It is human nature to try and save money where you can.
It makes sense that if you see a car for sale at £20,000 and you see the same car down the road priced at £18,000 that you will buy the cheaper one and save £2000.
This is what people call a ‘no-brainer’.
And the ‘money saving mantra’ follows us everywhere.
For example, the UK DIY industry is worth a staggering £14 Billion.
Yes the whole concept around DIY is to ‘do it yourself’ and save money.
Despite the sheer amount of people that try and save themselves money doing their own DIY, stats show that people spend on average around £3,000 fixing their bad ‘DIY’.
One other area that people try and save money is their accounting.
After all, ‘it is just counting isn’t it?’
Well, accounting is more complicated than people think and in this article, we look at why you need to outsource your accounts and what it costs you when you try and do them yourselves.
The Power of ‘Opportunity Cost’
Most people see transactions of time and money as ‘black and white’.
They give you money in exchange for your time or vice versa.
But there is something else that you lose when you do your own accounting.
And this is called ‘Opportunity Cost’.
What Is Opportunity Cost?
“Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action.”
The term opportunity cost originates from economics where it is used to refer to the value of the next-highest-valued alternative use of that resource.
So how does this affect you?
So, for example, you set out to save money and instead of paying a qualified accountant to take care of your business accounts, you do them yourself.
Perhaps you buy some accounting software and think ‘I can master this’ and off you go.
Well, the second you start to do your own accounts you are ‘spending your time’.
And that is at the cost of another benefit you may have received.
Yes, you did not take money out of your bank account and pay the accountant, but it cost you something else.
In layman’s terms you could have been doing any of these activities and more:
Making sales calls.
Spending time with family
and so on.
Ok if you want to know the science behind opportunity cost and work out precisely what doing your own accounts is costing you check this out:
Opportunity Cost = Return on Most Profitable Investment Choice – Return on Investment Chosen to Pursue
So let us say that your highest leverage area is getting on the phone and speaking to prospects.
Your business makes £1000 profit of every client sale, and your closing rate is 50%
Your accounts will take you 12 hours to do, and it takes 1 hour to talk to a prospect and convert them to a sale.
In 12 hours you will have made £6000 if you met 12 clients (12 meetings, 50% closure rate).
To outsource your accounts would cost £1000.
If we use the formula it looks a bit like this:
£6000 (what you could have made) – £1000 (the cost of outsourcing accounts) = £5000
The decision to do your own accounting has cost you £5000.
And this is what most people never consider.
There is a tangible cost to something when you take it on yourself rather than outsource, yet people rarely see or consider this cost.
But what about if you hire an accountant to work in-house?
The Cost Of Having In-House Accountants
When a business becomes a certain size, they will consider if hiring an internal accountant is better than outsourcing.
And depending on the size of your business and the size of your accountancy bill this can be tempting.
Does opportunity cost apply here?
The answer is a resounding yes (and then some).
First, you will need to recruit the member of staff to be on your internal team.
You will need to hire a recruitment agency or advertise yourself.
The potential cost is around £400.
Then we have the salary which could cost you somewhere in the region of £25,000, depending upon experience, qualifications and location.
But hold on there is more.
National insurance contributions come into play which will cost you even more money.
And then we have pension contributions that you might need to pay.
And then we have things such as IT and office equipment, sick leave, human resource management costs and so on.
It soon starts to add up financially, and this is BEFORE we look at the opportunity cost.
Employees require management, and that is your time.
So when you do your employee reviews, deal with the sick leave and of course, all the paperwork that comes with hiring an employee this is a cost that spreads not only to yourself but also to your organisation.
And this comes again at a cost.
So What Should You Do?
I think we have shown that it makes no financial sense to employee in-house accountants or to do your own accountancy.
Both the cost of hiring staff and the opportunity cost of trying to do the accounts yourself is too high.
This is where an accountancy company such as MI Accountancy Solutions comes in.
We can offer a full range of accountancy services to meet your business needs. And as we have seen this will save you money because you have time to spend elsewhere.
Get in touch to outsource your accounts and get focused on spending your time on things that only you can do.
Outsourcing your accounts = time back to you and your business.
And as we only get a certain amount of time; we need to maximise it.
Thanks for reading
MI Accountancy Solutions are accountants based in Stoke on Trent