Most of the employees and workforce in the United States generally work for small businesses, not big multinational corporations. With the rise of entrepreneurship, most business graduates now prefer to establish their own company rather than working for an already established one. These small businesses keep the engine of an economy running like a well-oiled machine and help in keeping the unemployment rate in control. But most of the in-house departments in small and medium-sized organizations are cost centers that increase the expenses of the firm and reduce its profitability.
Accounting and finance departments are considered as the biggest cost centers for small businesses. Accounting is the task of recording the firm’s financial data in its books. Most organizations use accounting software programs to reduce the time and cost of this department, while others decide to outsource this department altogether. Here we have discussed accounting itself and have provided a framework for you to be able to answer the question how much are accounting fees for my small businesses? Based on the fees, cost, advantages, and disadvantages of the accounting department, you can then decide whether you want to keep your accounting department in-house or want to outsource it.
History of Accounting
Various ancient civilizations have used accounting to record economic transactions but the accounting principles that we use today were laid down centuries ago by the merchants of Italy. Italian mathematician, Luca Pacioli is considered as the father of modern accounting and was the first to propose the method of double entry system in accounting. Although the subject of accounting dates back to ancient times, but the profession of accounting does not date back to the era of ancient civilization. Accounting became a profession in 1850s and most of the companies and small businesses started to employ it for managing the books of their business. Although the subject witnessed and is still witnessing noticeable changes, but the basic accounting principles that evolved at that time are still used by accountants to this day.
Importance of Accounting for Small Businesses
Most small businesses tend to ignore accounting and only focus on their core business operations. Remember that accounting is the language of business, so carefully reading and analyzing accounting statements will enable the business owner to make astute business decisions for the future. Accounting statements do not only record data but also show us the cash flow patterns, liquidity of the business, filed taxes, capacity utilization and the overall worth of the business. The accounting department ensures that the business is not losing money and suggests ways in which the money can be saved by reducing the expenses faced by the business.
All business owners must be well informed about where the money is coming from and where the money is flowing to. This task is done be analyzing the cash flow statement, income statement and balance sheet of the business. All these three statements are prepared by the accountants of the business. Most of the businesses fail in their start-up year; not because of the poor business idea or business plan, but rather because most business owners ignore the fact that financials are the only way of gauging the health of their company. If the company or small business or even start-up is not strong financially, then it will face solvency issues which will eventually force them to file for chapter 11 bankruptcy.
Using Accounting for Business Decisions
Imagine you are reading a Chinese newspaper. What you will see are some unknown characters and lines; you won’t be able to interpret the information unless you learn the language. Similarly, accounting is also a language that requires learning so that you are able to interpret the accounting statements. Otherwise these statements will just look like a jumble of numbers, randomly written in columns. Nowadays, most of the decisions are based on complex financial and economic models. In order to be able to make an effective financial model, it is necessary that you are able to interpret the company’s information in its accounting statements.
Cost of Operating an Accounting Department in house
Well, we all know most parents in the United States want their children to either become professional athletes or professional accountants. This is mainly because the financial reward in both these professions is humongous. Annual salary of a charted accountant of a small business can range from $50,000 to $65,000 but this is not the only thing that constitutes the accounting fees for a small business (more on this later). This is the prime reason why a small business who cannot afford a full time accountant, is outsourcing the job of accounting. There are various firms that provide services of maintaining your account, filing your taxes and any other corporate functions that you may require. This is a great way to reduce expenses for small businesses.
How Can This Cost Be Reduced
Cost reduction is what stresses out an entrepreneur mind during the start up phase of the company and continues to engulf the mind of the business owner later in the life cycle of the business. Most of the technological innovations have dramatically reduced the cost of doing business. Accounting software such as Peachtree, Quickbooks, Sage and FreshBooks have dramatically reduced the number of people required to complete the accounting job, resulting in many cost savings.
Apart from the technological innovations, most small businesses are also outsourcing their non core functions in order to cut corners on their expense. This has let them to focus on their core business functions and also save a lot of office space and expense. Most of the accountants charge ridiculously high fees for their services, but outsourcing the whole department will result in savings. By outsourcing you will not need to worry about hiring the right talented individuals for your department anymore, reducing a huge burden from your shoulders as a result.
The Rise of Corporate Shopping Malls
You do not have to go firm to firm looking for services such as accounting, finance, corporate law, and many others. All these services are now provided under one roof in most of the law firms by consultants that assist corporations in all matters of their business. Just like most banks depict financial supermarkets, in the same way law firms nowadays are more like a shopping mall for corporations. You can even purchase a shelf company from these law firms and it will take just a day or two to transfer the company in your name.
Pros and Cons of Outsourcing the Accounting Department
While accounting is important for business, accounting department is not. An accounting department can be outsourced to another location or any their party can be hired to carry out the task of managing the accounts and financial statements of the company. Following are the benefits of outsourcing the accounting department.
This should not come as a surprise to you because we have discussed it a lot of times previously in this blog. By outsourcing your accounting department you will be able to save some office space, as well as pension and gratuity benefits that you will otherwise have had to pay your accountants. This would increase the accounting fees for a small business. Money that is saved from the outsourcing of the accounting department can be invested in the core operations of the business thereby increasing the profit potential of the firm.
Time and Energy Savings
If you have all the cost centers in-house, then you will be spending money on recruiting, training and managing the staff. By outsourcing such revenue sucking departments, you will be able to save your time and focus on the core business operations of your company.
Availing the Expert Services
Your business might not afford to hire full time, certified and highly qualified accountants, but you can still avail their services. Most third party accounting service providers hire the crème de la crème of accountants who remain abreast of the changing nature of accounting and financial reporting standards. This means that they are better able to serve their clients and remain ahead of the competition.
Apart from all the benefits that we have discussed above, outsourcing a business department also has some disadvantages.
Loss of Control
Business organizations fail when the senior management loses control of the departments. Most of the entrepreneurship gurus have put emphasis on the fact that an entrepreneur should be in control in the start up phase of the organization. The decision of outsourcing should be taken when the business is in its growth stage. Accounting department can give valuable insights to the entrepreneur about how the cost of the business operation can be controlled and reduced.
Risk of Confidential Data Loss
Accounting data is always the confidential data of the organization. Businesses make detailed financial and accounting statements to be used internally within the organization. These statements consist of data such as your investments in other projects, investment in new technology, structure of tax planning and shareholding in other foreign companies. All this is not disclosed in the financial statements that are published for the shareholders, creditors and general public. If this kind of data falls into the hands of the competitor, it will adversely affect your business. Outsourcing the accounting department might expose you to such risks.
Lack of Synchronization in the Business Processes
United States alone has four different time zones. Outsourcing some of your business functions to regions with different time zones will make your business unsynchronized and the process will take much more time to be completed. Although you will be saving some bucks, but you will be trading it off for the efficiency of your business.
How to Correctly Calculate Accounting Fees for a Small Business
Salary of your accountant is not the only cost of the accounting department; there are four other factors that determine the true cost/fee of an in-house accounting department. Following are the four factors that need to be kept in mind when determining how much are accounting fees for small business:
- Benefits & Taxes
- Time and Effort
The gross amount that you pay to your accountants is the wages. It is easy to compute but it will vary greatly on your location, skills of accountant and the work that you want your accountant to do. If you are based in New York then the wages that an accountant demands will be much higher than if you were operating from Kentucky. Also it depends whether you want your accountant to only maintain the books of your business or whether you want him to be a controller level accountant.
Benefits & Taxes
Benefits such as pensions, gratuity, vacations, health insurance and payroll taxes must be kept in mind in order to correctly determine how much are accounting fees for a small business. These costs are significant and most of the accountants base their decisions to work in any particular organization base on the fringe benefits that they receive. Most small businesses cannot afford to provide a large number of benefits to their accounting staff because their resources would otherwise be exhausted.
Equipment, Office Supplies and Office Space are all included in the overhead component and is useful in calculating the accounting fee for a small business if the accounting department remains in house. Most small business owners forget to factor in this cost. It may not be a significant amount when compared to the benefits and taxes, but ignoring it will give you an inaccurate cost of the in house accounting department.
Time and Effort
Recruiting, training and managing the accountant for your business also involves some costs, but it is very hard to quantify. You as a small business owner are letting go of some opportunities when you are investing time on the managing and training of your employees. Worse, if your accountants are de-motivated then you have to invest your time on them to find their motivators, so that you can motivate them accordingly. During this, you are making a tradeoff for a potential business opportunity that you are foregoing. All this is the opportunity loss for the small business.
By knowing how much accounting fees for a small business, you as a business owner are better able to take a decision whether to keep the accounting department in-house or to outsource it for cost savings. A small business might also decide to outsource the accounting function if it feels that it won’t be able to hire a competent accountant for the business. Note that if you are in a business that is regulated by the government, then you will be required to appoint an auditor to audit your financial statements. The fees for auditing the accounting records are humungous and can cause problems for a small business.
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