You’ve finally started the business you’ve been dreaming about. You’re doing what you love and getting paid for it. But you’re starting to find more of your time spent doing paperwork, looking at bank statements, and filing forms and less time on the work you enjoy. You think it may be time to hire an accountant but you aren’t sure where to start, what an accountant can do, and what you should expect. This post will go over the basics of what a simple bookkeeping engagement will encompass and hopefully leave you better prepared when discussing your needs with a potential bookkeeper.
In most cases the first step an accountant will take doesn’t actually involve bookkeeping. When meeting a client for the first time a good accountant will ask about the business, how you make your revenue, what your main expenses are, and generally understand your business model. If this is the first time a professional has worked on your books the accountant should provide a cleanup service before working on the current period. This will make sure your books start on a good foundation and there are no surprises that will come back to haunt you later down the road. Having seen many financial systems across companies of varying sizes and across multiple industries the biggest problems I see almost always involve poor bookkeeping at the start of the business.
The first step of a cleanup process is evaluating what your chart of accounts should look like. I will expand on this topic in a later post but the main point is a manufacturing company and a software company have different revenue streams and expenses. Logically it doesn’t make sense for both companies to use the same exact chart of accounts. The same principle applies to your business. Your accountant should ask enough questions to get an understanding of your business and understand how you want the financial reports presented. There are rules we must follow regarding financial reporting and presentation but we do have enough flexibility to customize the reports to give you the clearest picture possible of what is going on in your business.
Once the chart of accounts is settled the bookkeeper should review all transactions up to the current period and reclassify transactions as necessary. This will ensure the entire year is consistent and you do not need to make mental adjustments when comparing one month to another. This will also give the accountant another way to better learn your business. I personally find that I gain a much better understanding of a client after going through several months of data. Another potential benefit is the accountant may note potential issues that can be addressed now rather than waiting until year end.
In general a cleanup service will cost two to ten times more than the price of one month of bookkeeping services. This is because the service covers a large time period and can involve a lot of setup work that will make both of your lives easier down the road. The price may vary depending on exactly what your bookkeeper covers in their cleanup service and what your exact needs are. An effective cleanup will reduce your ongoing monthly bookkeeping bill by allowing the accountant to set up the accounts correctly, setup any rules to automatically classify transactions, and in general reduce the amount of back and forth needed to ensure all transactions are classed correctly.
Back to bookkeeping. A typical month will start with you sending your bank/credit card/loan statements to your bookkeeper. They will then ensure all transactions are recorded and reconcile the books with the statements. At this point the accountant may ask you for clarification on some transactions. They will then make entries to record depreciation, recognize revenue, accrue interest, etc. to make sure your books comply with your chosen accounting method. Financial statements may be sent to the client but in most cases are only provided upon request. This can be negotiated before signing any agreements. For most engagements the process stops here. Most clients do not need much more than this basic service as getting their data in a usable format is sufficient to guide their decision making.
Generally you should expect your books to be completed by the 10th of the following month. However, this is very dependent on how quickly you provide the relevant information and again can be negotiated up front. To ensure the fastest turnaround possible I recommend sending statements as soon as they are available and responding to information requests within a business day. This puts the onus on the bookkeeper to get the work done as they now have everything needed to complete the work.
After the work is completed you will have a basic balance sheet and profit and loss statement. I will go into both of these statements in detail in a later post as well as cover more in depth analysis an accountant can provide. But for now these will give you a snapshot of where your business is (the balance sheet) and the story of how it got there (the income statement). They will give you some solid information to understand how the business is doing, where you’re doing well, identify some potential weak spots, and give you the information you need to make the tough decisions.