Is Outsourced Bookkeeping Right for Your Small Business?

In this article, you’ll learn

• Why businesses need to keep detailed books
• Bookkeeping best practices
• Pros and cons of outsourcing bookkeeping
• How to reach a final decision on outsourced bookkeeping

A new small business owner is usually responsible for a variety of tasks. But as the business matures, some of these tasks may start to take up way too much of your time – preventing you from working on higher-value projects and making key business decisions.

An activity that commonly overburdens small business owners is bookkeeping. There’s nothing wrong with personally handling bookkeeping if after setting up your business accounting system you only have to spend a couple of hours a week on bookkeeping tasks. But it becomes a huge issue when bookkeeping-related activities are taking 10-20+ hours of your time per week.

Let’s start by looking at why bookkeeping is important for small business owners – there are business reasons and tax reasons.

3 Reasons Why Businesses Need to Keep Detailed Books

Here are three reasons why businesses need to keep detailed books.

1. Create a Budget

As a small business owner, you need a budget for both short-term and long-term business purposes. You can calculate your financial resources with pinpoint accuracy with detailed books, making it simple to build a budget. Without accurate and up-to-date books, on the other hand, you’d be stuck guessing how much money you have available for your business needs.

2. Keep Organized Financial Records

What would you do if a client disputes a past invoice? Or if you get audited? For too many small business owners, the answer is that they would panic. But this doesn’t have to be the case. Through bookkeeping, you can create accurate and easily accessible financial records that make it easier to get out of any jam.

Another benefit of keeping organized financial records is that you don’t have to be stressed during tax season. You can send the IRS whatever is necessary, and know that if they ask for additional documentation, you probably won’t have much trouble putting it together.

3. Reach Growth Goals

Want to grow your small business into a medium or large-sized business? To accomplish that goal, you may need to hire more staff, buy more equipment, and lease more space. You have to look at your balance sheet, cash flow statement, and other financial statements to see if your business can support new expenses and investments.

But what if you have poor financial records? Again, you would be unsure about your available financial resources. Let’s say you hired a new employee and later realized that you couldn’t afford to hire them. It’s not easy to undo that business decision.

Bookkeeping Best Practices

Here are a few bookkeeping best practices for entrepreneurs:

• Use bookkeeping software or accounting software. There is a lot of grunt work involved in bookkeeping. By using software, you can eliminate these repetitive tasks – and likely make fewer errors in the process.
• Keep personal and business finances separate. Let’s say you’re always using your business credit card for personal purchases – in this case, you’re going to have issues come tax time.
• Create an internal review system. You are ultimately responsible for your financial records, so you need a system that catches errors before they can cause problems for your business.

What are the Pros and Cons of Outsourcing Bookkeeping?

For some business owners, it’s smart to do bookkeeping in-house. For others, a bookkeeping service provider is the right choice.

Let’s look at the pros and cons of outsourcing bookkeeping, so you have the tools to make the right decision for your business.

3 Pros of Outsourcing Bookkeeping

1. Outsourcing Bookkeeping Might be Cost-Effective

Let’s say you have 10 hours per week of bookkeeping-related tasks for your small business. You could hire a full-time staff member to do bookkeeping – but what are they going to do for the other 30 hours per week?

By outsourcing, you only have to pay for what you need, when you need it. You also don’t need to pay for a full-time employee’s health insurance, paid time off, and any other benefits.

2. Access to Multiple Bookkeepers

Let’s say you have enough bookkeeping-related tasks to keep a full-time employee busy every week. Does this mean you should hire an in-house bookkeeper? Not necessarily.

By using a bookkeeping service provider, you can get access to an entire team of bookkeepers. A strong team has members that complement each other – for example, you may have one person who is an expert on tax scenarios and another who is extremely reliable with keeping financial records.

3. Time Savings

If you haven’t outsourced bookkeeping or hired someone to do it in-house, it means that you or a non-bookkeeper on your staff is doing bookkeeping. Here’s an obvious issue: you probably can’t do the job as well as someone who specializes in bookkeeping.

But there’s another, less obvious issue: you may indirectly be losing money by doing it in-house. Let’s say you are paying your employee who doubles as a bookkeeper $50 an hour. The average bookkeeper in the U.S. is paid $18.20 an hour. So, you would be losing more than $30 an hour for every hour that the employee spends on bookkeeping!

3 Cons of Outsourcing Bookkeeping

1. Outsourcing Bookkeeping Might Not be More Cost-Effective

Yes, this one can be either a pro or a con. If you are using someone outside of your organization, you won’t have as much control over how they complete bookkeeping activities… which could lead to additional expenses.

For example, you might assign what you believe to be 10 hours’ worth of tasks per week. But what if it takes 20 hours to complete the tasks? In this scenario, it might be hard to know whether it’s legitimately taking longer or the person is slacking off.

To reduce the risk of spiraling costs, you should set clear expectations for the independent contractor or bookkeeping service provider on what you need to be done. In addition, you should ask them for time estimates on tasks (if you’re paying hourly) and to check in with you at predefined intervals.

2. Loss of Control

It’s impossible to overstate the importance of bookkeeping, as accounting functions and tax preparation are reliant on accurate and timely financial information. This means that you might be reluctant to outsource bookkeeping services, as a bad bookkeeper can be disastrous for your small business.

However, this possibility of a negative outcome shouldn’t stop you from outsourcing bookkeeping.

You can mitigate this risk by carefully screening bookkeeper candidates or bookkeeping firms. Look for a provider with a long track record. If they have helped many other small business owners without any major mistakes, you are more likely to have a positive experience with them. It may be tempting to save a few dollars by going with an inexperienced applicant, but the risk is rarely worth the (relatively) small cost savings.

3. Harder to Reach

Do you ever need a piece of financial data immediately? If you have an accounting team in the same office, it shouldn’t be difficult to get financial information whenever you need it. With an external provider, on the other hand, you might not get an immediate response.

This con isn’t a deal-breaker, though, as long as you set clear expectations from the beginning. Let’s say you want a guaranteed one-hour response time – in that case, you should set that as a precondition for hiring an external provider. There might be limits in response time – you probably won’t be able to get an answer in the 30 seconds it would take to walk to an employees’ desk – but there are few if any bookkeeping issues that require instant attention.

How to Reach a Final Decision on Outsourced Bookkeeping

So, how do you know if you should build an in-house bookkeeping team or outsource bookkeeping?

For some small business owners, the decision isn’t too hard. Consider a couple of examples:

1. You only have 1-2 hours of bookkeeping tasks per week and you are a numbers person. You might be sacrificing a little bit of your valuable time, but outsourcing the tasks might be more trouble than it’s worth.
2. You have 20 hours of bookkeeping tasks per week, so too much for you to handle… and not enough to hire a full-time staff member. In this case, you should probably outsource bookkeeping.

The decision becomes more challenging for small business owners who have enough bookkeeping tasks for one or more full-time employees. Here are a few considerations:

• Do you have enough work for one or two bookkeepers, or does your business need 10+ bookkeepers? If it’s the former, you are more likely to see the benefits of outsourcing bookkeeping.
• Do you prefer to have a lot of control over how work is done? With an in-house team, you are going to be able to exert more control over accounting processes.
• Do you have time to create an accounting system upfront? Do you have the expertise to create an accounting system? If the answer to both of those questions is “yes,” you might be able to build an efficient and cost-effective in-house team.

To reach a final decision, consider the above factors and scenarios. If you are still unsure, you may want to consult with a financial advisor or Certified Public Accountant (CPA). Many small business owners think that CPAs are only able and willing to help with tax returns, but in fact, CPAs can help your small business beyond tax season.