One of the first signs for when it is time to outsource your accounting is the time you are spending on it. There are a few ways to get to an answer, but here is a 3-step process: determine time spent doing your own accounting, assess the pain involved, and calculate the opportunity cost.
Determine Time Spent
Before you make any decisions, you first need to determine how much time you are spending on your accounting. The critical accounting functions for any business include: payroll, invoicing, collecting receivables, bill pay, and annual tax preparation. After that, add up your time spent bookkeeping, reconciling account statements, managing expenses, and generating \ reviewing financials. Many business leaders who are doing their own accounting aren’t doing all or any of this second set of activities. These activities may be time you’re not spending, but know you should be. There are many other accounting activities, but most businesses aren’t doing those if they haven’t addressed these first two sets of activities. Here’s a worksheet to help you calculate how much time you (or others in your business) are spending.
Hours Per Month
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With your hours per month calculated, you can now measure the impact through two methods: qualitative pain assessment and quantitative opportunity cost calculation.
This is a qualitative assessment and will vary by individual and business. The question you need to ask yourself is how great is pain from the time you (or others in your business) spend doing your own accounting? Rate the pain on a scale of 1 to 10.
Opportunity Cost Calculation
Next, do a quantitative analysis of the time spent doing accounting versus revenue generation doing the same time. This calculation can be difficult as you must quantify how much you generate per hour knowing that there are many activities that go into generating revenue. Here is a quick and dirty formula:
(Business revenue per month * your share of revenue generating activity) / hours worked per month = your revenue generation per hour worked (RG/H)
With your RG/H value established, calculate the break-even cost of outsourcing your accounting with the following formula.
RG/H * hours spent accounting = break-even cost of outsourcing accounting
Now this formulaic approach is far from perfect, but let’s walk through it. Say your business generates $480,000 in revenue annually with an even distribution of $40,000 a month. Let’s also estimate you work 180 hours per month and you are the primary revenue generator. Using the formula, your Revenue Generation per Hour (RG/H) is $222. Now let’s say you are spending (or need to be spending) 20 hours per month on various accounting activities and could shift time freed up to more revenue generation, your break-even cost of outsourcing your accounting per month would be $4,444.
The biggest challenge with formulaic decision making is the complexities of such decisions. Here are some things to consider:
- Are you capturing all the time you are spending on accounting accurately?
- With the pain calculation, you want to factor in your accounting expertise, as the pain you will feel in the future will be great when you need to address issues from poor accounting today.
- Can you generate more revenue with every hour you get back? If not, what is an accurate share of revenue generating hours you could use
Making a Decision
Pain calculation may be difficult, but if you hate doing your own accounting, you will know. Anything over a 5 on the 1 to 10 scale is worth considering. Opportunity cost calculation is less emotional, but can be somewhat complex. Use this value as a reference point when discussing outsourced accounting with different providers. Once you’ve gone through these calculations on your time spent, you will likely know what is right for you to do.