In response to my earlier post, John writes:
That works for single owner /employee businesses, but I’ve found it gets harder as you scale up. (either more owners or more employees).
Aren’t payroll checks their own nightmare?
It does get harder as you scale up. This is “Sam’s business advice – tiny business edition”: when your business is not big enough to be called a “small” business.
Take me as a specific example: I have between three and five transactions a month — invoices to clients, one payroll check, one payroll tax payment. Add in a few trips to Staples and I’m still barely breaking 100 journal entries in a typical year. This is not rocket science. I can do my bookkeeping in five minutes a month. I spend as much time waiting for Simply Accounting to load as I do using it.
But maybe you have 15 employees. Maybe you have 100 different categories of inventory, with 5-10 different items in each category. Maybe you’re billing the federal government (in which case, God help you, because I can’t.)
You should still do your own books. You should hire a bookkeeper or a payroll specialist to enter the journal entries for the complicated bit, but you (as an owner) should still be involved in the bookkeeping. As a rule of thumb I’d try to limit it to no more than 5% of your working time. Anything above that, I’d consider hiring a part-time employee.
So then let me ask you: do you spend 2 hours a week on your books? Is there even two hours a week (ten hours a month) of work to be done there?
And if you think 5% is excessive, then how much time do you think a typical “real” business CEO spends thinking about accounting and business development and cash flow, all of which are founded on up-to-date, accurate books?
5% is probably about right. For larger companies, ERP/Accounting systems represents software 1-2% of revenue. There are a lot of headcount dollars that go along with it, but all of G&A shouldn’t be above 10% or so and that includes the CEO, etc.
My specific business is residential real estate. I have a couple of partners and several properties. Some of these have mortgages, and despite our best efforts, we have many transactions that go outside our property managers. Worse, our property managers end up being their own account (they credit/debit internally and pay out a net). We probably have 400 JE lines a year.
Once your tax return is no longer simply wages and itemized deductions, I fear the IRS looks much more closely at it. Thus we have a tax accountant do the company’s taxes and pass through the results to our own.
You absolutely need to be involved in the *accounting*. In our case we want to answer the question, which properties are making money? how much? what are our unexpected expenses? But that the work you do *after* the books are lined up/transaction categorized and has nothing to do with taxes. Given that this is not a primary business, but meant as passive/investment income, my tolerance for spending time on it is minimal.