One would assume that bookkeeping is a profession relegated to the absolute smallest of businesses, lacking any real employee basis or solid revenue, and therefore out of any accounting or financial ecosystem meriting discussion. The reality is rather different, as I have seen bookkeepers occupying a primary role for companies in excess of $20MM revenue, which is an astonishing number.
Differentiation between accounting and bookkeeping is a must, so I will offer it by virtue of definition. A bookkeeper records transactions, and often little more. Accountants, on the other hand, do everything from that point and higher on the financial food chain: cash flow, internal controls, cost accounting, treasury management, audits, tax, debt, equity transactions, and more. If it has anything to do with money, for an institution of any size, there is an accountant of varying skill level involved in the process. Bookkeepers and the associated skill set, while at times used in larger organizations, are strictly relegated to the act of recording transactions.
A common evolution of a bookkeeper is when a business is started by an entrepreneur with no employees. As a subset of tax accounting, the owner realizes he or she needs someone to make sense out of a pile of receipts, so a bookkeeper is hired. In this role, the bookkeeper is doing two things: entering all transactions, and also categorizing them by expense account category. The process generally involves the owner making all actual cash movements with a bank account and credit card, and the bookkeeper follows behind, hopefully in an organized fashion, producing a basic set of financials based on this activity, primarily to be handed off to a tax accountant at year end. I must specify that sometimes CPA firms dip their toes into the bookkeeping arena, at often conflated rates, though that will be the subject of another article.
The above described situation is perfect for a one-person business. It may even work up to $1MM in revenue, provided that there are no mysteries, the owner has a strong pulse on cash flow, and money is being earned. Depending on the situation, there can be some intelligence to involve more capable oversight at a lower revenue point, though generalization is unwise, and business owners tend to wait until some form of discomfort presents itself before upgrading internal staff.
The question is when using a bookkeeper is a poor idea, as it is a very common practice that can cost business owners incredible sums of money by the time it is realized that a bookkeeper is not suitable for financial management.
- The single most impactful service that a business needs is to make sound business decisions based on financial statements. I have literally seen businesses that have squandered in excess of $1,000,000 in losses, and neither the CPA firm nor the bookkeeping entourage bothered to phone the owner to advise that there was a financial problem – financial statements, laden with problems, continue to be sent with nay a simple comment noting a grotesque business problem. This situation has repeated itself time and time again in my career, often being a primary reason that my firm is called in to manage a situation.
- Sensible cost accounting is more complex and nuanced than looking at net results, though the utility of getting deep into the numbers is to diagnose what is working and what is broken. Cost accounting is more than just wedging things into default Quickbooks categories on the income statement; it is the process by which specific revenue is tied to specific direct and indirect costs, which enables a business to monitor its lifeblood: margins. Quite simply, if a product isn’t being sold at a price high enough to cover costs, then the business (and its cash) won’t be around for long. Again, I cannot state enough how many times I have seen cost accounting completely ignored by seasoned professional accounting staff, much less the bookkeeping industry, rendering financial statements useful only in determining if the business turned a profit.
- Accounting tends toward the historical. Financial statements are always in the past, recording what has already happened, which is a primary job of accountants of all types. While the core of accounting is to track the flow of money (“counting beans”), it is from this baseline that forward-looking forecasting and planning can take place. From the day-to-day cycle of accounts receivable and accounts payable comes the intricate knowledge of what is coming in the near future. This is critically important for businesses operating on trade terms, as effects of present changes in business condition materialize in the future, and these changes can be predicted as the accounting data exists to support it. For retail businesses, the pressure is even higher to monitor known cash obligations, as changes in sales strike almost immediately; thus, it is best to have outflows known in advance.
- From the trenches of small business comes a fixation on cash accounting in lieu of accrual. For a one-person show, there is not much of a need to consider accrual financial statements, where a single time period’s incurred costs and incurred earnings (regardless of when either is paid) are presented. Cash usually follows actual business activities, and so long as the business owner understands things like machinery depletion and plans for it, he or she is covered. However, once a business grows, business owners tend to remain addicted to cash accounting, as it is something that can be understood, and both bookkeepers and an undesirable amount of accounting professionals lack a meaningful way to educate entrepreneurs on the value of accrual financial statements and teach them how to understand them. This situation becomes a problem when reporting is inadequate, causing a drain on cash (due to a foreseeable accrual situation), for which replacement staff is triggered at a tremendous cost.
- One must remember the tendencies and job description of bookkeeping to understand how it can go from becoming useful to problematic. Recall that bookkeepers record transactions and categorize them. Both duties are useful in small environments, though when these mantras are applied to businesses operating in the millions of revenue, obsessive compulsive behavior reigns, creating extra work and more confused financials. In a need to categorize every transaction precisely, general ledger accounts begin to grow with shocking abundance, creating an incredible quantity of minutia that is nauseating, costly to maintain, and not needed. As transaction volume grows, discretion around flow-of-information and retention requirements is lost, and senseless details are tracked that could be accommodated using other accounting methods. In summary, the two job duties are misaligned to company size, and the result is more labor and confusion.
The bottom line is that bookkeeping, as a small business’ sole accounting platform, is contextually beneficial in very small environments. As businesses grow past the early days, it is sensible to move on to efficient and effective solutions to manage an entirely new equilibrium. Sadly, most business owners do not know when to change staff much less are they able to recognize early signs of an impending problem. Most often pain levels and cash crises hit extremely uncomfortable levels before a higher-level professional has to be brought into to untangle the mess, making that seemingly inexpensive bookkeeper cost more money than anyone could have ever imagined.
