Business school, just like law school, teaches you new ways of thinking. While the actual tools, theories, cases, and people you get exposed to are great, what really sticks over time (hopefully) is the ability to face an issue or a challenge and think about it in ways that others may not.
Recently the managing partner of a four-person law firm asked me this question: why would I ever want to outsource my books? He further explained that outsourcing something means a loss of control and control over his finances is not something he is willing to give up. He’s worked hard to build his practice and knowing his numbers inside and out was a key to that success.
While I agree with his basic logic, I’ve been programmed to think a bit differently. Specifically, I believe the best companies in the world have an unrelenting focus on doing what they are best at (their core) and look to find more effective, cheaper ways to get non-core tasks and functions off their plate. When it comes to bookkeeping, I have yet to meet an attorney who is both excited by accounting AND is a rainmaker for their firm. Perhaps they exist.
For the rest of us business owners, when making decisions we must weigh the pros and cons of our various options. One way to do this is to look for a Return on Investment (ROI). Here is the basic equation for determining ROI:
ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
Hiring someone to do your books is definitely an investment – some cost $20-$30 per hour while others can cost $75+ depending on level of expertise and type of work being performed. The equation above is pretty straightforward, except when you start to dissect “gains” and “costs.”
Let’s first look at a raw dollars and cents approach. Let’s say you are a corporate transactions attorney and you bill out at $300 an hour. A bookkeeper pitches to do your monthly maintenance and reporting, including your payroll taxes, and they charge $50 per hour. At the hourly level, you could spend your $300 adjusting your chart accounts or making general ledger entries on your own, or you could spend it billing a client or finding a new client. The math could look like this:
Per hour ($300 – $50)/$50 = 500% OR 5x ROI
If you or the bookkeeper don’t bill hourly (you get an A+ in my book by the way) and instead price using flat fees, your analysis would be sl
ightly different. Let’s say your average matter/project is $2500 and the bookkeeper charges a flat monthly fee of $500. Spending your time finding or working on just one additional matter in a month would produce an ROI like this:
Per month (one extra case) ($2500 – $500)/$500 = 400% or 4x ROI
But the analysis thus far is quiet limited. To this point, we have really only looked at opportunity costs – foregoing the opportunity to generate revenue and instead doing the books on your own. There are other gains and costs to consider.
Other Gains to Consider:
1. Quality of keeping your books up-to-date and accurate - avoiding errors, knowing the nuances of accounting procedures and avoiding time consuming data input can save money come tax time. One attorney I know saved an additional $3,000 in taxes the year after she hired a professional bookkeeper, all because the bookkeeper maintained more detailed and accurate finances. Getting an expert to perform a non-core business function can pay off.
2. Analysis and insights – some bookkeepers (and consultants) go beyond just keeping your books tidy. They analyze your numbers for trends and insights and can help you run a better business and make smarter business decisions. For example, one client I work with saw an increase in overall profitability of +15% in the year following the addition of a bookkeeper. Objective analysis can produce line of sight to help you grow revenues and/or reduce expenses.
3. Control over your business – contrary to the logic of the managing partner I mentioned above, you shouldn’t give up control of your finances when you outsource bookkeeping. You still must “know your numbers” but you don’t have to be in the accounting weeds to do so. A great bookkeeping arrangement facilitates the transition from reactive decision making to proactive decision making – getting ahead of the game. Seeing an issue ahead of time (like when your staff will reach maximum capacity or when you need to increase your marketing spend) gives you time to react and reduces stress.
Other Costs to Consider:
1. New software – some solos and small firms don’t have accounting software per se, and others don’t utilize what they do have. While Quickbooks is the industry standard, other tools like Xero, Freshbooks and Wave can provide great alternatives. These typically cost from $10-$100 per month. Even practice management tools like Clio, RocketMatter, Amicus, and Tabs3 (to name a few) have accounting features. The point is, you may have a cost related to adding or upgrading software to get your books done right.
2. Training – if your financial acumen is limited to “I made $100,000 last year” or “my P&L looks good,” you may want to invest in an online course, a few books or even a CPA or management consultant to teach you how to be a smarter business owner. Moreover, you may not want to get your hands dirty with the in’s and out’s of accounting software, but you need to at least be familiar with the basics. And you may have to pay to understand how your current practice management software “talks” to outside accounting software. That can cost time and money.
3. Get what you pay for – another thing to consider here is value. A college student studying accounting or finance might run you $15 or $20 an hour to do your books. Some professional bookkeepers and even CPAs who do bookkeeping can charge much more, but not deliver much more value. Expect a wide range of prices, services and value. The best solution is one that fits within your budget (yes, you need one) and also delivers on your objectives. Do you just want a clean file come tax time? Or do you want to build a smarter, more productive business?
In the end, the decision to outsource your bookkeeping, although not to be taken lightly, should be a relatively easy one. When done properly, the benefits far outweigh the costs, especially when it comes to a solo or small law firm. Do your homework, know your strengths, and have an unrelenting focus on doing what you do best. The rest is just academic, isn’t it?