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How much should small companies spend on their accounting function?

26 May 2021
Mark Friend
Accounting & Compliance, Payroll, People, Building a Business

This is a really good question, and the simple answer is that it depends, but in many cases it is not nearly enough!!!! In general it depends on what the business owner wants and how big and complex the business is.

When we talk about the accounting function what do we mean? This isn’t the cost for the annual accounts but the amount the business should spend in time and money on the financial operation of the business, the invoicing, the book-keeping, VAT, payroll, job costings, budgeting, cashflow forecasts, management accounts etc….

Let’s look at a couple of examples:

John is a business owner with sales of just over £100K and only wants to keep basic books to fulfil his statutory obligations such as completing VAT returns and providing the information necessary for the external accountant to prepare the business’ statutory accounts. He has no interest in the figures themselves nor in growing the business. He has time available to prepare his own books. In this circumstance the costs of the accounting function for John is negligible and may simply be the monthly accounts software subscription and his own time in doing the books.

Elizabeth has a business with turnover of £1m. Her business is fast growing; she needs an internal book-keeper and outsources certain functions to her external accountant to help with payroll, management accounts, budgeting and cashflow forecasts and they also assist her in the interpretation of the results and help with decision making. Clearly Elizabeth will need to invest a significant sum both for internal team members and outsourced services.

Michael runs a business with turnover of £10m. He has a large internal accounts team consisting of a purchase ledger clerk, a sales ledger clerk, a payroll clerk and a financial controller who oversees everything and assists with budgets and forecasts etc… Michael is considering appointing a proper CFO (chief financial officer) or finance director rather than the current position where he is heavily outsource many of these functions to his external accountants. Michael is looking at bringing everything in house and again will have to spend a significant sum of money and time on building his team.

As a rough rule of thumb 2% to 4% of turnover is considered a typical guide to costs for the accounts function. On average that means £3k per annum for John’s business, £30k for Elizabeth’s and £300k for Michael’s!

With businesses at the lower end of the turnover range like John’s doing more themselves, getting part-time help or even outsourcing everything is the most likely route to keep within this budget.

Full-time staff cost money and here in the South East of England good bookkeepers will generally cost £25K to £35K as a basic salary. A financial controller will probably cost between £40K to £60K and an experienced finance director between £70K to £120K. Getting good people and keeping hold of them is however incredibly difficult as most business owners will know from bitter experience. If you get a good team it makes sense to look after them and make sure you have a great internal culture where it is fun to work!

The fact is that if you are serious about growing your business – in the same way as for marketing, product development, technology, systems and building a great team – you should not skimp on the costs for your accounting function!

The benefits of a strong accounting function are many:

  • Having peace of mind to know that your accounting records are in good order so that you won’t get into trouble with the regulatory authorities,
  • having your fingers on the pulse of your business,
  • having the right information to make the crucial business decisions and
  • having the right people around you to advise you

All of this is crucial to enable you, the business owner, to grow your business with confidence.

Increasingly we are finding that our clients with businesses with turnovers of up to £20m are struggling to build a comprehensive in-house accounting function and are turning to us for help in the following areas:

As a simple test and out of interest why not review the cost of your accounting function by multiplying your turnover by 4%. How does that compare? Are you getting the results you desire from your spend? Are you spending enough?

If you plan to invest more into your accounting function then why not speak to us about the outsourced services we offer. If you are a client of Friend & Grant then please speak to your contact manager.

The content in this blog is correct as at 26/05/2021. See terms and conditions.

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