Lets first start with the cost of making errors, or doing your books incorrectly. As an example, say that you are a DIY bookkeeper for your business, but you incorrectly account for some of your transactions. As a result of your incorrect accounting, one of two things will happen. First, come tax time, a good CPA will uncover these mistakes, and need to work with you to correct them. This can lead to extensive back and forth, and cause you to rack up a hefty bill with your CPA, sometimes in the thousands of dollars. The second outcome is that your CPA glosses over the mistakes, and you file your tax returns using incorrect information. This can be dangerous for a variety of reasons, but can also be costly if you are audited and mistakes are uncovered that would have created a higher tax liability. The penalties and interest charges can be huge, and will almost certainly exceed the cost you would have incurred to simply get things done correctly from the start. In general, if you don’t know what you’re doing– outsource your bookkeeping. It’s not worth the costs of doing it incorrectly. However, for the financially literate bunch, there still are situations in which it does not make sense for you to be doing your accounting. I like to tell clients to lean on the five hour rule if they are trying to determine when to outsource bookkeeping. In general, I recommend that if you are spending more than five hours a month performing bookkeeping, it is no longer worth your time. This is because of a simple formula used to calculate the cost of your time spent on bookkeeping. If you value yourself as a small business owner, you should consider an hour of your time worth at minimum worth $50. I would argue that depending on your specialization, it is much, much higher. However, for the purposes of this simple analysis, we’ll say it “costs” you $250 a month to work on your bookkeeping. If you are truly only spending that much time a month performing your bookkeeping, you can find an affordable outsourced bookkeeping package with a reputable firm that should suit your needs and give you financial peace of mind. Consider retiring your pocket protector, and leave the accounting to the professionals– you’ll thank yourself for this down the road.
According to a recent survey, 58% of business owners working 60 or more a week said bookkeeping was draining, and almost half of small business owners said it was their least favorite task to complete. In my experience working with startups and small businesses, this does not surprise me. In fact, I thought the number would be much, much higher given the feelings of disgust I often hear clients associate their accounting tasks with. I hear clients complain about the time it takes them, or concern that they may not be doing their accounting correctly. These are equally valid concerns, and both signs that you should consider outsourcing bookkeeping to a professional.
The fact is, being the accountant for your small business is no easy task, but it is a very important one. However, most small business owners and startup founders struggle with determining when to outsource bookkeeping for their business. There are a variety of reasons for this, but in general, it mostly comes down to a cost benefit analysis. There are two different analysis that should be done to determine when to outsource bookkeeping, with the first being the cost of error/corrections, and the second being the cost of time.