Calculating the Cost-Benefit Analysis of Hiring an Accountant
Small business owners seeking to make the most of every penny often try to save money by doing without an accountant. With software solutions such as QuickBooks or Xero that make bookkeeping easier than ever, this might seem like a wise move. But even if you’re adept with accounting software, you could be selling your business short by not hiring an accountant.
While bookkeeping involves maintaining financial records, accounting encompasses much more. A certified public accountant (CPA) can provide a wide range of services, including:
- Setting up bookkeeping and accounting systems
- Maintaining financial records
- Tax planning advice
- Preparing and filing your business taxes
- Generating audited financial statements or auditing your business’s books
- Providing business advice to help you operate cost-effectively
- Creating a personal financial plan
However, hiring an accountant can also be a substantial financial investment. Before making the decision, do a cost-benefit analysis to see if hiring an accountant makes financial sense for your business.
In a cost-benefit analysis, you list and estimate all the costs of an action as well as all the benefits of that action, assign a dollar value to each, add up the two columns, and subtract one from the other to determine whether the action is financially feasible. Generally, you assign a time frame to the costs and benefits—in this case, a three-year period might be reasonable.
Suppose you own an IT consulting firm and handle all the bookkeeping yourself using QuickBooks. You’re so busy that bookkeeping falls to the back burner. As a result, you’re late getting invoices out and cash flow is suffering. Should you hire an accountant?
Before calculating the cost-benefit analysis, gather some information.
- Determine what services you need. In this case, you probably want everything from bookkeeping to business advice.
- Get price quotes from several accountants. Most accountants bill by the hour, but some work on monthly retainers. Also ask if the accountant uses lower-cost help (such as a bookkeeper) to perform some of the duties; if so, those rates may be lower.
- Get an estimate of the hours per month it would take to provide what you need, and the total monthly cost.
Think through all of the possible costs and benefits, not just the short-term or obvious ones. Here are some you might itemize:
Monthly cost of accountant’s services
- Cost of your time interacting with the accountant (you’ll still need to provide necessary records, get documentation together and meet with the accountant occasionally)
- Cost of any new software required by the accountant
- Opportunity costs (what could you gain by using the same amount of money for something else? Would hiring another IT employee or buying equipment generate a better return?)
- Monthly amount of time you save giving up bookkeeping (Multiply the hours you spend on bookkeeping by your hourly pay rate, being sure to include the overhead costs of any benefits).
- Potential new business you could obtain using that time. Suppose you currently spend 20 hours a month on accounting, and could spend those 20 hours on business development instead. If it takes you an average of 60 hours to land a new client, and your average client accounts for $80,000 of business annually, the dollar benefit of the accountant would be 20 x 12 (or 240) divided by 60, which = 4 new clients. Multiplied by the average account’s fee, that’s 4 x $80,000 or $320,000 annually.
- Potential financial gains you could make based on the accountant’s retirement planning advice. You can find average rates of return for various types of investments online.
- Benefits of avoiding costly tax filing mistakes or fines (if you’ve ever had tax problems, you will have some estimate of how much these can cost.)
Some costs and benefits are easier to quantify than others; in many cases you’ll be using estimates or averages. However, by thinking through the costs and benefits in financial terms, you’ll be better able to assess the real value of hiring an accountant.
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