How Much Should I Pay for a Bookkeeper? Redux

Almost two and a half years ago, I wrote a post called How Much Should You Pay For Bookkeeping? and it is consistently the most viewed post on this blog.  If I was a blogging genius, I couldn't have named it any better as traffic comes here from that very search term.  I am not a blogging genius - I am just a gal who likes to write and sometimes I indulge that need through this professional outlet.

Anyway, I thought I would come back to this subject today.  That post is longer than I thought and not everyone has that kind of time.  Unfortunately, even two and a half years later - the answer is no easier.  More goes into setting a billing rate than just trying to make as much money as possible.

For those who don't like to contemplate things like I do, here's the short answer:  You get what you pay for.  And sometimes, you pay too much for what you get.

For the rest of us, I am reminded of an illustrative conversation I just had with a client regarding maximum allowable rates on grant agreements.

The grantor will let them source out a deliverable as long the source does not exceed $X per hour.  And they will not allow you to pay a premium from another source over that amount.  My rate is over that amount.

So, like all good accounting consultants, I batted around a few ideas with the client on how to bill to this grant if I was going to help with this deliverable.

In the end, we decided not to do it.  And here is why:

1 - It isn't fair to my other clients.  I bill everyone the same.  It is always nice to get a deal, but it is never nice to be the one paying more - so it is better to be consistent.

2 - My billing rate is a stretch for most when they hire me.  And before too long, they know they are getting more than they even knew to expect.  This isn't hubris - often an organization is going from a bookkeeper to a full service accounting system and the change is valuable.

This client I was working with is still going to have me help with the deliverable, we just will put that part of the grant money towards the salary of the employee I will be working with.  She gets the value.

3 - My actual rate of pay works out to $10 less than $X.  Trust me, I do the math.

The reason I set my rate where I do is because I do aspects of bookkeeping (that you can get for $35 an hour) all the way up through CFO-ing (that would cost you $150 per hour, or more), so I am in a blended area between that.

I am also a CPA and I have extensive experience in one industry, both of which gives me a premium in the marketplace.  One thing I know to be true - if you bill too low, you are treated accordingly.  So, you have to pay attention to the marketplace.  (And if you don't think that is true - tell me, is there a price that you think is too little to pay for a hotel in New York City?  I mean really, if you get a hotel there for under $100, you know there are going to be bed bugs.)

And finally, I think I have a better working relationship with my clients because I don't bill for travel time, or for random phone calls (I want you to tell me that stuff is going to hell in a hand basket before it is too late), or even for a lot of quick e-mail exchanges.  And if I am only visiting a Board once a year, I don't charge for that either.

I don't even charge for random calls and e-mails from the auditor.  My clock really starts when I open Excel and start putting something together or when we spend an hour reviewing a tangible item.  Or when I walk in the door to work for you and only for you.

I could charge a lower rate and I could track all that stuff and I could spend two days putting together a monthly invoice and my client could spend two hours reviewing it and begrudgingly pay it and I would probably make more money, but life is too short for me to run my business that way.

I know how much I work.  And I do track a lot of that stuff that I mentioned above, even though I don't bill it and I know that my actual working rate comes out to $25 less per hour than I bill for my major clients.  And knowing all that, I know that my rate can't change for one strange grant request.

And my client, who is smart, knows that too.  (I try to only work with smart people.)

So when you are trying to figure out how much you are willing to pay for a bookkeeper, maybe some of the points I mention above should be in your consideration.  Billing rates are not really apples to apples and you should not take a number at straight face value.

Speaking of face value, since it is your finances - please meet them before hiring them to make sure you are not paying too much for what you are getting.

Allocations Part II

Last week, I began the unenviable task of explaining expense allocation reporting in non-profit organizations.  I mentioned that there are four common entries and I described DIRECT ALLOCATIONS and SALARY ALLOCATIONS.  Today, I would like to wrap up this topic by writing a bit about the other two types of allocation entries.  If you have a chance to look at Part I, it is helpful to understanding this discussion.

GENERAL EXPENSE ALLOCATIONS

General expense allocations refer to expenses that are not easily identifiable to a program.  Examples include copier leases, office supplies and insurance costs.

Note that worker's compensation insurance would fall in this area even though it is an employee expense - it is not an expense that can normally be broken out by individual and so it would not be considered under the salary allocation entry.

These expenses are typically accumulated on a monthly basis and recorded as either an unclassified or an administrative cost.  As part of closing out the month's reporting, these costs would then be allocated out to the various programs.

The preferred method used for allocating these costs is generally effort reporting.  Effort reporting takes into account the amount of time that employees spend on a program and applies that effort to the general expenses.

The theory behind this method contemplates that an employee is spending 50% of their time doing the After-School work and so they must be using 50% of the copier costs on After-School work.  This method, applied consistently, will survive an audit of cost allocation.

Effort reporting is NOT the same as salary allocations, but you do start in the same place - with the timesheets.  If you remember, we used the hours on the timesheets to generate the percentages for each individual's payroll costs.  The total percentage used for payroll can NOT be used for general expense allocation because it is skewed based on different salary levels.  The total hours in a program can be used.  Here is an example to explain what I am talking about:

S is the Executive Director and makes $4,000 per month.  She spends 80 hours (50%) in Programs and 80 hours (50%) in Fundraising.
T is the Program Manager and makes $2,000 per month.  She spends 128 hours (80%) in Programs and 32 hours in Fundraising (20%).

For Salary Allocations, you would do this:
Payroll Expenses would be allocated 60% to Programs and 40% to Fundraising.

The program expense is S's salary of $2,000 (50%) plus T's salary of $1,600 (80%) to equal $3,600 (or 60% of $6,000 in Payroll Expense).

This fundraising expense is S's salary of $2,000 (50%) plus T's salary of $400 (20%) to
equal $2,400 (or 40% of $6,000 in Payroll Expense).

The Salary Allocation is 60/40 because the Executive Director makes more than the Program Manager and skews the salaries.  You have no choice but to take actual payroll costs on the Salary Allocations, but you do not want to apply this skewing to other costs.  The copier does not cost more to use when the Executive Director is doing it.

For General Expense Allocations, you would do this:
General Expenses would be allocated 65% to Programs and 35% to Fundraising.
This is comprised of the total of S and T's Hours = 320.  Of those hours, the total Program Hours are 208 and the total Fundraising Hours are 112.

While a 5% difference does not seem like much - keep in mind this is a very limited example.  When you pull it out to the population, the difference can be larger.

Volunteers
I have used Volunteer hours when calculating general expense allocations, if it makes sense.  If your volunteers are on-site doing program related work that use up general expenses, then why not include them in the effort reporting?  You can't put them in salaries, but you do want to be reasonable about just how much that copier is getting used for your program.

Let's look at the above example and add in the hours for the Volunteer that runs the After-School program.  If their hours are 20 per month, you now have 340 total hours - 228 to Programs and 112 to Fundraising.  Or a general expense allocation split of 67% Program and 33% Fundraising.

Volunteer time makes sense for some organizations, but not all.  If you decide to use it, you should be prepared to explain why it makes sense and to demonstrate that you used a complete tally of volunteer time (not just the program hours).  Again, timesheets are useful for providing the substantive back-up.

OCCUPANCY ALLOCATIONS

The fourth most common allocation entry is occupancy.  Occupancy costs include rent, interest on a mortgage, utilities, depreciation and sometimes maintenance expenses.

The preferred method for allocating occupancy costs is based on the square footage that a function literally takes up within the office.  If a program is off-site completely, then the allocation might be the costs of the off site location or it might have to come from an application of the general expenses allocation method to occupancy.

Getting a layout of your office is the first step to figuring out how you want to allocate.  Sit down with that layout and calculate the square footage of each area to each function.  Apply that percentage to the occupancy costs on a consistent basis and you're done.

This allocation should be re-visited at a minimum on an annual basis, but may require a more periodic review.  Especially if there is a major shift in office layout or new programming is added.

BONUS ALLOCATION DISCUSSION - ADMINISTRATIVE COST ALLOCATION

After all other allocations are completed, you may want to perform an allocation of administrative costs to the various programs.  Note that this would be for funders that allow it and for internal management reporting purposes.  A full allocation method like this would present a program's contribution to the overhead of the non-profit.  On tax returns for non-profits, general and administrative expenses must remain separate.

This is very easy to do - again, after everything else is allocated, just take your general and administrative expense total and apply it using the formulas that you used to do the general expense allocations.  With one tweak.

If your General Expense Allocation was 10% Administrative, 10% Fundraising and 80% Programs; then you would want to allocate all Administrative between Fundraising and Programs.  Your allocation would be based on Fundraising being 10 of 90 or 11%.  The allocation to Programs would be 88% or 80 of 90.

General Expense allocation is normally shown as a separate income statement line item - it is a lump adjustment at the bottom of reporting and it should add up to zero for top-level and tax reporting.

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I know all of this is a lot to think through objectively while staring at a computer screen, but it is the way we do it.  And once you get these allocations set up and start running through them a few times, it becomes very systematic and can easily be done by a solid general ledger accountant.

Knowing that your allocations are correct and supportable will give you credibility within your organization and within the various funding communities that you operate.  It will also give you a lot of information for when you are building budgets.  Allocations are worth understanding, setting up properly and vigorously maintaining.

Charting Your Accounts - NonProfit Version

It seems like a good time to talk about the chart of accounts.

Oh, I know it's not sexy.  And it's not really that fun.  Personally, I  try to have a career goal of never changing a chart of accounts again.  Yet, if you plan your chart of accounts properly, it really can be used for a long time to come.

I have to admit, since I started serving non-profit organizations almost exclusively, I have struggled with the allocation of costs.  There are allocations that are required for grant reports, for tax returns, for financing compliance, for management reporting and sometimes just because a Board member wants to know a random bit of information.

I have spent hours on the phone with colleagues trying to determine if I was really doing these allocations right, when I am making entries that have $0.20 in them.  I am.  Unfortunately.

I have learned, however, the more allocations you can do through initial transaction entry, the better off you are.  And a flexible chart of accounts consistently used aids that process.

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Lets take a look at the basics of a chart of accounts.  Note that this is a discussion of the actual account numbering; it is not about categorizing the chart into revenues or expenses or what have you.  I consider the categorizing a function of reporting and it is beyond the scope of this post.

NATURAL - Your first numbers should match the natural expense categories.  This is expected and necessary if you have to file a tax return or undertake a financial audit.  A natural expense would be Salary.  Or insurance.  Utilities, etc.  It is common for people to use four or five numbers for this category.  Example:  Repairs - 6120.

SUB-NATURAL - This category is not used often, but I have worked with it before and I really love it.  This is when you take a natural expense and give it a sub-category.  Two numbers is generally sufficient for this category.  Example:  Carrying on with Repairs, you might have Repairs on the HVAC System - 6120.02.  Note that you could now do reporting on all repairs or just on repairs related to HVAC.

PROGRAM - This is where you start breaking out different departments or functional areas of expense.  In non-profits, this could be administrative, fundraising and various programs.  Having this segment allows you to report by functional expense and accumulate your administrative or overhead costs for allocation purposes.  Most small and medium size businesses are okay with two numbers here.

Example:  Repairs on the HVAC system at the administrative office would look like this - 6120.02.99.  Repairs on the HVAC system related to a program could be - 6120.02.05.

A note about QuickBooks: 
QuickBooks is a common accounting software that has a some very frustrating limitations to its chart of accounts structure. You can't add dashes or dots in the basic versions and the most numbers you can use is seven. Seven.

With only seven numbers and no breaks, it is hard to properly separate programs (departments) and funders.  In QuickBooks, I generally use classes to track programs, since I am already up to 5 or 6 of the allowable account numbers. However, classes add a complicated element to data entry, as they must also be used consistently to work properly.  If you have too many, you risk errors and "messes."

ACTIVITY - Activity and program could be the same, but it might be used as a sub-program.  For example if you are a theater arts business, your program could be Plays and an activity would be The Taming of the Shrew.  It makes sense in this case to track activities, but unless you are going to recycle charts of accounts (which is not recommended), you will need a lot more number spaces here - three at a minimum, but more likely four.  Example:  Repairs on the HVAC system at our play, the Taming of the Shrew (keep an open mind here as I try to keep my examples consistent) - 6120.02.05.1420.

You will notice that we have gone way beyond QuickBooks limitations at this point.

LOCATION - Location may be more important to your business than activity or it may be an additional area of interest.  Location notifiers are probably sufficient with two digits.  Example:  Repairs on the HVAC system at our play, the Taming of the Shrew, which is held at the downtown community theater - 6120.02.05.1420.06

SOURCE - And finally, we reach the really important area.  Source is when you might want to track funding sources for a program or activity.  This is vital for grant reporting, but is similar to activities in that you may need a large number of digits - I would say at least three.  Example:  Repairs on the HVAC system at our play, the Taming of the Shrew, which is being shown at the downtown community theater and which was funded by the National Endowment for the Arts - 6120.02.05.1420.06.150.

I use customers in QuickBooks a lot to track this information, but it does cause problems as it is very hard to keep it consistent.  Others find job tracking to be helpful here, but again, there are limitations.

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Let's see what we have ended up with, assuming we want everything:  6120.02.05.1420.06.150

Okay, I admit that this account number has gotten a bit ridiculous, but if you look at it, you could run reports on several different aspects just from a download to Excel.

All of these segments are sortable!  It's the Holy Grail of accounting reporting!  You can report on any of the following:

Repairs
HVAC Repairs
Plays
The Taming of the Shrew
Any plays held at the Downtown Community Theater
Expenses funded by The National Endowment for the Arts

It is amazing!  But...

Let's get back to reality.

You likely do not need all of these segments, but you do need some of them.  Regardless of how many you do use, any account separation will give you flexibility as your organization changes and grows.

I beg you - don't just randomly accept the canned chart of accounts that comes with the accounting software.  Take some time, approach it thoughtfully.  Look at your current reporting needs and structure your accounts accordingly.

It will be worth it in the end.

Instant CPA - Just Add Coffee

There is nothing instant about finding a CPA that both understands your business and that, ahem, you can afford.  Well, I am going to let you in on a little secret, from the CPA side, there is also nothing instant about getting the good referrals - the clients that match your personality, your skill set and that, ahem, want to pay you.

CPA's are continually targeted by people that want to help them market - they say we need to advertise, do mailers, do monthly newsletters, etc.  I think there is value in a newsletter when there is news and we really don't need to become part of the noise that fills your inbox each day.

And ultimately, is your financial information something you generally trust to a name that shows up on a postcard in your mailbox?

I don't think so...

Well, then how do people find their perfect CPA?  And how do CPA's find their good clients?

I am not sure that there is an easy answer to that, but I would like to propose the idea that it starts with coffee.  Coffee with a friend in your industry.  Ask them who does their work and do they like them?  Coffee with a mentor, same questions.  Get a couple names from friends.  Call those names.  See who calls you back.  Meet them for coffee, pick your favorite and begin the relationship. 

I believe that financial services is still an industry that works best through personal referral.  There are good on-line matches, but one should not overlook the personal relationships.  I am not saying finding a CPA is like getting married, but I suspect that your CPA (the right one) will understand and communicate about your finances better than most spouses.

By the way, when I choose to market, and I do choose to market, I do it through community events - a table at a non-profit event; a hole on a golf course for charity, a sponsorship of a festival for kids who don't have festivals. I calculate that I get about as much return on this marketing as I would get on sending out mailers (nearly none), but at least I feel a whole lot better about where the money went.

I have written a companion piece to this called How Much Should You Pay for Bookkeeping if you would like to read more (much more - it was a tad wordy).

I Suffer From Depreciation

Some time ago, I was speaking briefly with a Board Member of an organization and he mentioned that “we don’t ever record depreciation during the year.  Do whatever you need to get the books in shape, but don’t ask or make us look at depreciation.”

“Depreciation doesn’t matter.”

“GAAP entries?  Oh, you mean like depreciation.”  (Big sigh follows.)

Depreciation is technically the recognition of a capital expense over the life of the asset.  In other words, if you buy a building for 3.6 million dollars and you believe it will last 40 years, then each year, you will have an expense of $90,000.  Ninety thousand dollars that you have to cover with support, revenues or some other offset on your way to positive net assets.  Ninety.  Thousand.  Dollars.

Oh, and you are probably paying debt service on that building in which the interest is also creating an expense.  Another expense (this time real cash) that you have to cover with support, revenues or some other offset.

Depreciation can cause confusion among non-financial Board and Leadership people in the organization.

Every good cash analysis and operational/management tool adds back depreciation in the first step.

EBITDA – Earnings BEFORE interest, taxes, depreciation and amortization.

Depreciation, depreciation, depreciation – I suffer from depreciation.

So, why do we record it?  Why do we make you look at a large number that represents money already spent?  Why do we set you up to have to explain you have a net loss, but only because of depreciation?

There are some good reasons to record depreciation:

First and foremost, it IS generally accepted accounting principles and if I know that you are handing out “board approved” interim statements for Grant applications or financing or whatever, then I am going to make sure that those interim statements are as close to accurate as possible within an accounting framework.  And that includes depreciation.  This just protects you.

Second,  it can loosely represent future capital needs and if you are covering it with your support in this year, theoretically, you are increasing your cash to meet those needs.

Third, if you are doing a tax return, depreciation is actually the law for certain listed assets.  (Note that tax depreciation and book depreciation can vary widely – one is legislated and one is based on estimated actual life).

Finally, well…  I can’t think of any other reason to record depreciation because, I also don’t like depreciation.  I also add it back at the earliest opportunity. And I also generally think it doesn’t matter.  For my clients, I often take it out of the main expenses and give a net income before depreciation – it is still there, but it is way below the operational data.

BUT, I work with service entities, arts based and community services organizations.  These organizations do not have large capital expenditures for production.  The number one cost on most of my financial statements is payroll – not inventory, not production cost, not warehousing.  There is a place for depreciation in the world of manufacturing, etc. and for those, please carry on.

In the meantime, we will keep recording it because we should and then we will add it back to find our important ratios – debt coverage, operating cash, income from operations.

How Much Should You Pay for Bookkeeping?

How much should you pay for a bookkeeper? And how do you find a good one? A quick look at Craigslist will show a "million" bookkeepers with rates from $25 per hour to $50 per hour. In my mind, I think $35 per hour is average. But there are a lot of factors here.

First of all, you know you can hire an employee for a rate of between $12 and $20 per hour for basic bookkeeping services. This is less, but the other costs of an employee have to be factored in - basic employer payroll taxes will average about 11% (in Oregon), if you have benefits that has to be added in, but you also should not forget the other costs of an employee. They take time off, some of which you pay for - they need to be trained; you need to be available to deal with whatever comes up in their lives and if you turn over the position regularly, well, it starts all over. This is all time consuming and your time is definitely worth more to your business than $12, $20 or even $35 per hour.

Now, contractors have their problems also - the most important one being accountability. I can not even count the times I have gone into a new client and heard their prior bookkeeper/accountant say, "No one told me about that, so I did not book it." Another draw back to a contractor is that you are subject to their schedule - you may not get something done today, but rather when the next bookkeeping packet goes out. Finally, are your records at your location, at their location or a mix of both? Who knows what is really going on in your business from the dollars side? And which software are you going to have to use?

Okay, back to the $35 per hour average. I think it is important to point out that you get what you pay for. Right now, the better bookkeepers that I have sub-contracted with from time to time are actually charging $50 per hour. I have one that I pay $65 per hour and at this point, you are probably thinking, WHAT??? $65 per hour??? Well, frankly, she is really fast, really good and I very minimally have to supervise her. She gets it done and she is worth every penny. 2 hours of work at $65 per hour is $130. Another less efficient, less experienced bookkeeper might take 4 hours to do the same work, which would be $140. And I still have to spend time answering basic questions and providing extensive supervision. This exponentiates as the job gets bigger.

Having said all of that - we have all been burned by an accounting person during our careers. We have overpaid for someone who just sold themselves but have no practical ability. There is just no way to tell who "gets it" and who doesn't. Experience, education and/or personality don't seem to actually factor in to the person who just understands numbers. When I hire bookkeepers for my staffing needs, I have actually gone to "working interviews", so that I at least know what I am getting into in terms of software capabilities and accounting knowledge. That has really helped and I recommend it if hiring an employee is your preferred method of getting the books done. See one man's perspective on this at http://www.arboristsite.com/showthread.php?t=31486.

Okay, let's switch over to what you can do. I think billing by the hour is actually really tricky and not very useful when dealing with regular bookkeeping activities. It is much more useful to use a "value" billing approach that contemplates what this work is actually worth. Bookkeeping is a fairly consistent activity. There are busier times - usually in January when 1099's have to be prepared and other times that your business may have natural cycles, but it is much easier to forecast cash flow if you know what you are going to pay each month. It is also easier for the bookkeeper to deal with cash flow if they know how much they are going to receive - less billing headaches and a consistent flow of cash - a win for everyone.

Let's take an example: what if you were to pay $1,000 per month for a bookkeeper? Does that sound like a lot? That works out to $12,000 per year, all in all, less than an employee, but maybe more than you wanted to spend. But what if you get an amazing person that takes accountability seriously and who really gets how numbers work? What if your experience with your tax accountant is both much more timely and much less stressful? What if your tax fees actually go down? What if you never had to worry about finding another accountant again (no transition pains)? Would it then be worth $1,000 per month? What about $500 per month? What price makes sense when you actually get the headache of bookkeeping off your plate in a competent and useful way?

Pricing is always negotiable and when I come to this point in the proposal process with a new client, I try to find a price point that gives the client value and at which I can still make money. Because that is my job. To figure out how to make money at the price the client is willing to pay. Isn't that your job when you set prices for your products and services? We are all running businesses here.

Value billing lets you know that you are getting what you are paying for and not worrying about how many hours someone is working and what their rate may be. Try this out with your contractors and see how it works. Understand that you will be billed separately for extraordinary activities, but that the regular work just is what it is. And enjoy the feeling that you can actually call your advisors once in a while without pausing to think about how it impacts your monthly bill. Wow.