal accounts for business purchases
Request meetings with the bookkeeper for interim periods, such as annually or quarterly versus monthly
Utilize software applications that allow integration with the accounting software provider
Learn which areas you can manage some of the bookkeeping work to alleviate the work on the time spent – for example, the owner can send all the invoices or input bills to minimize the time required from the bookkeeper
What do I look for when I am ready to hire a bookkeeper?
Each small business will have different expectations for a bookkeeper. Be knowledgeable about specific needs to assess each potential option.
Here are a few items to consider:
Discuss expectations for availability to ensure the bookkeeper is a good fit
Verify that the bookkeeper is well-versed in the accounting software utilized
Ask the bookkeeper if they have any experience with the specific industry
Review terms and conditions for the contract length and conditions
Discuss the timeline for reports to be produced & provided for review
Investing in a bookkeeper can be one of the wisest decisions a business owner can make. Like each small business owner is passionate about the product or service they provide, bookkeepers are passionate about books! Allowing a bookkeeper to manage the details of the finances will free up an owner to focus on what really matters—in most cases, managing the small business they created.
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