Definition: A person whose work it is to inspect, keep or adjust accounts.
Accountants help you keep an eye on major costs as early as the startup stage, a time when you're probably preoccupied with counting every paper clip and postage stamp. When you're looking at the details, accountants help you keep your eye on the big picture.
Even after the startup stage, many business owners may not have any idea how well they're doing financially until the end of the year, when they file their tax returns. Meanwhile, they equate their cash flow with profits, which is wrong. Every dollar counts for business owners, so if you don't know where you stand on a monthly basis, you may find you're not around at the end of the year.
No other business relationship has such potential to pay off. Nowadays, accountants are more than just bean counters. A good accountant can be your company's financial partner for life--with intimate knowledge of everything from how you're going to finance your next forklift to how you're going to fund your daughter's college education.
While many people think of accountants strictly as tax preparers, in reality, good accountants have a wide knowledge base that can be an invaluable asset to a business. A general accounting practice covers four basic areas of expertise:
- 1. Business advisory services
- 2. Accounting and record-keeping
- 3. Tax advice
- 4. Auditing
These four disciplines often overlap. For instance, if your accountant is helping you prepare the financial statements you need for a loan and he or she gives you some insights into how certain estimates could be recalculated to get a more favorable review, the accountant is crossing the line from auditing into business advisory services. And perhaps, after preparing your midyear financial statements, he or she might suggest how your performance year-to-date will influence your year-end tax liability. Here's a closer look at these four areas:
1. Business advisory services. This is where accountants can really earn their keep. Since the accountant is knowledgeable about your business environment, your tax situation and your financial statements, it makes sense to ask him or her to pull all the pieces together and help you come up with a business plan and personal financial plan you can really achieve. Accountants can offer advice on everything from insurance (do you really need business interruption insurance, or would it be cheaper to lease a second site?) to expansion (how will additional capacity affect operating costs?)
2. Accounting and record keeping. Accounting and record-keeping are perhaps the most basic accounting disciplines. However, most business owners keep their own books and records instead of having their accountant do it. The reason is simple: If these records are examined by lenders or the IRS, the business owner is responsible for their accuracy; therefore, it makes more sense for the owner to maintain them.
Where accountants can offer help is in initially setting up bookkeeping and accounting systems and showing the business owner how to use them. A good system allows you to evaluate your profitability at any given point in time and modify prices accordingly. It also lets you track expenses to see if any particular areas are getting out of hand. It allows you to establish and track a budget, spot trends in sales and expenses, and reduce accounting fees required to produce financial statements and tax returns.
3. Tax advice. Tax help from accountants comes in two forms: tax compliance and tax planning. Planning refers to reducing your overall tax burden; compliance refers to obeying the tax laws.
4. Auditing. Auditing services are required for many different purposes, most commonly by banks as a condition of a loan. There are many levels of auditing, ranging from simply preparing financial statements from figures that the entrepreneur supplies all the way up to an actual audit, where the accountant or other third party gives assurance that a company's financial information is accurate.
Before engaging an accountant, ask about fees upfront. Most accounting firms charge by the hour; hourly fees can range from $75 to $275. However, there are some accountants who work on a monthly retainer. Figure out what services you're likely to need and which option will be more cost-effective for you.
Get a range of quotes from different accountants. Also try to get an estimate of the total annual charges based on the services you've discussed. Don't base your decision solely on cost, however; an accountant who charges more by the hour is likely to be more experienced and thus able to work faster than a novice who charges less.
Don't hire anyone with getting references, particularly from clients in the same industry as you. A good accountant should be happy to provide you with references. Call each of the references they supply and ask how satisfied the client was with the accountant's services, fees and availability.
After you've made your choice, spell out the terms of the agreement in an "engagement letter" that details the returns and statements to be prepared and the fees to be charged. This ensures you and your accountant have the same expectations and helps prevent misunderstandings and hard feelings.