What Options Do You Have for Accounting Services?
Okay, so you’re sold on the importance of accounting. Hooray!
Next up, as a business owner you should be aware of the various accounting options available to you. In brief, they are:
· Track it yourself (either using a cloud software like Quickbooks Online or by tracking transactions in an Excel spreadsheet)
· Outsource your accounting
· Hire an in-house accountant
Depending on the size of your business and the number of transactions you have, one of these options will likely stand out as your preferred pick. Let’s break those down with a bit more color around the pros and cons of each option.
In my experience, keeping track of your own accounting is the preferred option for many businesses in the start-up stage, as well as many lifestyle businesses. If you operate a one or two-person service-based business, this may be the best option for you (i.e. lawyer, therapist, plumber, etc.).
Generally, these types of businesses are a bit smaller and tend to have a manageable number of transactions. In these cases, business owners will often monitor revenue and expenses through Excel spreadsheets or Quickbooks Online. Quickbooks Online, or QBO as it is often referred, is widely considered the gold standard of small business accounting systems.
Today, there are many options for businesses looking to outsource their accounting. Making this choice can be beneficial for a business with owners who are poised to grow the company as it allows them to delegate this task to a professional bookkeeper or accountant while they focus their energies elsewhere. Popular options can be generally boiled down into three buckets:
· Low cost leaders (think Bench.co)
· Mid-range services (local bookkeepers)
· High-end services (CPAs and the like)
Outsourcing your accounting can be tricky since it’s hard to know what you’re getting until you’ve paid for the service. While the low cost leaders might be more appealing to your wallet, bear in mind that they often cannot offer many services. For example, Bench currently doesn’t offer help with 1099s or renewing business licenses. They also don’t have a built-in payroll option.
In-house accountants or bookkeepers are definitely the most costly option, but once your business has grown to certain point, this becomes your best option.
Unfortunately, it’s difficult to say when you’ve outgrown an outsourced accountant, but most of the time, your monthly charges will be a good indication. If you are watching your outsourced accounting bill go up and up, do the math to determine if it’s in your best interest to bring this role in-house.
The average bookkeeper salary is currently around $40,000 per year, +/- $5,000. If your accounting fees are nearing this amount, it’s probably time to make it an in-house position. Of course, there is a difference between bookkeeping and accounting. If your accounting needs are more complex, then an accountant may be your preferred option (and naturally, they come with a higher salary requirement).
As in all things, you get what you pay for with accounting. If your needs are more complex (and they will be, as your business grows) then the more expensive options are going to be preferable to you due to the insights and level of control you’ll receive.
By now, you have a decent idea of what accounting IS for small businesses as well as what options exist for setting up accounting for your small business. Lastly, let’s cover the biggest question you’ll face when setting up your accounting: should you use the CASH or ACCRUAL basis?
Accounting has to follow rules known as Generally Accepted Accounting Principles (GAAP). These rules ensure that everyone performs accounting in the same manner.
GAAP permits that you can use either the cash basis or the accrual basis when you account for your business. It also dictates that you must continue using one basis consistently, although you can elect to change your accounting basis, but it requires filing forms with the IRS to do so.
Remember back to when I mentioned the five elements of a journal entry? The first of these is “a date.” That is, every transaction you record has to have a date associated with it. What date you use to record your transactions is entirely dependent upon whether you elect to report on a cash basis or an accrual basis.
To make this easier to understand, imagine you performed your service on February 1st, sent an invoice on February 3rd, and received payment on March 2nd.
Cash Basis:
The Cash basis uses the date that the cash is either received (revenue) or paid (expenses). In the above example, we would record a journal entry with a date of March 2nd, because that is the date that the payment was received.
Accrual Basis:
The Accrual basis uses the date that the revenue was earned or the expense was incurred. So, in our example, we would record a journal entry with a date of February 1st, since this is the date that we performed the service.
This was a simple (one-transaction) example, but you can imagine how this difference would be compounded in a business with a heavy number of transactions. Many owners start on a cash basis but eventually switch to an accrual basis once the business has become more complex. Regardless of which option you choose, make sure that you understand what the rules of your reporting are. Without that understanding, you won’t be able to tell if your business is doing well or if there’s trouble afoot—and in that case, what are you accounting for in the first place?