Wednesday, April 16, 2014

The Costs and Benefits of Hiring a Bookkeeper

Many small business owners think that it is cheaper to hire part-time clerical staff than a professional-bookkeeper. Is it so? Let's work the math.

To hire and retain part-time staff, you probably have to pay $15/hour and offer 20 hours/week, which provides some sort of living wage that your staff can live on. That is $300/week. Times 4 weeks per month, that is $1200. What kind of qualification / quality you get? Do you need all those hours? Will there be a lot of down time?

Compare this to hiring a professional-bookkeeper with an accounting degree, professional accounting background, and years of experience. Add in qualifications such as  Quickbook Proadvisor  certification with knowledge to use this tool efficiently and effectively and he/she can get the work done much quicker. He/she works on as-needed basis, on-demand. For a small company with up to 10 employees, one day/week will suffice. For a smaller company, sometimes twice a month will only be needed. At $40/hour, 7 hours/day, you pay $280/week. Times 2 days/month, that is $560/month. If 4 times a month, that is $1120. Isn't it still cheaper?

What you don't know can cost you.

I have seen a high-end real estate broker who managed multi-unit apartment buildings for his mother advanced a lot of money to pay her bills. When she repaid the loan of $100,000, the office manager who did the bookkeeping posted it to income. What will the tax be on this $100,000 income? Say, if Federal and State income tax combined are 30% -- which is on the low end, that simple mistake costs him $30,000. If the bookkeeper is paid $1000/month, her whole year of compensation is only $12,000. $30,000 can pay a bookkeeper for close to 2.5 years.

I have seen an architect firm have his project manager do the bookkeeping task; creating invoices for clients every month. Since the architect's expertise was on architect/design, and was not accustomed to bookkeeping which is numbers and detail-oriented, he mistyped one of the items by $25,000 less, and  another item $50,000 less. What was the price for not billing this $25,000 plus $50,000? $75,000! $75,000 can pay a bookkeeper who works one day a week at $40/hour for 4.5 years! (8 x 40 hr = $320/week x 52 weeks = $16,640/year).

I have also seen other mistakes; such as a $20,000 payment from an accounts receivable being posted twice costing my client $6000 additional Federal and State taxes. And a tax return was prepared based on accrual instead of cash basis, with income overstated by $50,000 costing her an additional $20,000 in Federal and State income taxes. Luckily the mistakes were caught in time and with amended tax returns and she recovered all.

Qualified bookkeepers do not just cost money. They provide benefits. They get the work done. They provide timely and accurate reports so that the business owners can see where they are, how they're doing, and can base off those reports to make some informed strategic planning, and pay the right amount of taxes no more and no less.

Monday, March 31, 2014

Bookkeeping Presentation at SFPUC Contractor Assistance Center

On 3/20/14, thanks to the sponsorship of Merriwether and Williams Insurance Service, Wayne Lee and I have the opportunity do do a presentation at SFPUC, Contractor Assistance Center on Bookkeeping and Quickbooks. Ben Poole and Price Hallowell of the center have been most helpful in providing technical assistance with the equipment set up. Jennifer Elmore of Merriwether was most kind in chauffeuring us around and provided sandwiches to nourish the mind and bodies of the attendees.

It was a great venue; great conference room with lots of space, light, nice furniture and huge mixing area. We have about 15 attendees. We thought of it a success. The attendees were enthusiastic about the subject matters. We tried hard to share some fundamental principles about money, cash flow vs profit, and financial reports. We hope that these principles will come in handy in the future.

At the first half, we discussed all money related issues; such as why care about financial matters? For it is one of the 3 major areas besides operations and marketing that all business owners need to cover. Why cash flow is different than profit; for you likely have to front all job costs -- labor, material, equipment for 2 months before you get paid. Hence each new job or expansion demands more credits, and you must establish as much credits as you could before you need them. We talked about the 2 ways of financing; i.e. debt vs equity. And how to get a good FICO score; i.e. by demonstrating your willingness to pay and your ability to pay. We covered the 3 major financial reports; Balance Sheet, Profit and Loss and Cash Flow Statement. We dissect components that made up those reports. We tried to explain them in the simplest language.

In the second half, we covered tips and tricks on Quickbooks. Among the attendees, only 1 uses American Contractor which costs $10,000 and 5 uses Quickbooks which costs $250. No wonder majority stays with Quickbooks for the price difference is so big.

Since Quickbooks is form-driven, if you use A/Receivable invoice and A/Payable bill features, Quickbooks will give you many more reports; especially job related ones. We covered items set up. various jobs reports such as Job Profitability Summary, and detailed report on each job, such as Job Profitability Report. Since labor and burden make up a big part of job costs, we emphasized that to effectively allocate labor and burden to jobs, payroll must be integrated within Quickbooks; i.e. by using Intuit Payroll Services. With all payroll burden set up on payroll items list, the allocation will be auto pilot thereafter.

We explained how we work with our clients; mostly on-site as their in-house accountants on a once-a-week or twice-a-month basis. We also support their in-house staff if they already have their accounting personnel.

Friday, March 28, 2014

The Price of Cheap Bookkeeping

I recently worked with this new client of mine, who is an interior designer. Of course, the book was not good, as expected, which is most of the time.

I found that in 2010, there was  $20,000 sitting in a bank account named "uncancellable." Obviously, there is no such bank, hence no such deposit. Her bank balance was inflated by that amount. By tracing the entries, I realized that the deposit was posted and incorrectly applied to various invoices issued in May and September 2010. This was not true --  her client always paid right then and there. The invoices are due-on-receipt. The deposit entry has been reconciled to the bank statement. The former bookkeeper realized the mistake, and posted another payment to apply to the correct invoice in August. And she moved this payment into this "uncancellable" bank account with memo "already posted. can not delete."

The result; the income was counted twice, which cost my client $6000+ for Federal and California taxes.

Curious, after quick glance at 2010 tax return, I pulled out 2011 tax returns which were filed right next to it. And the sales and net income were $50,000 more than book. Minutes later, I realized the tax returns was filed based on accrual basis instead of cash basis, for there was $50,000 sitting in Accounts Receivable. Worse yet, these A/R invoices would never be collectible, for there was procedural error. Her clients were showed 100% of material and service costs, and asked to pay 50% upfront while placing order for the material. The remaining 50% was billed again on later invoices, and promptly paid when presented. So the first invoice with remaining balance was not real and would never be paid.

We were in time to amend 2010 and 2011 tax returns, and reduced her Federal and California taxes by $6000 in year 2010 and $20,000 in year 2011.

That was the price of $25/hour bookkeeping.

To find a good bookkeeper, business owners should definitely ask for an accounting degree which is much more important than Quicbooks knowledge; for software skill can be learned much faster. A solid foundation on accounting principles takes time and is essential.

Wednesday, September 14, 2011

Quickbook - Bank Reconciliation - 4 places to look for errors

It is quite easy to spot where errors come from if you can't reconcile.

Look at these 4 numbers to zero-in where error(s) come from:
- begining balance
- ending balance
- total deposits
- total withdrawal
at the bottom of reconciliation window.

Say, you found that error(s) is on total withdrawals side, you just need to focus on finding error there.

Tuesday, September 13, 2011

Quickbooks - workflow

Before you can reconcile to bank statment; you should do these first:

First, take care of A/R (accounts receivable). In this order:
Enter invoice - process payment - move deposit into bank a/c.
(These deposits should agree with deposits as stated on bank statements.)

Second, take care of A/P (accounts payable). In this order:
Enter bill - pay bill

Third, when reconciling to bank statement, if you see other deposits and debit charges on bank statement, post them to your bank a/c on Quickbooks.

Quickbooks / Bookkeeping Procedures

  1. Your main data source is bank and credit card statements -- a high 80 - 90% data came thru these 2 places. So, if you have capture all the data from here, you have captured a great 80 - 90% of data.

  2. The workflow is always:
- Enter data
- Reconcile to monthly statement.
(By reconciling, you verify that all data been entered, and is correct.
If there are errors or omissions, they would be detected and corrected in this step.)
- Review financial reports.

The owner runs his business, so he has the "reality check". If numbers don't look right, the owner should know it better than an outside contractor. It is a team effort.

Friday, January 16, 2009

Found leads from Better Business Bureau site

I googled "contractor association/ group/ exchange. One related website pointed me to Better Business Bureau. Bingo! I hit a jackpot and compiled 67 leads who are in zip code close to me.