As their business scales, startup founders have to decide how best to handle their accounting and tax needs at each stage of growth. How much should they do themselves? What should they outsource to a bookkeeper? When is it time to hire someone internally?

In this post, we collaborated with our partner Charlie Perrin of CloudBookkeeping to spotlight the most beneficial and cost-efficient options for quality bookkeeping at each stage of growth.

How do bookkeeping services differ from accounting services?

In general, bookkeeping refers to day-to-day transactional record-keeping and compliance services. On the other hand, accounting then takes the data gathered and maintained during the bookkeeping process and applies accounting rules and theory to prepare financial statements, advise business owners on strategy, file business tax returns, and more.

Bookkeeping services include items such as:

  • Recording and categorizing transactions
  • Reconciling bank, credit card, and loan statements
  • Filing sales tax reports
  • Making payroll adjustments
  • State & Federal payroll reporting

Accounting services use that data for activities such as:

  • Tax planning
  • Advanced accruals
  • Deciding the best tax strategies (e.g., when to expense vs. capitalize)
  • Advising business owners for goal setting/benchmarks

When should a startup begin to use DIY accounting software?

Every business should have QuickBooks or a similar program to keep track of activity in real-time from day one. Don’t wait until you need the information to try to gather it from disparate locations like spreadsheets and a drawer of receipts. It is wise to set aside time each week to file your receipts/invoices and categorize your transactions while everything is fresh in your mind. Activities such as reconciling bank statements, paying vendors, and preparing/sending invoices should be done monthly and also tracked in your accounting software. Staying diligent in those efforts doesn’t just mean you’ll be prepared when tax season comes around; it also provides you with an accurate picture of your company’s financial health at any given moment. And when you need advice from a bookkeeper or CPA, good record-keeping is the golden ticket that ensures they have all the pertinent information required to provide the best strategy or solution that will meet your needs.

When should a startup look to hire an external bookkeeper?

Unless a company is very strapped for cash and has a good understanding of basic accounting principles, every business should have external bookkeeping. By choosing to outsource, your company gets a team of bookkeepers that are experts for a fraction of the overhead cost associated with finding and hiring an internal employee.

A good bookkeeping firm should:

  • be insured
  • carry certifications in software and accounting
  • hold memberships to professional associations
  • stay current on the latest accounting industry information

Data security and company reputation are two important things to keep in mind while researching external firms. One of the most common questions asked of Charlie and his team at CloudBookkeeping by prospective clients is, “I am giving you access to my books and financial records; how can I trust you with this sensitive data?”

And here’s the type of answer you want to get: “We do not offshore our labor like many firms do. We are fully insured with General Liability, Errors & Omissions, and Cyber Attack insurance. We wouldn’t want anything less than a 5-star review. Our reputation speaks volumes.”

When should a startup consider hiring an internal bookkeeper?

As a general rule of thumb, when your external bookkeeper is charging you more than $5,000 per month, it may be time to consider hiring someone and moving things in-house. Another consideration is the type of industry. Service-based industries are generally better off working with an external firm. On the other hand, manufacturing, retail, and e-commerce can be more involved and may require a full-time internal resource.

As far as finding that resource, the right candidate should have a strong accounting background that spans across all functions from accounts receivable to payroll to making accruals. They should be responsible for the financial statements and can decide which tasks can be delegated to other staff (e.g., invoicing and filing receipts). Ideally, they should be able to do everything themselves to start, and then as the company grows, they can break off tasks to administrative staff.

What about virtual/remote bookkeeping services?

Along with almost every other industry, bookkeeping and accounting services have definitely evolved due to the pandemic. Many bookkeepers have expanded to service clients in other markets in addition to their local clientele. One potential advantage to using a remote firm is pricing. Different markets mean different rates. For instance, someone in a market such as New York or California may be able to find remote services in a state like Texas at a lower rate than their local market.

Taking it a step further, however, can turn an advantage into a risk. There are remote firms located in the Middle East, Philippines, India, and South America, and while they may be even less expensive, sending sensitive accounting information offshore can have risks that outweigh the cost-benefit.

Another consideration in deciding whether to work with a remote bookkeeping firm is knowledge. For example, working with a local firm means they may know the vendors and businesses that will appear on your receipts and have fewer questions/need to do less research. Engaging a local firm can also lead to more networking and connections that can be beneficial for both your company and the bookkeeping firm.

Can a company outsource its bookkeeping forever?

Many companies do choose to keep their bookkeeping external because they can rely on a professional group rather than taking the risk of hiring someone who may not be as qualified. By hiring a bookkeeping firm, they also benefit from the vast knowledge and experience that firm has gained working with clients across multiple industries. A good bookkeeping firm will bring cost-saving ideas to the table based on what their other clients do or have done.

Hiring the right bookkeeping firm is often less expensive than hiring an accounting firm to perform “bookkeeping.” Some companies are never large enough to hire internal accounting staff, and others may have internal staff but just want a second set of eyes on the books, a separation of duties, or a firm to do the monthly closing. An external bookkeeping firm can fill any/all of those roles. There are varying levels of outsourcing available, from basic bookkeeping to advanced bookkeeping services from firms like CloudBookkeeping that go well beyond the traditional definition. These can include:

  • Managed Bookkeeping
  • Full Service Payroll
  • Tax Return Preparation Work Papers
  • Sales Tax Reporting
  • 1099 Vendor Management
  • Software Consulting
  • Controller Services
  • Fractional CFO Service

If you are currently evaluating or re-evaluating your company’s bookkeeping and accounting needs and would like to discuss the best options for your unique business, we’d love to help. Contact us today.