Are you doing your own bookkeeping? When should you outsource your accounting & bookkeeping?

The time you spend doing bookkeeping is taking away from the revenue you could be earning from your core business. This is called "Opportunity Cost" but could equally be considered 

"Lost Opportunity Income".

Hourly Rate:  Annual Net Income / Annual # of Hours worked = Hourly Rate

Opportunity Cost:  Bookkeeping Hrs per month x Hourly Rate = Monthly Opportunity Cost

Consider this example: You and your partner own a very successful restaurant, and you have been doing all of your bookkeeping since the day you've opened. Your share of the profit last year was $396,000. Although your restaurant is only open for dinner 6 days a week (4:00 pm to 11:00 pm) you come in every day at 11:00 am to spend 2 hours on your bookkeeping before you start prepping for dinner service. Additionally, you don't get out of the restaurant until at least midnight because you have to ensure everything is clean and ready for the next day. Because you work so hard for so many hours, you always close the restaurant each year for 2 weeks at Christmas-time so you can have a break with your families.

So, excluding your 12 hours a week for bookkeeping activities, your core business work hours (1:00 pm to midnight) are 11 hours per day x 6 days a week - 66 hours/week x 50 weeks = 3,300 hours/year. You are spending 48 hours per month on bookkeeping over and above your core business activities.

Let's calculate your Opportunity Cost using the formulas above.

Hourly Rate --  $396,000 / 3,300 hrs = $120 per hour           

Opportunity Cost --  48 hrs x $120 = $5,760 monthly opportunity cost.

In this example, your DIY bookkeeping is costing you both $5,760/month in LOST INCOME. 

Potential Options: 1) Carry on if you're happy with the way things are. 2) Outsource your bookkeeping and start opening for lunch to earn more revenue. 3) You don't want to open for lunch, but decide to open during Christmas and New Year which is a hot time for parties and reservations. Just opening for those two weeks could bring in an additional $25,000 to $30,000. 4) You could simply outsource your bookkeeping for a fraction of your opportunity cost, and stop donating 48 hours of your life every month for FREE to bring a little more balance into your life. The options are many and it's a good exercise to go through this and strategize ways you can increase your revenue without working more, or decrease your hours of work while maintaining your current revenue.

You would think that business owners who rank bookkeeping on the bottom of their list of things they enjoy doing or their talents would be the ones outsourcing it right from the beginning of their business journey.

You'd be wrong! 

It is understandable why many owners decide to give it a try, anyway, to save money when they have a lot of start-up expenses, or are not earning a lot of income at the beginning. They may start out keeping on top of the basics like entering expenses and sending invoices, but allow the critical, more complex activities to slide (like filing sales taxes, reconciling bank and credit card accounts, managing their inventory or COGS - Cost of Goods Sold, etc.). But as they start to take off in their business, even the basics start to pile up and get ignored, until they have no idea where they stand financially. 

At the end of the year, these are the folks that bring the pile of... well... everything to their Accountant in a shoebox (or 10 shoeboxes). Their accountant's fees are ridiculously high because they have to do an entire year's worth of bookkeeping to catch you up before they can even start to prepare your Financial Statements and file a Tax Return.

Proper Financial Management is critical to the long-term success of your business. If you don't like it, or are not good at it, save yourself a lot of headache and outsource early on. Your bookkeeper will look after all of the day-to-day transactions, and hand over a complete set of books to your accountant at year end for review, adjusting entries, and taxes (if you choose). The Accountant's fees will be lowered because the time spent is minimal (Accountants can charge in the hundreds per hour). 

If you don't like doing bookkeeping, or you realize you're just not that great at it, then outsource early and stay ahead of the game!

You've managed to get your business off the ground and you're now into the growth stage. You're pretty pleased with the number of hours you've been putting in at work and the decent amount of money coming in from a growing list of customers. 

You even manage to stay on top of your basic, and essential, bookkeeping to track your progress and stay compliant with the government. Your Accountant has been a great help at yearend by giving you a list of adjusting entries to make, and with their guidance, you seem to get them all entered to close your year and start anew. 

The biggest issue you have with this plan is that the only time you have to do your bookkeeping is at home, after dinner, from your kitchen table. You love being around your family and it's better than being at the office in the evenings, but you just don't feel as engaged as you'd like to be. You wish you could enjoy your evenings actually doing things with your family, engaging with your kids, binging Netflix with your partner, going out with friends, and feeling more rejuvenated each morning.

You feel like you're between a rock and a hard place, sacrificing quality personal time to keep your business running smoothly.

1. Refer to "Opportunity Cost" above.
2. Determine what your priorities are right now - the pros and cons of the sacrifice.
3. Assess the value of your personal happiness and work/life balance.
4. Decide if outsourcing your bookkeeping is the right choice for you.

It is extremely common for a couple to approach a new business venture in the same way they approach all aspects of their relationship -- a give-and-take, fully-onboard supportive attitude. One of you has the dream, the skills, and the experience to launch your own company, while the supportive spouse agrees to help out with the administration and bookkeeping during the cost-saving, start-up phase of the business because, let's be honest, they're just better at doing those things.

Oftentimes, they already have a pretty full plate with their own career or a family (or both), but because they are 100% supportive of their partner's dreams and ambitions, as well as being invested in your company's success, they gladly fill this role on a part-time, fit-it-in, work-around-life, and unpaid basis. 

As the business grows, this arrangement may not be sustainable in the long-term. If the business owner is too slow to notice that a new plan is needed, or to transition to a more permanent solution, it's possible for tension to creep into the relationship. I have first-hand experience with this issue, and I've seen it happen with many other couples involved in their own businesses.

1. Keep the lines of communication open, and check in regularly on how everyone is doing and feeling. If things are going swimmingly, great! Just be aware that things can change as your business grows.
2. If you're thinking about next steps, have a frank discussion about the value of time and what your priorities are as a couple/family.
3. If you both agree that it makes sense to hire an employee to support the business (a combo admin/accounting clerk) then get started on the hiring process.
4. If you don't need, or want, or are physically set up to bring on an employee with all of the overhead, do a realistic evaluation of your current profit margins and decide how much you can afford to outsource some, or all, of the administration and bookkeeping to a third party.