When to hire a bookkeeper is a question most entrepreneurs and company directors ask themselves at one point. At what stage is it the right time? You don’t want to do it too early, but leaving it too late is just as bad decision. At What a Figure! Accounting we will cover this in detail to help you make the right decision.
Why you shouldn’t hire a bookkeeper too early?
When starting a business, usually you have a lot of expenses and very little profit (if at all). Even if you are lucky to make a profit at a very early stage, you will probably want to reinvest it into the company. This is important for its growth. If you hire a bookkeeper too early, this can usually wipe out the very little profit you make. Therefore in most circumstances – we would suggest you to wait. There are very few circumstances when we actually recommend using a bookkeeper even at an early stage – and we will get to this later in this article.
Why you shouldn’t hire a bookkeeper too late?
There is a time, when your company comes to a point where you should use a bookkeeper. The longer you wait, the worse it could be. This is mainly because of 2 reasons:
-You are wasting your time doing accounting when your precious time could be used elsewhere growing your business and increasing your profit.
-Your company’s bookkeeping is rather complex (eg. you trade internationally). Mistakes with taxes (either claiming back more or paying less) could incur penalties. Not to mention they could affect your cashflow. You assume you have more money, when in reality, they should have been paid in taxes.
Hiring a bookkeeper to ensure your accouting is correct and to free up your time to grow your business are both very important.
When is it too early and too late?
You might ask how do you decide when it is too early or too later to hire a bookkeeper? There isn’t one straight forward answer. Every company is different. However, there are a few factors that should help you decide.
Deciding factors:
1. What is your turnover / overhead?
In the early stages of a company, two great metrics are your turnover and total overhead. We mention both of them as many companies don’t make any profit in their 1st or 2nd year. If you are on track to make a profit, then use your total yearly turnover. If you are in a research & development stage, use your total yearly overhead instead.
Based on our experience, £600k in yearly turnover will require a bookkeeper for around a day a week. It is totally up to you when you feel your time could be used a lot better. However, we don’t recommend using a bookkeeper below £300k in annual revenue and above £500k – we actually highly recommend it.
Most companies generate around 10-20% net profit. Therefore if your company’s turnover is £300k and you are only making £30k in profit, it is probably too early to use a bookkeeper.
2. How many bank transactions do you have?
The number of bank transactions don’t necessarily differ if a company issues an invoices for £10k vs a company selling coffee for £2. This is because the company issuing £10k invoices, might issue 5 a month. Whereas a company selling coffee, will use a payment provider and a till system. The payments will be deposited in the company’s bank account as a sum, rather than every £2 individually. Therefore in most cases the volume of work is fairly similar.
However, in some cases, it could happen that you have so many transactions going through your bank account, that it is a good decision to hire a bookkeeper. Sometimes even if your business only has a turnover of £150k.
3. How complex is your bookkeeping?
As mentioned above, you could be trading internationally or claiming back research & development. In these cases, to ensure you do everything by the books, it is advisable to hire a bookkeeper. It will give you a peace of mind.
4. How much time would a bookkeeper save you?
If you are spending a few hours a month on getting your finances in shape, it is still manageable to do it yourself. You may even enjoy it to oversee it in the beginning and have a tight grip on your finances. However, if it starts taking a few hours a week, it is probably better to outsource.
How much does it cost to hire a bookkeeper?
Bookkeepers can cost you anywhere from £8 – £35/hr. However, the irony is that the cheaper you go, the more it might cost you in other areas (eg. VAT not claimed back, paying too much taxes on profit – as something was wrongly accounted for or in penalties). So going cheap might save you money now, but you might actually lose more in other areas.
How to save costs until it is really necessary?
If you have just started trading and this is your 1st financial year, in the UK you can choose your year-end to be within 6 – 18 months of starting to operate.
This means that if you have started trading in July 2020, you can choose 31 Dec 2021 as your year-end, rather than Dec 2020. This means you can delay paying for an accountant for another year.
Furthermore, in the UK, your accounts will be due 9 months after your financial year end. Meaning if your year-end is Dec 2021, you will actually have to file your taxes by the 1st Oct 2022. So in theory, you could save your money on accouting for 2 years – which is a lot for a startup.
If you reach the VAT threshold and have to file your VAT returns, you won’t have a choice.
Extending your 1st financial year-end is great if you want to save on accounting in the beginning. However, if you want to get a bank loan, find an investor, submitted year-end accounts are usually required. In that case, you will want to make your first financial year-end as early as possible – as some lenders ask for 3 years of submitted accounts.
We hope this blog post gave you all the answers you needed to make a decision. If you have any other questions that we haven’t covered in this post, please do let us know in the comments section below.
Read next: What does a bookkeeper do? (How to find a good one?)