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So, what exactly is an “Outsourced Bookkeeping Service”?
Well, first of all it is important to differentiate if the bookkeeping service is working with data 100% “offsite” to their client or if they are working collaborative with the same data. Because it is a big difference and distinction. For the purposes of this article, we will focus on the type of collaborative bookkeeping where the client and bookkeeper/accountant have access to the same accounting database (such as QuickBooks Online) and essentially could work concurrently. We will answer that question at the end.
Before we get into what the outsourced bookkeeping services does, lets talk about what the client (small business owner and team) typically might do inside their accounting system BEFORE the outsourced bookkeeper gets to work:
- Create Estimates and Invoices and send them to their customers
- Create Bills for vendors that they owe money to
- Scan some receipts, bills, and other documents into accounting system to have records on file
- Receive Inventory and perform periodical inventory adjustments (only if they actually manage Inventory)
- Create items (products and services) that will be in estimates and invoices
- Create new accounts into the chart of accounts when a new category of income or expense arises (although this is most accountants’ pet peeve)
- Create new customers and vendors that the company is doing business with
- Receive customer payments (marking invoices PAID or partially paid)
- Create Checks or Pay Bills with checks (Print Checks from QuickBooks)
- Enter employee data into timesheet and/or create Paychecks (assuming that payroll is managed in-house and not outsourced)
- Make sure that all invoices have the correct Sales Tax applied based on their customer’s shipping address, exception status, and/or whatever circumstance affects sales tax. Pay the sales tax liability
Then, the job of the outsourced bookkeeper typically is:
- Adjust or write-off any invoices that were created erroneously, duplicated, or are deemed uncollectible
- Adjust or write-off any vendor bills that were created erroneously, duplicated, or are that will not be paid for whatever reason
- Match up / decipher scanned documents to see if they are relevant to accounting results (or that any action needs to be taken upon them, such as creating a bill or expense related to a receipt)
- Help client make inventory adjustments, merge/delete redundant items
- Make sure the items (products and services) are mapped to the correct chart of accounts
- Merge, Delete, or group (make into a “subcategory”) new accounts into the chart of accounts to make sure that reports show in the best possible way that it makes sense to both the client (small business owner) or govt. entity (IRS, State, etc.) – Generally speaking, the outsourced bookkeeper will maintain the chart of accounts integrity
- Merge or Delete duplicate or redundant customers/vendors created by the client
- Match up customer payments with bank deposits
- Match-up or apply vendor payments or expenses with open bills (accounts payable)
- Make sure paychecks have accurately withheld taxes and make sure that payroll liabilities have been paid correctly (assuming payroll is not being outsourced to a 3rd party processor, but payroll responsibility was included as part of the outsourced bookkeeping engagement). File payroll tax forms
- Make sure that 1099 eligible vendors are entered correctly in the accounting system with their complete information to easily be able to prepare 1099’MISC reports at year end
- Pay Sales tax and File Sales Tax forms (assuming that responsibility has been included as part of the outsourced bookkeeping engagement)
- Reconcile all bank and credit card accounts. Delete (or adjust) all uncleared transactions generated by client; except for outstanding checks. Void/Reverse outstanding checks that are no longer cashable, like 90+ or 180+ day old checks
- Adjust all loans principal balances (liabilities) with allocating loan payments to principal and interest
- Cleaning up any errors entered by the client or redoing work from transactions deleted or modified by client. Reclassifying transactions that were entered in wrong categories, typically: Business vs. Personal expenses, Fixed Assets vs. Expenses, Admin vs. Direct Costs, Loans vs. Leases, etc.
- Generate monthly, quarterly, and/or other periodical financial reports requested by client. And creating custom reports at client’s request
- Remind clients of numerous deadlines related to compliance, licensing, renewals, and of course, taxes.
Generally speaking, the items above are the most typical; maybe bookkeeping services treat sales tax and payroll as two separate engagements or add-ons to the core service, so they are often excluded. Income tax preparation or Income tax planning is typically not included but some bookkeeping service offer that service as well as an add-on.
Because this is collaborative work, the efficiency of the bookkeeper is high tied to the accuracy of the client entered data; and behooves that bookkeeper to make sure that the client is well educated on HOW to enter the information accurately to prevent a lot of time spent cleaning up and essential redoing some of the work; and because of that, Training Services are a common additional service that outsourced bookkeeper provides. In some cases, the training services are inclusive of the outsourced bookkeeping engagement and in others, it is sold as a separate service. Additionally, sprinkled through this bookkeeping or training services, there is some general “Advisory” type of service, where the outsourced bookkeeper does answer client clients and offer general advice to items that are blatantly obvious that they need attention. However, there is a general lack of intentionality or proactivity towards giving advice to their clients unless it is clearly stated or planned for on the engagement, and that is potentially the most valuable piece
Now what do these collaborative outsourced bookkeeping services typically cost?
That is a complex question, I would say that most bookkeeping services are based on “effort” or amount of time spend working on the file. In my firm the average customer will take about 6 hours of work from one person per month (spread across two sessions of 2-3 hours each) which also includes time spend sending list of items to customers via e-mail, responding to emails, and typically at least one phone call per month. Some bookkeepers choose to work more often, such as weekly, which generally renders more time spent, about 2 per week arguably; In other cases, the engagement is quarterly or annually, and renders significantly less time (avg. per month) as there is less aggregate time spent on communication and back and forth. How these hourly-based bookkeepers typically charge between $20 to $80 per hour working remotely or $40 to $150 per hour when working onsite (@ client’s office). So, we can safely average that the typical remote-based bookkeeping service costs about $450 per month (assuming $75 per hour x 6 hours). Again, there are so many assumptions here, but is a discussable starting point; our firm has several customers that pay $1,500 per month… so the number is completely irrelevant without the context.
The more “evolved” and modern bookkeeping firms, opt out of an hourly-based model, and tend to estimate the amount of work they will do throughout the whole year and determine how much is all that work worth to the customer, and triangulate the two thoughts into one complete annualized cost (that might be divided into monthly payments). On the same spirit, this annualized cost is also packaged in three flavors such as “good, better, best” with 3 prices including difference services or add-ons (such as payroll, sales tax, income tax planning, advisory, an/or some predetermined agreed upon outcome) giving the client potential ways to work with that bookkeeping firm.
Is there a “standard” that these outsourced bookkeeping services follow? In other words, how would I compare services across multiple firms?
In theory, all bookkeeping firms should follow GAAP (Generally Accepted Accounting Principles); however, that work is typically reserved for CPAs or CPA Firms engaged to prepare financial statements (even within the CPA world there are multiple levels of this service: Compilations, Reviews, or Audits). But most bookkeepers will do a hybrid between GAAP and preparing financial reports in a way that their client understand it. In many ways, this is more art than science, as these bookkeepers have to triangulate 3 standards:
- Management Reports: expectations from the client to have information formatted in such a way so they can make timely decisions, which requires highlighting the information that matter most to the client, such as trends in increasing expenditures, changes in expected cashflow, and areas of the business that are dragging down the effectiveness of the entire organization
- Tax preparer or IRS standard: financial reports that are “Tax-return ready”; clearly identifying items that are not deductible (or partially deductible) adding additional non-cash deductions such as tax basis depreciation, amortization, and other tax deductions/credits not typically accounted for when doing just bookkeeping
- 3rd Party Lenders, Investors, and Institutions: that want to see the reports compliant to GAAP or industry standards so they can make decisions to lend to, invest, and/or do business with the entity they are looking at
So, the bookkeepers, usually pick one of these standard or create some kind of hybrid that could satisfice all 3 potential report users and/or make it easy to make an adjustment (typically a journal entry) that complies to any of these. Since most bookkeeping firms are not CPA firms, they do not have any standards that they need to comply with in order to maintain their legal capacity to provide this service. Not being CPA, does not say anything about the bookkeeper’s ability to provide high quality work, many bookkeepers are better “accountants” than CPA’s that do not do this for a living; many CPA’s focus on taxes, corporate accounting, or other activities that do not mimic the typical accounting work done for small businesses.
There are some scattered bodies in North America such as: AIPB, ICB, IPBC, and others that have ethical and continued education standards and must model after the AICPA’s standards anyway; and some bookkeepers choose to be part and comply with these organizations’ standards, but the proportion that actually do is minimal – unfortunately the average small business owner that hires an outsourced bookkeeping service, has no awareness of these organizations and do not even bother to ask for certifications/affiliations. Some bookkeepers like using the term “accounting professionals” and in some states it is allowed for them to call themselves accountants; unfortunately, in Texas, for example it is prohibited unless you are a CPA. Because the CPA brand is very strong and well known through most of the small business community, bookkeepers often stride to be looked as “quasi-CPAs”; but others just try as much as possible to dissociate with the “CPA” brand because its connotations of high price, highbrow, and strict rules that slows down the outsourced bookkeeper’s capacity to serve their clients instead of serving the standards; which were designed to protect the “public” that might be looking at financial statements that are not fairly stating the accounting value of the business. In most contexts, the work of bookkeepers is not looked by the public and requires no specific standards to be followed other than the small business owner’s need, however, often in order to obtain funding from investors or lending institutions, they often require to see financial statements prepared (in some cases even Audited) by a CPA or CPA firm; which is where the limitations of the typical bookkeeping service lies. Some small businesses will have two professionals: an outsourced bookkeeper for the “everyday” internal use report and a CPA for the external reporting needs and/or tax preparation.
Bookkeepers and CPAs often battle for their customer’s hearts about what are the standards that should be followed. The best bookkeepers actually partner with the client’s CPA and arrive at a happy medium that satisfies both the need for compliance and management information; in some rare cases the CPA firm also provides the bookkeeping services; but more often than not, a collaborative outsourced bookkeeping service is highly specialized and most CPA firms lack the technical skills or patience to provide such services. It is important to note that there are other standards not related to the actual accounting work itself and more related to ethics! Outsourced bookkeepers should have high level of ethical standards to advice their clients on conducting their business under the compliance of tax laws (classifying deductible and non-deductible expenses correctly), including the cash-based transactions into the books (which might require the small business owner to pay more tax than they are used to if they didn’t include them before), and not discuss the financial information with anyone outside the organization; it is to each bookkeeping firm to set their own ethical standards and perform quality control across all their staff/systems that are involved in the work.
Small Business Owners should have an in-depth conversation with their outsourced bookkeeping service to understand which standards will be applied and what would the relationship with other professionals involved with the accounting or finance of the business will be; this will help set the expectations to what those standards would.
What about preparing bookkeeping and financial reports for companies that will NOT be accessing their accounting system concurrently?
We call these in our firm: “cash-basis engagements”. Where the customer just needs to see a monthly or quarterly report that basically organizes all the bank, credit card, and possibly a client provided report (such as a petty cash log) to prepare a Profit & Loss and Balance Sheet. Typically, these reports are only used to give to banks, governments, or institutions that require them as part of their compliance or documentation. Also, for internal tax planning or even tax preparation (assuming the company files as cash basis). There are much easier, simpler engagements; and I have seen some bookkeeping firms charge on the low end of $100 (or less) a month for this type of service. Typically, most bookkeepers don’t spend more than 2 hours per client a month for something like this if they are using an advanced bookkeeping system like QuickBooks Online and successfully connect their banking feeds download (and possible auto-classify) most transactions downloaded.
This type of service cannot be compared with the collaborative outsourced bookkeeping service described above.
-Hector Garcia, CPA
Quick Bookkeeping & Accounting LLC