The “Opportunity Cost” of Being Your Own BookkeeperPosted on May 28th, 2017
Outsourced Accounting Department, Inc.
In my recent article, “Why Outsource Your Bookkeeping?”, I explained several reasons why it is advantageous to small business owners to outsource their bookkeeping, such as accuracy and the lack of accounting knowledge, or in general, avoiding making a mess out of your books that someone else eventually has to clean-up at tax time, and at your expense.
I also mentioned in my article another reason to outsource that I think is even more important to you as a small business owner; and that is, the other, more profitable activities you could be doing with your time if you weren’t spending it trying to do your own books. This article from Entrepreneur Magazine, “The 80/20 Rule of Time Management: Stop Wasting Your Time,” hits that nail right on the head with this statement:
“Sometimes you have to do everything when you start out. But now you’re doing a $10 or $20 per hour fix-the-faucet job and you’re not doing your No. 1 job, which is getting and keeping customers. That job pays $100 to $1,000 per hour.”
The author’s example of how this particular business owner is spending his or her time is an example of the old cliché, “penny-wise and pound-foolish,” and his point is a perfect example of an “opportunity cost.” So how may this concept also apply to doing your own bookkeeping?
To illustrate, assume your sales are currently running at $100,000 a year, and your gross margin after your direct cost of sales is 50%. Now assume that by shifting your focus from “bookkeeping” to “marketing” you could increase sales by say 20% per year to start. The increase in your available profit would then be $100,000 times 20% times 50% = $10,000 (which flows right to your bottom line).
Now, assume that you can outsource all or part of your bookkeeping at say $350 per month, or $4,200 per year. Your “opportunity cost” in this example would then be $10,000 minus $4,200, or $5,800 per year! In other words, that’s the profit you are forgoing by doing your books yourself in an effort to “save money.”
Of course, there may be other marketing costs you would incur depending on how you go about increasing your sales, but you get the general idea. The ultimate question is, as a small business owner, how would you prefer to spend your time, and is that the most profitable use of your time?