Most businesses starting out can’t afford the services of a professional and competent bookkeeper. Maybe you’re in the same boat, muddling through as best as you can. This is understandable because in their infancy most businesses need to be ruthless about minimising expenses to have a better chance of surviving those challenging early days. Bookkeeping is arguably an avoidable cost in the short term, even though there cam be long-term, negative consequences to doing the bookkeeping yourself. But there comes a time that may no longer be the best strategy. Perhaps you’re now at a point where you’re starting to ask yourself, do I need a bookkeeper?
There are a few factors to consider when making the decision to engage a bookkeeper. I’ll cover these below.
Higher Value Activities
As the business owner, one question to ask yourself is what you are worth to the business. I don’t mean your hourly rate plus superannuation, public holidays and leave, (which is around 25%). I’m talking about your opportunity cost. This is the loss to the business when you take an alternative course of action. For example, perhaps you are solely responsible for sales activity and you manage to generate $100,000 in sales every month. You have staff that fulfil the sales, but you generate the sales. Assuming a standard 38-hour week and four weeks of annual leave and two weeks of public holidays annually, you generate an average of $686 in sales every working hour.
Of course, as a business owner you’re juggling a lot of balls: dealing with activities like staff supervision, recruitment and training, finance, legal, IT, marketing, production or order fulfillment, business systems, general management, and possibly some level of administration.
When deciding whether to delegate or outsource an activity, consider your value to the business and the opportunity cost of you continuing to manage that activity. If your business is giving up an average of $686 an hour when you’re not selling, should you be doing administration or bookkeeping yourself? The answer is no, obviously not!
If you want your business to grow, you need to give up activities that you can delegate or outsource effectively for less than your opportunity cost.
If your business isn’t making enough profit for you to feel comfortable delegating or outsourcing that activity, then you need to take a really good look at your expenses, your debt load or the amount that you charge for your widgets or services. Check out our article on this here.
Are your Accounts Up to Date?
Do you have unreconciled bank transactions going back more than one or two months? Are you behind on your customer invoicing? Could you find every document to support your expenses? I’m talking formal tax invoices here, not just emails, order confirmations or EFTPOS receipts. Is the BAS deadline or tax return deadline crunch time for you? If any of these sound like your business, then you’re not in an ideal situation.
Savvy and successful business owners have their accounts up to date so that they can see how their business is performing at any given time. It helps confirm their gut instincts or point out what they may be missing. It also means that they can meet their tax lodgement obligations, budget for payment of their tax and employee obligations and understand at all times how much of the money in the business bank account isn’t really their money.
Ask yourself, do you think that high net-worth individuals let their accounts get out of control? My experience seeing many businesses’ books over the course of several years is that this is very rarely the case. If you want to be successful in business, do what successful people do.
Financial Reports & Analysis
Do you know how much you’re really making? Does your monthly Profit & Loss statement make sense, or are there some line items that appear in the wrong places or in the wrong months? Do you have wildly fluctuating profits and losses from month to month that you’ve just accepted? Do you understand how to read a Balance Sheet and what those assets and liabilities mean to your business? If you don’t, then it indicates a lack of control or understanding. None of us are born with this knowledge. If you haven’t learned yet, perhaps it’s time to! Consider what value that knowledge and understanding would have to you and the growth of your business.
Imagine if a bit of financial analysis that revealed that if your employees were better at keeping timesheets then you’ve be able to invoice an extra $9,000 per employee per year without doing any extra work. Would that information be worthwhile? Absolutely! If your bookkeeper cost you $36,000 per annum and they discovered that this affected four of your full-time employees, then they would have paid for themselves. These numbers may seem large and unlikely, but consider that this works out at $195.65 in lost revenue per employee per week for 46 weeks. (I’ve even allowed for four weeks of annual leave and two weeks of public holidays). When you look at it that way, it seems far more probable. Small numbers multiplied become big numbers!
Another scenario is that someone in your business was invoicing your clients and they made an error with the pricing by using the wrong amount (including rather than excluding GST), which caused a shortfall equal to the GST amount, or a difference of 1/11th. On $1,200,000 of annual turnover, that’s $109,090!
These scenarios are borrowed from real-world examples. Imagine how you would feel if you found out that this was happening to you and someone brought it to your attention. This is the kind of value that you could expect from a highly proficient bookkeeper, if you respond to their probing questions and listen to their suggestions.
Whom Do I Trust?
First, do you hire an employee or outsource the activity? If you hire an employee, then you’re fully responsible for what happens, or doesn’t happen. If they screw it up, all the while making it appear that they’re doing a good job for one, two or more years, then the cost of doing it all over again will be on your head, and multiplied many times over due to the complexity of the job.
If you’re considering using your administrator to do your bookkeeping because you believe that it’s a data entry activity, check out our article on this here.
If you don’t have the bookkeeping and/or accounting expertise to supervise an employee bookkeeper and know whether they are doing a good job, then employing someone may not be the wisest option. If you’re relying on your external accountant to perform this function, then you might find out too late. Few accountants are interested in supervising bookkeepers to this degree. In addition, since accountants are typically not well-versed at using accounting software on a day-to-day basis, or skilled at payroll and associated functions, they are unlikely to ever notice certain types of discrepancies that could be quite costly for you. To understand the differences between bookkeepers and accountants, check out our article on this here. In this case, you’d be better off getting a BAS Agent to supervise your employee bookkeeper.
If you engage a contractor, specifically a qualified, experienced and registered bookkeeper (BAS Agent), and ideally someone who is a member of a professional association and has good testimonials, then you are very likely to find someone highly competent. As a condition of their registration as a tax professional, they need to hold professional indemnity insurance. If they make a mess and cause a loss for you, you have a safety net. BAS Agents needs to engage in ongoing professional development too. This means that you’ll get up-to-date expertise that you’re unlikely to find in an employee bookkeeper.
Second, do you choose the $40/hour option (after all, that’s the hourly rate of a well-paid administrator or PA), or the $80/hour option? Well, let’s consider this a couple of different ways. I won’t bore you with the details of the calculation, but a sole trader BAS Agent working from home with minimal overheads will earn an hourly rate of roughly half of what they charge out to their clients. If you’re paying $40/hour, then they’ll be earning $20/hour. Given that the minimum wage in Australia is currently $17.70, you wouldn’t be paying a lot extra for a qualified, experienced, registered tax professional. Consider how likely it is that you will find such a person.
Another consideration is how well you want your finances managed. If you’re happy for average bookkeeping and financial management, then choose an average hourly rate. If you want to have above average, then pay an above average hourly rate. As a guide, the Australian Bookkeepers Network 2016 benchmark report indicates that the going rate for a capital city bookkeeper is $67 – $72/hour (average) and $72 – $87/hour (upper quartile).
Yes, I Need a Bookkeeper!
Okay, so you’ve made the decision to get a bookkeeper. Enquire with us today about how we can help you transform your business finances and let you get back to doing what you’re best. This way you can do what has the most value for your business.