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Why Your Small Business Needs a Certified Public Accountant (Emphasis on the Certified)

Gretchen Schmid

Gretchen Schmid

Gretchen Schmid is a freelance writer who previously wrote about business, technology, and healthcare for Longneck & Thunderfoot. She also writes for Publishers Weekly, mental_floss, Dance Spirit magazine, and the Brooklyn Rail.
Gretchen Schmid

One of the most important parts of running a business is keeping your finances in order. If you’re making major mistakes on your tax returns or regularly going over budget, it doesn’t matter how wonderful your product or service is or how qualified your employees are. You and your business are in trouble. Hiring a person or a team of people to work with you on keeping diligent financial records, filing taxes, applying for loans, and planning for the long term is one of the best decisions you can make as a small business owner. One of those people is a Certified Public Accountant (CPA).

A good Certified Public Accountant will bring invaluable expertise to your business, serving as an advisor as well as an accountant—and freeing your time to focus on other parts of your business.

Accountant, Bookkeeper: Same thing, right?

Here’s one thing to get straight: an accountant is not the same thing as a bookkeeper. People often use the two terms interchangeably, but they play different—although both important—roles in a business’s financial management.

Think of a bookkeeper as working with short-term finances, while an accountant works with longer-term finances. Day-to-day expenses are the (mostly) the bookkeeper’s domain, while tax returns and long-term financial planning are (mostly) accountant territory. A bookkeeper, if they do their job well, will make the accountant’s life a lot easier by diligently recording the transactions that the accountant will then analyze and report.

Still confused? Let’s take the example of a landscaping company and walk through a year in their finances.

  1. If the company is brand-new, that accountant will be a valuable source of advice, helping the owner to decide which type of legal structure is best—S-corp, C-corp, LLC, sole proprietorship—and make decisions about budgets and benefits.
  2. The owner—or whoever manages the finances internally—will create invoices to send to clients to tell them how much money to pay. When those invoices are paid off, the money is deposited in the landscaping company’s bank account.
  3. The bookkeeper will enter the deposits into the accounting system, taking care to make sure that the bank statements and accounting records match up perfectly.
  4. The owner will also receive bills for rent, utilities, equipment leases, and other expenses. The bookkeeper will pore over these bills and send them to the owner to approve payment. Once they’ve been paid, the bookkeeper enters them into their accounting system.
  5. The bookkeeper will also enter ongoing expenses, like from business credit cards. For the landscaping company, gas for its trucks might be one of those expenses. Again, the bookkeeper’s goal is to record everything and match all records up to bank statements.
  6. A few times a year—especially around tax season—the accountant will prepare tax documents and enter adjustments as needed, using that detailed, accurate information logged by the bookkeeper. They can also make recommendations for the next year.
  7. At the end of the year, the landscaping company might decide that it wants to take on a loan to cover the cost of new equipment. The accountant will help them prepare the paperwork for their application.
  8. If the business is audited by the IRA, the accountant will act as the business’s representative.

Accountants and bookkeepers are both incredibly important for your business—and should work together to keep its finances clear and accurate.

What’s the difference between an accountant and a Certified Public Accountant?

Not every accountant is a Certified Public Accountant. Qualifying as a Certified Public Accountant is the only form of licensed accounting qualification in America. In order to become a Certified Public Accountant, prospective accountants need to pass a specific exam. Other requirements vary by state: in addition to the exam, applicants often need to have a bachelor’s degree and two years’ of experience in accounting.

A Certified Public Accountant has already been pre-screened and is likely to be well trained and experienced. They’ll also be certified to perform more complicated responsibilities and tasks, like tax audits. A Certified Public Accountant certification has to be renewed periodically—how often depends on the state)—which ensures the accountant’s expertise and knowledge remain up-to-date.

Do you need both a Certified Public Accountant and a bookkeeper?

In a short answer, no—but you should probably have a Certified Public Accountant.

You can use a number of software programs to help you with your own bookkeeping. QuickBooks Online is one of the most popular choices, both for professional bookkeepers and for small business owners who want to record their own finances. It syncs with your bank and your credit card accounts and lets you create invoices, process payroll, and view simple accounts of your finances. You can also look at FreshBooks and Xero for alternatives.

With the help of this software, it’s absolutely possible to keep your own clear, accurate records, but a few times per year, it’s time to turn them over to an accountant. (The cloud-based software programs we described above make this easy, since you can share your account directly with the accountant.) The responsibilities of the accountant—checking your records for errors, preparing your tax documents, advising you on major financial decisions—require an expert’s input.

The accountant can also help you set up this software, so if you’re just starting out and have no idea where to begin with keeping your own books, a Certified Public Accountant is a good bet.

Certified Public Accountants: Determining whether or not you need one

If your budget is extremely tight—or if you’re confident in your own ability to perform an accountant’s responsibilities—you’re probably considering forgoing the Certified Public Accountant. The best way to figure out whether or not this decision is the right one for your business is by performing a cost-benefit analysis,:

Costs

Obviously, the principal cost is going to be the amount of money you’ll be paying the accountant. In order to estimate this figure, think about the specific services you need—if you’ve already set up QuickBooks, for example, you won’t need to pay an accountant for their assistance with that—and then ask for a price quote from several different accountants.

Make sure to ask specifically what the accountant charges for—is there a monthly retainer fee, or do you only pay for the hours the accountant works?

Other potential costs include the cost of additional equipment—you can ask the accountant what he or she prefers to use—and the opportunity cost of using that funding. Could it be better used elsewhere in your budget, like for hiring a new employee?

Benefits

This part requires much more guesswork. You’re saving time, but you’re also potentially saving future money—if the accountant offers sage big-picture financial advice—and you’re avoiding the possibility of paying fines for tax mistakes.

If you’re currently spending 30 hours a month on work that could be given to an accountant, and your own hourly rate is around $30, then you can account for $900 as the value of the time that the accountant is saving you. For future investment gains, you can find calculators online to help you figure out what you could be making years in the future.

As for tax penalties? Well, as SurePayroll reports, approximately 40% of small businesses rack up $845 a year in tax fines, for anything from trying to claim too many deductions to payroll mistakes.

Doing the math

After you’ve come up with ballpark figures for each of the costs and benefits, make a table of each, add them up, and subtract one from the other. If the benefits outweigh the costs, go find yourself an accountant!

What exactly does a Certified Public Accountant do?

Taxes

Most obviously, when tax season rolls around, the Certified Public Accountant will prepare your tax returns for you.

Although it is possible to do it yourself—and bookkeeping software like QuickBooks makes that easier—business taxes can quickly become complicated, and mistakes are easy to make: that’s where that $845 estimation above comes from. For example, sometimes businesses have to work with filing taxes for multiple states, especially if their sales are through the Internet. And the interest from a short-term debt needs to be written off properly, or else you might have trouble securing a loan in the future. (Find out more about this common mistake here.)

Figuring out which expenses are tax-deductible—your car? Your rent?—can also be tricky to do without professional help.

Setting up your business

If you’re just starting your business, the Certified Public Accountant can help you pick the correct legal structure, whether it’s a sole proprietorship, a C-corp, an LLC, a partnership, or an S-corp. Once you’ve chosen one, it’s difficult to change—so it’s important that you pick the right one to begin with. The differences between different legal structures can be confusing, so it’s best to have the advice of a professional.

They also can advise you on choosing the best health insurance policy for your employees depending on your budget and make sure that you’re complying with federal and state employee rules and regulations so that you avoid fines.

Advising through downturns

One advantage of hiring a Certified Public Accountant is that they’ll be able to take an outsider’s big-picture view of your business’s finances, helping you to make long-term decisions and evaluate risk.

As Susan Coffey, a senior vice president at the American Institute of Certified Public Accountants, writes, “Small business owners frequently devote all their time to day-to-day operational issues and may not stop to get a big picture view of the larger or long-term challenges they should address.”

If the Certified Public Accountant is familiar with your industry, they can even work with you through recessions and economic downturns, helping you to figure out how to stay relevant.

Financial checkups

Just as you visit your doctor for physical checkups every year, an accountant can perform financial checkups periodically—usually 4 times per year. A Certified Public Accountant can look at your sales data, profit margins, cash flow, inventory, and payroll and determine if you need to make any budgetary adjustments.

Loan applications

A Certified Public Accountant can advise you on whether or not you should take out a loan, taking into account your cash flow, any associated risks and fines, and the effects that it’ll have on your business taxes. Say, for example, you’re considering changing around the ownership percentages of your business in order to qualify for a loan. The Certified Public Accountant will be able to work with you, advising you on the specifics of changing ownership based on your company structure and referring you to a tax attorney if necessary.

If you can decide to take on a loan, the Certified Public Accountant will also help you through that application by preparing financial statements for you.

Preparing financial statements

Certified Public Accountants can prepare different types of formal financial statements specific to certain situations.

  • Basic financial statements are the least formal but are useful for the business owner to see a clear picture of the financial health of the company. Here, the accountant is preparing documents based on the information that you’ve provided, so there’s no verification of its accuracy. Each page of the report will say “no assurance is provided.”
  • Compilation reports are a little more involved because the Certified Public Accountant will emphasize their role in compiling them, which is often of use to potential lenders who want to see that you’re working with a certified accountant. The Certified Public Accountant still doesn’t need to verify the information, but should use their best judgment as to whether or not it’s accurate. These are sometimes used for loans with heavy collateral, or loans that require less documentation, like short-term loans from alternative lenders.
  • A review requires a low level of assurance from the Certified Public Accountant, meaning that they’re familiar with your company and the wider industry and can provide a formal report about the accuracy of the prepared statements. Reviews are often required for more complex loan applications and financing.
  • An audit is the full deal: the accountant has to verify the accuracy of your numbers to the best of their ability—for example, by physically examining your inventories, bank account, and assets. If you’re looking to make a major business decision, such as selling or merging your company, you’ll need an audit.

Where do I find a Certified Public Accountant?

You can ask your attorney or banker for a recommendation. You can also check in with your state’s Society of Certified Public Accountants, or with the Professional Association of Small Business Accountants.

Another option is to ask a small business in your industry for a referral. The advantage here is that you’ll find a Certified Public Accountant with specific experience in your field, which is particularly helpful for offering long-term advice.

Remember that you’re handing important and confidential financial information over to the accountant, so it’s extremely important that they be trustworthy.

What questions should I ask a potential Certified Public Accountant?

First, make sure that your accountant is readily available and easy to communicate with. This will save you from potential problems in the future. If you’re looking at an accounting firm, you also should ask whether or not you’ll be working with the same accountant every time.

Be sure to ask about their payment structure—are there any additional fees? Do they work on a monthly retainer or do they bill hourly? What are their rates? Do they outsource any of their work to a bookkeeper to keep costs down?

Next, clarify exactly what you expect the accountant to do for you. Will you be handling your bookkeeping yourself, or do you already have a bookkeeper? Do you want them to serve as an advisor in the event that you decide to take on a loan?

And finally, you should feel comfortable talking with your accountant. This should be a long-term and mutually profitable relationship, and they’ll be serving as an outside advisor and counselor to your company. Personal chemistry is important. If you find it hard to communicate with them or feel uncomfortable asking questions about your business’s finances, look for a different accountant.

Once you’ve found an accountant that seems like a good fit for you, we suggest that you ask for a few of their clients’ names so you can call to check references. Verify the answers to all of the above questions: is the accountant easily reachable? Are their prices fair? Are they familiar with the industry?

***

Not every business needs to have an accountant. However, they can be an extremely valuable resource that’ll save you time, money, and energy in the long run. From the decisions you need to make about your company’s structure, budget, and benefits to tax time to loan application, an accountant will add expertise and protect you from paying—literally—for financial mistakes. And if you’re going to hire an accountant, they should be a vetted and verified Certified Public Accountant.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Gretchen Schmid

Gretchen Schmid

Gretchen Schmid is a freelance writer who previously wrote about business, technology, and healthcare for Longneck & Thunderfoot. She also writes for Publishers Weekly, mental_floss, Dance Spirit magazine, and the Brooklyn Rail.
Gretchen Schmid

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