The High Cost of Cheap Accounting
It's almost become a right of passage... your company grows, and one day you wake up with the realization that it's time to get some help with your accounting.
Maybe you try outsourcing it to a CPA firm, Upwork, or a referral from a friend... You get quotes and - thinking you're saving money - you go with the lowest price option you can find. "I've made a wise business decision", you think to yourself as you dust off your hands with satisfaction knowing you were able to delegate that so well. "Problem solved", you think.
Then you learn the lesson that so many business owners have learned before you...
Price does not equal value.
In this article, I'm going to show you how cheap accounting usually costs you far more than you would think and how to assess for yourself what you really need in your accounting. By reading this, you will have smarter conversations with the people doing your books and save yourself money and frustration.
The High Cost of Cheap Accounting
The cost of bad accounting can be high, and it's often difficult to quantify. Ignoring your accounting can lead to missed opportunities, cash flow problems, and even bankruptcy because you never get real visibility of financial situation (You may think that sounds like hyperbole, but I've seen it happen).
In addition, bad accounting usually leads to "accounting cleanup" hell... an evil place of ongoing torment where there are no numbers to guide you, banks can't get the information they need to renew or approve your loans, you don't have the information required to file your taxes (leading to costly IRS fines and penalties), and your backoffice staff hates coming to work every day because it's pure stress.
Abandon Hope All Ye Who Enter Accounting Cleanup Hell
Many business owners in the early part of their career fail to realize that accounting cleanup isn't something that most bookkeepers can do because of the complexity of the work. It's a skill set that ofter requires a trained CPA or highly experienced senior accountant. As a result, where you may be comfortable paying $40 or $50 an hour for a full charge bookkeeper to keep your books up to date, a cleanup accountant will cost you closer to $100/hr or more.
The other problem with entering Accounting Cleanup Hell is that it's pure stress for your accounting and backoffice staff. Most businesses are only set up to handle the day-to-day accounting, but - during accounting cleanup - you're forced to do the day-to-day work AND REDO the day-to-day work that should have been done going back months (sometimes years). When little unexpected things come up, there's almost never enough hours in the day for your team to handle them. This is when your team start slipping on things like sales taxes, payroll taxes, cash management, and invoicing customers. At this point, you're racking up thousands of dollars a month in mistakes and this is when it can put an already struggling business into a tailspin.
Needless to say, these costs aren't factored into the equation when the business owner starts reviewing options for outsourcing his accounting. The cost that's not included here is Execution Risk.... the risk that someone doesn't do what you thought they were going to do and screws up your books.
What Is Execution Risk and How To Deal With It
Why is execution risk so important to consider?
First, as I’ve mentioned, for every hour it takes to do your accounting correctly, it takes a minimum of 2 hours to clean up accounting done incorrectly. So consider this…
Someone quotes you $300 a month to do your books, quoting you $30/hr for 10 hours a month. During that 10 hours, they end up really butchering it (and not documenting their work very well either because they knew you were price sensitive and were afraid to quote you enough hours to really do the job). It will take at least 20 hours to clean up the mess for that month and you’ll pay at least $75/hr for it. So, you originally thought you were spending $300 per month and now you’re spending $1800 per month ($1500 + $300).
Not only have you spent more money than necessary, but you’re also delaying getting your financials by not just weeks, but usually months because accounting cleanup usually means “processes cleanup, training, and searching for documents you didn’t realize you were supposed to be collecting.” This all takes time to implement.
You need to factor in this execution risk when pricing out your accounting because the cost is real.
Why Does This Happen So Often?
As a young business owner, you're plagued by two disadvantages:
You don’t know what you don’t know and
Because you're trying to plow money back into your company, you are hoping that there’s a magic solution that will allow you to not pay the price to get good accounting.
Some of you will disagree with this, but like Charlie Munger, a long-time student of the psychology of human misjudgment, once said... "You're smart and I'm right, so sooner or later you'll see that I'm right."
This mindset is a seductive little trap that's very easy to fall into when you don't know what the heck to ask an accountant for, how to screen vendors, and how to tell if someone knows their stuff. Much of your decision will just be based on trust, so - it's difficult to spot a weak vendor.
Good Accounting Takes More Time Than You Think
To give you a sense of all the things that a good accounting department might do – take a look at this list of all the things that a large accounting department does (which is a scaled-down version of what most businesses need) - https://airtable.com/shrfKW2lnwFkIfmwe/tblmTjKn4lx6pdlih
My guess is you didn’t expect the list to be so darn long. Good accounting takes A LOT! (And this isn't even a comprehensive list)
Think of it like this -- In your profession, I'm sure your customers think that your job is a lot simpler than it really is. They just show up and get served. They don't see all the hard work and planning behind the scenes that allows you to deliver that product. Accounting is the same way. It takes time and good people to do it right.
Here are some other ways you can ensure you get good accounting out of the gate:
Get some examples of how they plan to code expenses, revenue, and things like note payments.
Have an accountant that you trust (maybe a CPA or a friend who works in accounting) interview firms with you and take a look at the work they’ve done.
During the first few weeks of working with the person or company doing your books, block out time to meet with them and go over how they’re doing things and offer feedback on their work. Again, if needed, ask a friend who knows accounting to sit in with you on those meetings. Sometimes all it takes to get your accounting on the right track is to provide very clear feedback on what you want.
Every quarter or so, have someone review the accounting work and provide feedback. Do this monthly during the first 6 months of working with your vendor. It will set the tone for very tight work and not leave anything to chance.
So there it is. Hopefully now you understand the high cost of cheap accounting and have some tools in your toolbox to avoid entering Accounting Cleanup Hell and to manage your accounting vendors better. If you still feel lost and need some guidance, feel free to give us a call. We're happy to help.