Depending on the lifecycle stage of your business you may need "just-the-basics" bookkeeping or more advanced bookkeeping and management accounting. These are quite different approaches to financial management, and to justify the expense of the latter, your business needs to be at a stage where financial intelligence is critical and can provide an ROI.
Your business likely falls into one of these stages:
The Startup Stage
In the early stages, you’re working hard to develop your business model while tackling multiple priorities. Often you are the president, office manager, salesperson, HR, the accountant, as well as the IT person, and chances are, your biggest concern is survival. If you’re bootstrapping a startup, you may not be generating enough profit to even take a salary. Your primary focus in this early stage is proving that you have a viable business model.
At this stage, you should minimize the amount of money spent on your bookkeeping and accounting, as long as you’re ensuring you get the basics done. Compliance is the primary goal. Depending on circumstances, you can do it yourself or have a spouse or partner help, or the receptionist if they are trustworthy. You need to do the basics to pay the bills, make deposits and payroll.
You could also have a low cost provider do your books, or someone who can do it for you at a very low cost. This is a good solution until you reach a point where you need to get a more detailed level of management accounting and reporting.
When you are wearing multiple hats and have minimal funds at your disposal, it’s worth your time and effort to take the trash out every night on your own. A cleaning service expense of $300 a month is something you don’t need in the early stages. That’s $3,600 a year that you can put to better use.
As your profits and cash flow increase, you can start to think about taking more off your plate. This is when you will see the benefit of paying someone else to do your accounting since you can use your time more effectively to manage and grow your business.
Early Stage/Startups should get their bookkeeping done as cheaply as possible while ensuring compliance, unless they have investors that need advanced reporting early in the lifecycle of the company.
At this stage you should be getting the information needed in order to make data-driven decisions including receiving your reports in a timely manner. Getting reports at the end of the quarter is too late. Even if you get them 30 days after the end of the month, it’s too late.
As your business grows, you’re going to start making larger, more important spending decisions, and to do so, you’ll need to be able to measure the ROI of those decisions. You’ll need data and reports to help show you what’s working and what isn’t, so you can make adjustments and improvements as you move forward. You’ll need more than basic, cheap bookkeeping to:
- See the ROI on Marketing Campaigns
- Identify Your Most profitable Clients
- Understand your true gross margins
- Ensure your commission structure is correct
For example, if you’re spending money on marketing, you need sophisticated accounting reports on the profitability of your marketing campaigns. Is that national sponsorship creating enough new business to pay for itself? Is your Adwords program generating enough qualified leads to justify the spend?
For sales, you need to know who your most profitable clients are so you can develop an ideal client profile and target similar companies. First you have to understand your true gross profit on clients and projects in order to understand how profitable a client in a particular industry or at a specific growth stage is.
You also need this gross margin data in order to be confident in your commission structure – Are you paying the right amount to your sales people based upon the profitability of your jobs?
It’s in this growth stage when you need to go from a low cost provider to one that helps you see the leading indicators that drive your business. This transition to having actionable financial intelligence helps you make better decisions and ultimately make more money. When you make money from data driven decisions, is when you’ll truly see the ROI in your spending.
Often, low cost providers or in-house employees can have a lack of depth and expertise and can't provide actionable financial intelligence. Growth Stage companies need to get management accounting and advanced reports in addition to basic bookkeeping. Hiring and managing the right staff with the right expertise is both expensive and a challenge at this stage. Outsourcing becomes a viable option.
When you start making spending decisions based on financial intelligence, and not just by your gut instinct, is when you’ve broken free of the survival mode and moved into the expansion stage.
In this stage, you can’t see or touch everything that happens in the business. Your employees are no longer all in the same room. Sales is not the only thing that you are focused on. Growth happens when you embrace the true results of each area in your business, and make decisions based on the data of those results.
You'll need to have your fingers on the pulse of what makes your business grow. The decisions you need to make at this stage move beyond compliance; they need to be informed by the key performance indicators (KPI’s) that drive your business.
Expansion Stage companies need even more financial intelligence as they scale. They need to either build a dedicated, multi-person accounting department or outsource to a premier accounting services provider.
Benefits of Outsourced Accounting
For a business that is poised for growth, one of the greatest benefits of outsourced accounting is freeing up the brains and brawn behind the business to do what they do best: growing the customer base, building core competencies and improving cash flow. Outsourcing should be considered a competitive advantage, as it allows a business to take advantage of more business opportunities.
In short, outsourcing accounting gives a business owner more time to concentrate on innovation and revenue generating activities.
The opportunity cost of key staff deferring their time from the core business to handle accounting or financial issues must be factored into the decision on whether to outsource.