I talk to a lot of small business people. It is surprising to me how many of these people would rather do their accounting themselves to try to save money. I understand where they are coming from (I am in a small business too) but the logic doesn't hold up in all cases, especially if you examine it carefully. Often small business owners tend to under value their time. They can often misplace their priorities in growing their business, which can save expenses from the bottom line in the short-run but limit the growth of the business, and therefore the bottom line, in the long-run.
We have recently come up with a model for calculating the difference between a small government contractor that does the accounting on their own and the impact if they hired an expert firm (like ReliAscent) to perform these tasks for them. I would like to examine here briefly the assumptions, differences and impacts of this decision on a small business. First, I think there are 3 basic choices for the small business owner:
- Do all the accounting themselves
- Hire an inexpensive bookkeeper to perform these duties for the owner
- Hire an "expert" firm specializing in government regulations and compliance.
I think first of all we must state the assumptions up front. The driving assumption is the the small business is receiving a large percentage of their annual revenue from government contracts and that the total amount of these awards are significant (over $750,000 annually). We also are assuming that the small business has more than one award from the Federal Government and that at least one of these awards is a cost reimbursable type award. The type of contract that will require compliance with FAR part 31 accounting and most probably with DCAA regulations and audit.
Let's examine the first scenario from above, where the owner does their own accounting. While most owners are highly intelligent people, their expertise is rarely in accounting. I know, what could be so difficult, it is only addition and subtraction, right? There is also the complication of the regulations imposed on a government contractor. While these regulations are all public knowledge and readily available, knowing how to interpret them, what applys and how to "drill down" to the subsidiary requirements is key. For the uninitiated, this takes an inordinate amount of time. While the business owner may work a lot of hours, this type of work can really take some time to make sure to find the correct answer and then the correct implementation of that requirement. This takes the owner's time away from their expertise. I would argue that it takes away from the business potential because the owner is the best person to do business development and share their unique knowledge to convince both investors and customers that this business is worth investing in. So the biggest loss in this scenario is what I call an "opportunity cost" where the owner fails to spend time utilizing their core expertise to grow the business. Sometimes this is hard to measure. I can show you if you are interested.
In the second scenario, the bookkeeper is hired to do the accounting. I have seen cases where the bookkeeper had some previous knowledge of government requirements to cases where the bookkeeper did not understand government requirements. In the case where the bookkeeper does not know, it is easy to evaluate. The risk grows each day as entries are made in the accounting system and the chances of being no compliant are very high. When the non-compliance is discovered (by audit or by the CO), the cost to correct them will be very high. So while the company saves some money in the short-run, they pay a lot over the long-run. The same logic may apply even if the bookkeeper has some experience. The risk of making a non-compliance error are fairly high for those that do not perform government accounting tasks full time.
The third scenario can seem more expensive when you first look at it but the risk of errors are low enough that this seemingly higher cost to perform the task is saved over the long-run. The savings manifests itself in lower audit costs, lower corrective action costs, lower risk of stop payment orders until problems are fixed, etc.
We have actually developed a model to show the differences in these 3 options. If you are interested, give me a call (or visit our webpage) and I can run your numbers through the model to show you what I'm talking about.