I think it is clear that outsourcing bookkeeping is more efficient than doing it in-house. The people who would do the accounting in-house are probably better used doing other things, and even if they weren’t, you should be able to hire competent accountants for a fraction of the cost of keeping them on staff.
Accounting is inherently repetitive, so each time you outsource it, it should be to someone cheaper than before. You start with local firms; then regional ones; then national ones; then international ones; then you go online and use one of the big players like Intuit or Quickbooks.
A lot has been written about this phenomenon over the years, and I urge you to search out some of the classics: The Mythical Man-Month , for example, or Management Accounting . Even though they were written before the Internet became important, they still make good reading.
To decide whether you should do your books in-house or outsource the job to a bookkeeping service, it helps to understand what they actually do.
Some people object to outsourcing jobs on a gut level. Those people are probably not going to listen to arguments about how much more productive or creative they will be if they take on the work themselves. They will only listen if they want to know whether outsourcing is likely to get them audited, or catch fire, or otherwise result in their having less stuff.
So let’s start with the basics of bookkeeping. The way it works is that every month you sit down with all your receipts and invoices and enter the information into a ledger. Then you add up all your expenditures and subtract all your income, and see how far ahead (or behind) you are at the end of the month. If there was a difference between what you earned that month and what you spent, then you can pay yourself (or someone else) some of that difference at the end of the month.
Another reason we overlook the risks of starting a company is that we confuse accounting with economics.
When someone starts a business and has to decide whether to keep the books in-house or outsource, it looks like a pure accounting decision. The startup doesn’t have money to hire anyone, so it has to decide whether to spend its limited funds on something useful (like making the product, or hiring salespeople) or on something necessary (like bookkeeping).
Outsourcing the bookkeeping will definitely make the accounting less accurate. But that’s not the only relevant consideration. Accounting is just one aspect of a business. If you’re going to be a successful CEO, you also have to know how much things cost, how much inventory you have, what your customer list looks like, and so on. And those are all accounting issues too! So which decisions you make about accounting don’t have as much effect as they at first seem to have.
Accounting is more important if your business is small and simple than it is if it is large and complex. In a very small business, accounts can be so simple that keeping them accurately yourself may be as good as any system you can afford – better than hiring an expensive accountant who will create new problems by introducing nonstandard approaches.
Many small businesses decide to handle their own bookkeeping. This may be a mistake. The technology of small business accounting has changed dramatically in the past two decades.
The cost of computers and software has come way down, while their capabilities have gone way up. With off-the-shelf software, you can keep your books as easily as Microsoft does. And because you don’t have to hire programmers to write custom programs for your business, your costs are lower still.
A big factor with small businesses is that anything that’s easy to do yourself seems worth doing yourself–even if it isn’t. So if you’re thinking of having your books done in-house, stop and ask yourself why you’re not having them done by professionals. If it’s because it’s hard or complicated or time-consuming, think again.
I’m not a financial expert. I’m just an ordinary investor, and because I invest for fun and I don’t play the market, and therefore my own risk is limited, I don’t think too carefully about the details. So you should take this with a grain of salt.
But it seems to me that when you outsource your bookkeeping to an accountant or bookkeeper, you are paying for two things: someone who can do bookkeeping, and someone who knows how to read financial statements.
The first is valuable if the task is difficult or boring. But most people find bookkeeping easy, and most businesses’ books are fairly simple in structure. Unless you have unusual needs in either department, it seems likely you can hire someone for less than accounting firms charge.
The second is valuable if the task is unfamiliar. But financial statements are always in dollars, so it’s hard to be confused by them in ways you couldn’t sort out if you thought about them for a while.
The accounting firm PricewaterhouseCoopers (PwC) has a name that sounds like an old-fashioned NYC law firm, but it actually does something very different. PwC is the largest accounting firm in the world, and it has been helping businesses with their financial reporting and tax planning for over 150 years.
The first thing you notice about PwC is that it outsources almost all of its own bookkeeping to India. This isn’t because India is where all the best accountants live; on the contrary, PwC employs lots of very smart accountants in London and elsewhere. It’s because the work can be done more cheaply elsewhere. And “cheaply” doesn’t just mean lower salaries; it also means more automation. PwC’s Indian staff cost less than PwC’s UK staff mainly because they use computers to do more of the work than PwC’s UK staff do.
In the old days, a company’s management had to be good at accounting. A CEO could not find the time to be an expert on everything, so he had to hire accountants who knew how to read a balance sheet. In those days, you looked at a company’s financial statements to answer questions like:
How much cash does the company have?
Are there any problems with receivables or payables that would mean trouble for the business?
Is there enough profit to pay off debt without straining?
Are there any sudden changes in the companies finances that might indicate some kind of fraud?
Nowadays, you don’t have to be an expert on these things. If your business involves computers, you will probably use accounting software that is designed to track all of this for you. You can set it up so that every few minutes your software spits out an update on things like revenues and expenses and cash balances. And if you’re really big, you can get programs like SAP or Oracle that will collect all of your data from all of your subsidiaries and summarize it for you in one place.