Nick Kaptain admits he didn’t know the difference between a bookkeeper and an accountant in 2009 when he launched Adlava, a web design, video production, and digital marketing firm based in Las Vegas. He hired a part-time bookkeeper and assumed that was all he needed.
“It was hard enough to focus on getting business and staying afloat,” Kaptain says. “Here was someone I could pay for 30 minutes or an hour a week to manage all my transactions.”
But as the tax year ended, Kaptain realized he had made some poor financial choices, such as not spending money on expenses that would have been tax-deductible. The company wound up with a large tax bill as a result. Kaptain realized his bookkeeper wasn’t equipped to offer the kind of long-term financial planning he needed.
His takeaway from the experience: “Definitely hire a CPA. They know more about tax strategies and can help prepare you over the course of the year.”
The difference between bookkeepers and accountants
The bookkeeper and the accountant have complementary roles, but they are not interchangeable. A bookkeeper deals with transactions – entering account data, paying invoices, and balancing the books. An accountant will use that data to run more sophisticated analysis of your business’s financial situation and outlook, and help with tax planning. Online tools such as QuickBooks and Bill.com make it easier for these professionals to share information in real time when they’re not in the same location. As Kaptain says, “The bookkeeper knows what the accountant wants to see.”
After starting up and operating a small chain of wine shops in Brooklyn, New York, Jason Richelson created ShopKeep, a point-of-sales system for small businesses that funnels data into online bookkeeping software. Retail businesses in particular have a lot of cash transactions that need to be entered daily, Richelson says. That’s the job of a bookkeeper, he says – to handle the data entry that’s time-consuming for the business owner.
When Richelson was running his wine company, the Green Grape, it grew from one to three stores quickly. And the company’s bookkeeping needs grew as well. “We were used to getting one or two deliveries of inventory a day, and then it was 20,” Richelson says. The growth also meant more employees and more paychecks to cut, which meant more work for the bookkeeper.
Using an accountant from the beginning
For the most part, a bookkeeper can’t offer guidance on taxes, acquisitions, or exit strategies. Issues like these require the expertise of an accountant. The question then becomes: when do you need an ongoing relationship with an accountant for your small business? And how often should you meet?
Tax accountant Andrew Poulos, principal of Poulos Accounting & Consulting in Atlanta, says an accountant can be useful from the beginning in an advisory capacity. They can help entrepreneurs choose the right kind of structure and entity for their business, and can advise whether to classify workers as employees or contractors. Poulos says many business owners make early mistakes in these areas that are easy to avoid with the proper guidance.
“The one place you don’t want to cut corners is the accounting aspect,” Poulos says. “Unfortunately, we live in a day and age where tax laws are complex, and it doesn’t take much to get it wrong.”
A business owner may discover that it makes sense to incorporate as an LLC or an S Corp because it’s more favorable than paying the self-employment tax rate. Poulos says it’s also helpful to have an accountant set up payroll tax withholding– a task that many business owners fumble.
An accountant can also help a business set up its initial metrics, says Michael Paull, a CPA who has served as advisory chief financial officer to companies in multiple industries. “A lot of business owners like to grow into the need for an accountant,” Paull says. “But there’s certainly a benefit to starting with one.”
Growing into the need
Some business owners are comfortable checking in with an accountant a few times a year. Poulos recommends two to four consultations a year at minimum in order to stay on top of your tax situation. “If you come to me once the year is closed, I can’t do any tax planning for you,” he says.
Accountants also have the analytical skills that can help improve operations or identify growth opportunities, Paull says. For instance, a business owner may have a good sense of which products sell quickly and which move slowly. But he or she may not realize what’s happening with inventory in the middle. An accountant could recommend products to drop or to bundle, or suggest price adjustments.
“A good accountant is a thought partner. They can bring best practices to your business,” Paull says. “An accountant is in a good catbird seat to have a handle on costs and the market. They may see an opportunity that a business owner wouldn’t.”
It’s also important for business owners to see that accounting needs are dynamic, not static, says George Malina, partner-in-charge of the accounting services practice for Sikich LLP, a professional services firm specializing in accounting, technology, investment banking and advisory services, based in Naperville, Illinois. Certain occasions call for more hands-on involvement, Malina says, such as when a merger or acquisition is being considered, or when the business is being passed on to the founder’s children.
A worthwhile expense
Small business owners with limited cash flow may hesitate to pay for more than a couple hours of bookkeeping a month. But accountants say their time is a small investment with the potential to save big money in the long run.
Accounting mistakes can be expensive, Poulos notes. Compare the expense of meeting with a financial adviser a few times a year – maybe at $100 an hour – to the cost of a tax audit, which can average $3,000 in accountant’s fees alone.
Malina says business owners who try to handle their finances alone are also giving up the opportunity to generate income. “Just do a simple calculation,” Malina advises. “If you’re spending 10 hours a week on bookkeeping and accounting, and you’re not even sure it’s right, what could you do with that time that would be more valuable?”
Finding a good fit
The business owner and the accountant should have a close working relationship. So it’s important to find someone who’s not only trustworthy but also compatible with you. Start by asking fellow entrepreneurs for recommendations on both bookkeepers and accountants, and consider whether hiring an individual or a service is a better fit. Poulos advises using only a licensed professional: either a CPA or tax accountant who, like Poulos, is an enrolled agent licensed by the U.S. Treasury.
Kaptain agrees that hiring professionals helps you look professional, too. He values the input he gets from both his bookkeeper and his accountant. Just as importantly, he’s comfortable with them.
“I ask my bookkeeper and my accountant for advice on all types of things. It’s nice to have strong relationship for that,” Kaptain says.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.