27 Jun How to Maximize Profits Outsourcing Your Bookkeeping

Unlocking Profitability: The Power of Outsourcing Your Bookkeeping

In today’s article, we delve into the art of maximizing profitability through the outsourcing of bookkeeping services. Profitability encompasses more than the simple equation of revenue minus expenses. Although it may seem challenging to comprehend how spending money can generate greater value and wealth for a business, we will explore how outsourcing can save time, boost overall revenue, and help you achieve maximum profitability.

Opportunity Cost

Whether it’s the business owner or an employee dedicating their time to managing the books, it is crucial to calculate the total cost involved. For every hour spent on bookkeeping, there is not only an hourly wage to consider but also the opportunity cost of engaging in revenue-generating tasks.

To illustrate this point, let’s assume an owner pays themselves $50 per hour and spends 10 hours per month on bookkeeping. This amounts to a $500 cost to the company. However, this upfront cost fails to account for the value the owner brings to the business.

If they were able to focus on securing new deals, acquiring contracts, expanding the client base, or enhancing employee efficiency, the opportunity cost could potentially amount to hundreds or even thousands of dollars in revenue.

If, for instance, the owner’s worth to the business is estimated at $1000 per hour, and considering the number of hours spent on bookkeeping throughout the year, the company could lose $120,000 in potential revenue ($1000 x 120 hours).

When it comes to employees working in operations, calculating their opportunity cost is comparatively more straightforward. We need to consider the hourly rate charged to clients by the company. If an employee spends 10 hours per week on bookkeeping, the opportunity cost would be the billable rate per client per hour multiplied by 10 hours. If the rate is set at $200, that translates to an additional $24,000 in annual revenue for the company.

Just imagine the tremendous impact a $24,000 increase can have on your company’s bottom line.

Depreciation

Unforeseen expenses can occasionally push a profitable business into the red. Experiencing one or two such months within a specific period can raise concerns for both investors and banks.

Banks assess risk by examining the bottom line. If a business seeks a commercial loan or a line of credit, inconsistent financial performance can be seen as a risk factor. Likewise, investors considering an acquisition closely evaluate any significant fluctuations in the bottom line, affecting their risk assessment and the price they are willing to pay for the business.

Therefore, in months where large purchases impact the financials, a business can depreciate the assets over time. Let’s take the example of a restaurant that had to replace a large freezer and grill within the same month. For many restaurants, this expense could be the deciding factor between a profitable month and an excruciating one.

The IRS allows for the depreciation of assets, although the duration of depreciation varies depending on the type of asset. This is where the value of outsourcing bookkeeping services becomes evident. While it is not impossible for an owner to record depreciation themselves, the challenge lies in understanding which assets can be depreciated and for how long.

Pricing Adjustments

How frequently do vendors increase the prices of goods supplied to businesses? It is common to witness increases in the Cost of Goods Sold. In many cases, even though vendors raise their prices, businesses often fail to adjust their own pricing accordingly.

By maintaining up-to-date books, owners can thoroughly examine the costs incurred for goods and assess whether pricing adjustments are necessary to maintain healthy profit margins.

Uncovering Expensive Processes

When bookkeeping is managed by an outsourced service, there is a higher probability of recognizing cost increases or diminishing profitability over several months. For instance, imagine a bookkeeper identifying a sudden 2-3% increase in food costs within a single month. This prompts the question: What caused this sudden surge in expenses?

A skilled bookkeeper helps identify changes that might otherwise go unnoticed, allowing the owner to address the increased costs and pinpoint their origin.

Reducing the Cost of a CPA

Waiting until the end of the year to catch up on bookkeeping can prove to be a costly affair. Most certified public accountants (CPAs) charge a premium rate compared to bookkeeping firms. Consequently, businesses may receive a substantial bill from their CPA for performing extensive catch-up work, incurring a hefty premium.

Given the large volume of transactions and the CPA firm’s limited understanding of the business, there is a higher likelihood of mistakes. Two unfavorable scenarios may arise from such errors:

Your tax liability ends up being lower than it should be. If the IRS eventually identifies this, your business will owe additional taxes.

Your tax liability ends up being higher than it should be, resulting in your business paying more taxes than necessary.

Understanding Your Tax Liability

By the end of November each year, a company hands over their books to the CPA. You are already able to project your monthly expenses and income through December, enabling the CPA to estimate your tax liability even before the year’s end.

This gives you five months to devise a plan for tax payment, thus avoiding penalties. Thanks to your early submission of books, the tax return can be completed promptly, alleviating the stress associated with filing taxes close to the deadline.

For businesses unable to project their end-of-year tax liability by the beginning of December, outsourcing bookkeeping becomes an incredibly sensible choice.

By outsourcing your bookkeeping, you unlock the potential for greater profitability. It frees up valuable time, helps identify cost-saving opportunities, prevents costly mistakes, and allows for effective tax planning. Embrace the power of outsourcing and steer your business towards maximum profitability.