Keeping overheads low is important for every business, but especially for SMEs where the budget is that bit more restricted. Factors such as globalisation, increased competition, and technological advancements have intensified our need for cost efficiency and lean operations. Economic fluctuations and uncertainties further are also good reasons to maintain lower overheads as we prioritise financial resilience and competitiveness.
If you’re reading this blog, you might be wondering if you’re underinvesting or overinvesting in the management of your company’s financial health. Or you may be trying to gauge the value for money of quotes from potential accountants. Hourly rates can vary, and some accountants package their services based on outcomes rather than time input. Let’s discuss the implications for your business.
To outsource or not to outsource
Let’s address outsourcing first. For reasons such as control, quality assurance, protecting IP, and stability it used to be the norm that if your business had a need (HR, IT, marketing, legal, accounting, etc.) you would hire an employee or team to meet it. This was a rational choice decades ago. However, the world of work is very different now and so are the pressures businesses operate under.
Today, I would say that any function of your SME that isn’t your core area of expertise should be outsourced. The main reasons are:
- you have access to a range of different expertise levels and specialties
- you don’t need to hire more management-level staff to oversee teams
- you don’t have the additional costs and responsibilities associated with hiring employees
If outsourcing is a choice you are still grappling with, have a read of our related blogs, Strategic Outsourcing Gives You Room To Grow, The Advantages And Benefits Of Outsourced Accounting, and A Skilled Bookkeeper Will Save You Time & Money.
Are you paying too much for your accountant?
Whether internal or outsourced, we need to ensure the investment in our financial function is bringing value. This raises the question, what is a reasonable benchmark for employing an accountant? It would be easy for us to say, ‘‘Well, that depends on your business,’’ and this answer wouldn’t be wrong. However, we do have an applicable benchmark you can use for your own company, whatever type of business is it. That number is 4%.
Accountancy costs for SMEs
Beyond is the trusted accountancy practice of hundreds of different Irish SMEs. Rory Finegan, our company founder, was responsible for accounts departments and acted as the financial controller and the financial director for several large companies before founding Beyond. We have a deep understanding of how the accountancy function works in many different types of companies, both internally and externally.
With this wealth of experience at hand, we have concluded that 4% is the magic number for every type and size of company. You should not be paying more than 4% for your entire accountancy function (that’s 4% of your total turnover if you’re a service company, or 4% of your total gross profit if you’re a product company). This budget encompasses all the costs necessary for the function – not only the bookkeeper’s salary but also accounting systems, hardware, financial teams, external accountant, office space, etc.
Take a second now to calculate your 4%. Compare that number with how much you are currently paying for your accounting. How does it fare?
How should these accountancy costs be spread?
Now you know what budget to allocate for your accounting, the next question is what accounting activities should that budget be spent on? 50% of new businesses will fail within the first five years, and it’s widely accepted that financial problems are among the leading causes of business failure. As you grow your business, it’s important to invest in the support that will ensure your financial health. This is how I would bring capabilities onstream as an SME scales.
For a company turning over €300,000
Typically in this size business your transaction volumes are fairly low. You should be able to keep on top of bookkeeping internally (leveraging tools such as Xero, this is very straightforward) and only have a few salaries to process. While you’re small, keep your costs down by managing things in house, and use the opportunity to learn fundamental financial concepts and the tools that manage them.
You will hire an accountant to do your annual returns (for the business and the company directors), help you with business planning, coaching, ad hoc consultancy (support applying for grants, financial advice, pension planning, etc.), and training to get the most out of Xero. This comes comfortably within the 4% budget, with enough support to give you the financial confidence to grow your business.
For a company turning over €600,000
As your turnover/gross profit reaches €600,000, day-to-day financial management is no longer something that can be fitted in with all our other responsibilities. All well as the regular support you needed when your turnover was at €300,000, you’ll probably also have an outsourced bookkeeper to handle your VAT and payroll, with their associated filings and reporting.
For a company turning over €2 million
As it scales, your business becomes more complex and many of the strategies and processes that worked before will no longer be effective. Larger operational expenses and investments mean more need for meticulous planning to maintain liquidity. As we face a whole new set of risks, we may also have new compliance and reporting obligations to meet.
At this size, the business needs much more support to stay financially sound. You’ll probably have a bookkeeper for around 10 hours a week to cover tasks such as VAT returns, payroll, bank reconciliation, credit control, and purchase invoices. You will also have input from a management accountant who oversees the bookkeeper and carries out tasks such as reviewing the profit & loss accounts, tracking budgets and departmental performance, and responding to financial queries. In addition, some hours with an experienced CFO every quarter will ensure that wider financial issues aren’t overlooked or opportunities unidentified.
For a company turning over €5 million+
When a business reaches a size between €5 million and €7 million, it will make sense to start bringing the financial function in-house and putting in place a small team (you’ll have the budget for it at this point). Exactly what shape this takes will depend on the company.
The crucial thing here is that at every step of your growth you have had support that’s proportionate to your size and turnover. For example, when your company is turning over €300,000, you simply don’t need a management accountant; when your turnover is €3 million, it would be unwise not to have one.
How much is accounting costing your business?
How much is your business spending on the accounting function? If your budget is under that 4% benchmark, then happy days! However, if you’ve realised you are paying too much for your accounting, it’s advisable to find a more cost-effective solution. At Beyond, we can look at how your finance function currently works and offer practical solutions to bring your accounting costs under the benchmark. Your main options, if you’re not big enough to hire a full-time company accountant, will include:
- Outsourcing your accounting
- Outsourcing your bookkeeping
- Hiring a fractional management accountant and CFO
- Using a cloud accounting system, which is cheaper than desktop solutions
