What we are going to look at today is how to maximize profitability by outsourcing bookkeeping. Profitability is more than just revenue minus expenses.
It can be difficult to see how spending money ultimately creates more value and wealth in a business, but we'll break down how it saves time, increases overall revenue, and can help you maximize the profitability of your business.
As an owner, or even if one of the employees within a business is spending time doing the books, we must calculate the total cost. For every hour that an employee or an owner spends doing the books, there's an hourly wage, plus the opportunity cost of revenue-building work they could be doing.
For instance, if an owner is paying themselves $50 an hour, and they spend 10 hours getting the books ready per month, that's a $500 cost to the company.
Although the upfront cost that we see in the books is $50/hr., that does not account for what the owner is worth to the business. If they're creating new deals and getting contracts, increasing the client base, helping manage employees to be more efficient, the opportunity cost could be hundreds or thousands of dollars in revenue.
If an owner was worth $1000 per hour to the business, and with as many hours as they'd spend in the books throughout the year, the company ends up losing $120,000 in revenue ($1000 x 120 hours).
With an employee working in operations, their opportunity cost is a little easier to calculate. How much is a company charging its clients per hour?
If an employee spends 10 hours a week in the books, then the opportunity cost is the billable rate per client per hour x 10 hours. With the rate at $200, that's over 24k a year!
Imagine a $24k increase to your company's revenue.
There are unforeseen expenses in any business that can send a profitable business into the red.
Having one or two months like this over a certain period of time can be a trigger for both investors and banks.
Banks are looking at the bottom line to assess risk. If a business is looking for a commercial loan or seeking a line of credit, the bank may deem the business risky if there's inconsistency in the bottom line.
If an investor is entertaining an acquisition, any major fluctuations in the bottom line can impact their risk assessment, and especially what price they're willing to purchase a business for.
So, for months that were impacted by large purchases, a business can depreciate the asset over time.
For example, if a restaurant had to replace a large freezer and a grill in the same month. For many restaurants, this would be an expense that meant the difference between a profitable month, or an extremely painful one.
The IRS allows for the depreciation of assets, but the period over which they can be depreciated changes by the type of item.
This is where it's tricky and it pays to have an outsourced bookkeeping service. It's not to say that an owner can't record the depreciation, it's just a matter of whether they'll know whether an asset can be depreciated, and for how long.
Are you depreciating your assets correctly?
Can your bottom line be better? Get a free analysis to find out.
How often do vendors increase the prices of goods on a business?
It's common to see increases in the Cost of Goods Sold. In a lot of cases, even though vendors increase their own prices, a lot of companies won't adjust theirs accordingly.
When the books are up-to-date, owners can look through and break down the price paid for goods and determine if there needs to be an adjustment to their own pricing to keep healthy profit margins.
Uncovering Expensive Processes
If there's an outsourced service managing the bookkeeping, there's a really good chance that they will recognize cost increases or diminishing profitability over several months.
Let's say a bookkeeper recognizes a 2-3% increase in food cost in just one month. What happened? Why did the cost increase all of a sudden?
A bookkeeper helps identify those changes that may otherwise go unnoticed. It gives an owner a chance to have the increased expense identified, and then figure out where that increase came from.
Reducing the Cost of a CPA
Waiting until the end of the year in order to catch the books up can be very expensive. Most CPAs charge a premium rate compared to a bookkeeping firm.
So for work that could've been spread over a few months, a business may get the bill from their CPA doing a lot of catchup work, and charge a hefty premium for it.
With a large volume of transactions and a lack of understanding of the business, there's a chance the CPA firm will make mistakes. Two horrible situations can arise when this happens:
Your tax liability is lower than it should be. If the IRS identifies this eventually, your business ends up owing.
Your tax liability is more than it should be. If that's the case, your business ends up paying more tax than it should.
Spent too much on your CPA last year?
Or could your bottom line be better? Get a free analysis to find out.
Understanding Your Tax Liability
By the end of November every year, our company turns over our books to our CPA. We can already project our monthly expenses and income through December and have an estimate of what our tax liability will be even before the end of the year.
That gives us 5 months to make a plan on how we pay our taxes to avoid any penalties.
Since we manage to turn our books in early, the tax return is completed in a timely manner, and we're not stressing towards the filing date.
If a business isn't able to project its EOY tax liability by the beginning of December, it makes a lot of sense to outsource your bookkeeping.