What Should a Growing Business Spend on Accounting?

Business owners understandably pay attention to what accounting costs. They should. But I think the more useful question is whether they are comparing the right things.

A growing business might be able to hire a basic bookkeeper fairly inexpensively, buy accounting software for relatively little money, handle payroll somewhere else, and use a separate tax preparer. In the early stages of a business, that may make perfect sense. Sometimes the budget almost requires it.

The problem is that as the business grows, the piecemeal approach becomes harder to manage, and it may not save as much money as the owner thinks once their own time and the lack of coordination are included.

Doing It Yourself Has a Cost Too

Some owners are very capable of handling parts of the accounting themselves. If they enjoy it, have the knowledge, and have the time, there is nothing wrong with that. But there is a difference between entering transactions into software and maintaining an accounting system that is accurate, timely, and useful for running the business.

Even when everything is entered correctly, there is another challenge: getting useful insight back out. If the owner is spending hours coordinating a bookkeeper, payroll company, tax preparer, and software, and then still has to interpret the financial information alone, the inexpensive solution may not be as inexpensive as it first appeared.

Growth Changes the Equation

Once a business gets to around $1 million in revenue, I think it is worth seriously considering whether a more complete monthly accounting relationship makes sense. That is not a hard line. Complexity can make the value appear sooner.

Multiple locations, more employees, inventory, multiple entities or owners, payroll complexity, and regulatory requirements can make a smaller business more complicated than a much larger but simpler one. Revenue is a useful starting point, but complexity is what really drives the work.

As that complexity grows, there can be a real advantage to having bookkeeping, tax, compliance, reporting, and business guidance working together rather than as completely separate pieces. There are fewer handoffs, tax planning can happen throughout the year, and someone is looking at the whole picture.

What Is a Reasonable Amount to Spend on Accounting?

There is no single percentage that works for every business. As a very broad rule of thumb, I think many growing businesses can reasonably spend somewhere around 1% to 2% of revenue on the overall accounting function, depending on complexity and the level of support they need.

I would never use that as a pricing formula. Two $2 million businesses can require completely different amounts of work. But it can be a useful way to put the investment into perspective. A $1.5 million business spending 1.5% of revenue on accounting would be spending about $22,500 per year.

That can sound like a lot if the comparison is a software subscription or a low-cost bookkeeping service. It looks different when the comparison includes the owner’s time, tax planning, compliance, timely monthly accounting, business guidance, and the value of having better information when decisions need to be made.

I am not saying an accounting firm should promise to make back its fee every year through some direct calculation. Accounting does not work that way. I do think the accounting function should feel like a valuable part of running the business, and most of the time the owner should be able to see why the investment is worthwhile.

Compare the Right Things

One of the biggest mistakes in evaluating accounting cost is comparing completely different services. A full monthly accounting relationship should not be compared only to the cost of bookkeeping software or the least expensive provider available. Those may solve one part of the problem.

The better comparison is what the business actually needs. Are things being done correctly and on time? Are the monthly numbers completed while they are still useful? Is someone thinking proactively about taxes? Is the owner getting information they can understand and use? Is there someone available when an important question comes up?

Those questions matter more than whether one provider’s monthly fee is lower than another’s.

Accounting Should Add Value

As a business grows, the owner should occasionally ask whether doing things the old way still makes sense. Piecing together accounting services or doing part of the work yourself may have been exactly the right decision when the company was smaller.

But successful businesses change. The owner’s time becomes more valuable, the decisions become bigger, the accounting becomes more complicated, and the cost of not having good information increases.

At that point, outsourcing more of the accounting function can become a very good business decision. Not necessarily because it is the cheapest option, but because it creates more value than it costs.