Here is another question that we get asked all the time, or that otherwise comes up in our discovery and onboarding process (despite touching on it here briefly, on our services page 😊 ). How much should my accounting team cost me?
Read on to find out the full answer…
Like all great questions in accounting, the answer is as always “It depends”. But in general terms, the standard range for all of your internal and external accounting should be between 1 – 4% of gross revenue.
So we have a range now, but you might be thinking “that is a pretty big range”, and you are right, it is. Since there are so many things to factor into this range, let’s go over just a few of them, to show you what we mean. Many of these are related, but for sake of clarity, here we go:
Complexity of the business:
- Is it an incorporated owner/operator, running a consulting or professional services business with 1 employee, & low volume of income and expense transactions?
- A person in this position that does $300k/year, will be much closer to the 1.5% end of the spectrum, than a business like the one below…
- Or is it a more “conventional” business, with a mix of goods and services for sale, multiple PT staff & turnover, higher transaction volume, billable/non-billable expenses to track, etc.
- I.e: cafes/small hospitality location, smaller tradespeople (plumbers, electricians), etc.
- A business of this type, with the same ~$300k in revenue as above, will have higher accounting costs because of the complexity built in.
Transaction volume & variety:
- Transaction volume matters.
- As a simple example, it is much easier to ensure the correct recording of 30 transactions in a month, than it is for 300, or for 3,000 transactions.
- Transaction variety matters.
- Likewise, it is easier to slot transactions into ~10-15 different places as they come in, with a small group of regular suppliers all paid on the spot with business debit/credit cards, than it is to record them to 40-50+ different accounts, allocated to various projects, with a large and constantly changing assortment of suppliers, some of which offer credit and monthly statements, etc.
Number of staff on payroll:
- Running payroll comes with certain responsibilities, and the role grows as the # of staff grows. More staff means more overall processing of new hires, terminations, resignations, wage rate changes, ROEs, T4s, etc. And at a certain size, also means EHT reporting.
Quality & Timeliness of Information:
- Is the business primarily using a few key tools to process all their sales, incoming payments, etc.? These are usually easy to go back in time to retrieve old data if need be, you can get data immediately after it happens, and many offer direct integration to accounting systems, etc.
- Does the company use (or are they open to using) time-saving software receipt hubs, so that receipts are nearly all digitized and we can take advantage of software and automation?
- Or… is the support for the expenses always missing/never provided in the first place, everything is paper, etc.
Management’s involvement and “Tone from the Top”
- Saved for last, but what is the tone from the mgmt/owners? Is there a genuine desire for quality information, or are they just looking for someone to tell them the books are done, and they aren’t really interested in looking at things?
- The degree to which owners/managers are willing to be interested and invested in improving their accounting function greatly impacts the outcome of such efforts, and the cost of it too! It might be inexpensive each month to under invest in your accounting function, but underinvesting in your business’ finances is one of the most expensive places to do so! Owning a business is one of the best ways to generate wealth in Canadian society, don’t jeopardize your investment!
As you can see, there are a ton of variables involved, pulling in different directions that might not make intuitive sense. But overall, as a business owner, you should review and consider the above, and budget accordingly for your business’s total accounting and tax compliance to be between 1 – 4% of your total gross revenue.
“BUT WAIT”, you say. “You haven’t said why you used 4% as the uppermost limit, and the video used 3%!”
Yes, and here is the simple reason why.
The person in the video is talking about companies with several million in annual revenue. At that scale, 3% is usually more than adequate, even for companies with the most complex accounting and tax needs. Because we work with companies as small as <$300k revenue/year, up to those with $10 million/year, we need to give a larger range. Because ultimately, scaling quality accounting services can only go so far down in scale, relative to the business size.
Simply put, larger businesses will have some economies of scale in this regard that smaller companies just can’t achieve. There are still bank/cc & other accounts to reconcile, sales and payroll taxes to file, AP to manage, financial results to review & analyze, etc.
…
Now, some businesses may think that because they’re so small, they don’t need to have a whole team of us – bookkeeper, Controller, and CFO – working on their finances. Or, they don’t understand why we say that you can only scale down quality accounting services so small. And sometimes, companies that have been underinvesting in their accounting and finances, eventually find out why that is a bad idea.
This will be the topic of our next post, “Let’s talk about the F word“, where we’ll discuss the broad topic of fraud, and all the myriad of ways it can and does impact small- to medium-sized private businesses in Canada.