When it comes to bookkeeping, there are two common routes to choose from — DIY (Do It Yourself) and DFY (Done for You) approaches. The first type, DIY bookkeeping, refers to managing your financial records on your own. DFY bookkeeping, on the other hand, is all about outsourcing. The third option is hiring an in-house bookkeeper which is not recommended at all to small businesses and startups.
Let’s take a closer look at each of these methods, and assess the pros and cons attached to them:
|Freelancers & solopreneurs
|Low Transaction Volume: Ideal for those with a limited number of income streams (30-45 transactions per month)
|Moderate Transaction Volume: Suitable for those with moderate transaction volumes (where accuracy and efficiency are needed in financials)
|Control: Offers direct control over financials without reliance on external help.
|Limited Accounting Knowledge: Preferred for businesses with limited accounting knowledge, ensures compliant management
|Small Business Owners
|Limited Resources: DIY is cost-effective for sole proprietorships with tight budgets.
|Value Time & Focus: Those who want to concentrate on growing their business and managing core operations
|Simple Finances: Few transactions and straightforward financials make it manageable.
|Seek Scalability: Professional bookkeepers can handle increased transaction volumes and provide scalable solutions to accommodate business growth
|Committed to Hands-On Management: Those willing to invest the time and effort required for hands-on financial management
|Prioritize Accuracy: Small businesses that prioritize error-free financial reporting and adherence to tax regulations
|Startups (Seed Stage)
|Cost Considerations: Bootstrapped startups with limited funding can allocate resources wisely by DIY bookkeeping.
|Comprehensive Financial Management: Those looking for comprehensive financial management (payroll processing, tax preparation, and financial analysis)
|Learning Curve: Founders can gain insights into financial aspects crucial for early-stage business decisions.
|Complex Financial Structures: Startups with intricate financial architectures that may require specialized knowledge and expertise
|Nonprofit Organizations (<$100,000 annual budget)
|Internal Transparency: Internal bookkeeping provides transparency into fund allocation and adherence to budget constraints.
|External Transparency: Those seeking external transparency for stakeholders, donors, or regulatory bodies
DIY Bookkeeping: Accounting Your Way
DIY Bookkeeping involves tasks such as managing financial paperwork, sales invoicing & AR collection, supplier bills recording & payments, recording banking transactions, reconciling bank and credit card statements, vouching AP & AR, and generating financial reports, filing GST/HST and sales tax returns all by yourself.
Who Is DIY Bookkeeping For?
If you are a budding entrepreneur, a small business owner, or a freelancer with fewer transactions, DIY Bookkeeping might be the one for you. However, this route only works if you’re familiar with basic accounting principles and have enough time to devote to the practice each month.
Pros of Doing-It-Yourself
1. Cost Savings
Handling your financial transactions and bookkeeping tasks on your own translates into huge cost savings, especially if you have just started and have fewer transactions per month. Hiring a bookkeeper comes with additional costs, depending on the complexity of the services required. This underscores the importance of DIY bookkeeping– and saving you some bucks.
2. Confidentiality & Control
For small business owners, DIY bookkeeping means being in control. Unlike some professional bookkeepers who only work with a certain paid software, doing-it-yourself lets you choose your methods and tools and that’s further savings.
Apart from this, DIY Bookkeeping preserves the privacy and confidentiality of your business records.
3. Comprehensive Understanding
DIY bookkeeping gives you a better understanding of your business operations. It helps individuals to analyze all the elements that drive their units forward, from the cost of supplies to monthly financial reports, and more. In addition, DIY bookkeeping lets you see the business from a broader view: this project costs x dollars, and we’re investing y months on it — does it align with the outcomes?
Cons of DIY Bookkeeping
Managing your finances gives you better control and understanding of the business operations. However, the process comes with its own set of drawbacks:
- Bookkeeping requires basic accounting knowledge (assets, receivables, balance sheets) which can be challenging for some business owners.
- You need to be familiar with evolving technologies, like QuickBooks or Xero, indicating a major learning curve.
- DIY bookkeeping might be time-consuming as the business grows, with regular records maintenance and financial transactions.
- It can divert your attention from core business activities, limiting your ability to focus on strategic growth, client interactions, and overall business development.
- Lack of expertise in bookkeeping principles increases the probability of errors, resulting in inaccurate records and compliance issues.
- You may face risks and legal implications, especially when it comes to tax filing, resulting in penalties or fines.
- No professionals mean no insider knowledge. This could translate into missed opportunities for tax deductions and other financial strategies to save money!
DFY Bookkeeping: Accounting Done the Professional Way
DFY Bookkeeping is when businesses hire professional experts to manage their record-keeping tasks.
Who Is It For
For small to medium-sized businesses and startups with a considerable transaction volume (monthly >50 transactions in all bank and cards combined), and monthly sales between $10K to $10M, DFY can be a lifesaver. These professionals are compliant with CRA/IRS regulations, lead to no penalties, and know how to cash on tax deductions on the go.
As a rule of thumb, when your business exceeds $10K in monthly sales, it might be a good time to outsource the bookkeeping aspect to experienced professionals. This is when you’d better invest your time devising new advertising strategies or planning a new product rather than categorizing transactions and preparing financial reports.
Pros of DFY Bookkeeping
1. Accuracy and Compliance
Hiring a professional bookkeeping service is not only about basic debit/credit entries and cashflow projections; rather it gives you access to professional expertise and experience. These individuals are well-versed in financial reporting and management, ensuring that your statements are maintained according to relevant laws and regulations.
2. Saved Time and Resources
Not to say that DIY bookkeeping is not worth the time and effort, but all that energy could be invested in a better cause; say brainstorming for an upcoming product launch or analyzing the departmental functioning. In this way, outsourcing bookkeeping-related tasks helps business owners shift their focus to core business activities that bring growth and revenue.
3. Reduced Risk
As mentioned above, professional bookkeepers know what they’re doing and have a deep understanding of local & national laws and regulations. Doing the same job day in and day out, they are adept at steering your business clear of potential penalties and fines. So, by opting for DFY bookkeeping, you can avoid the risk factor related to compliance issues and incorrect financial reporting, making it a win-win for business owners, stakeholders, and your operations!
4. Cash Flow Forecasting
According to the U.S. Bureau of Labor Statistics, approximately 20% of small businesses fail within the first year and only a third reach the 10-year mark. This is due to the lack of financial management — with a 2020 survey indicating that 50% of SMBs don’t even maintain a documented budget. Cashflow forecasting helps mitigate all these challenges, providing 5–10-year projections of your business operations.
Many bookkeeping services also deal in cash flow forecasting, helping you analyze how much money will be coming in and going out of your entity in the future. This prudent approach gives you access to informed decision-making, resulting in optimized resource allocation (and less wasted resources).
Cons of DFY Bookkeeping
Although DFY Bookkeeping is a one-stop-shop for avoiding costly CRA/IRS audits and cashing on all those tax deductions, it comes with its own drawbacks. Here are the potential cons of outsourcing your bookkeeping tasks:
- A DFY bookkeeper comes with its own costs, but these costs are usually worth shelling out considering the time savings these professionals bring to the table.
- Outsourcing the money matters decreases your involvement in the company’s financials, although it lets you focus on other core business activities.
- DFY bookkeeping may sometimes raise software compatibility issues if the professional uses different tools. However, this opens up an opportunity for your business to explore potentially better alternatives.
The Verdict’s In: DIY or DFY Bookkeeping
DIY and DFY Bookkeeping are both promising approaches to managing your business finances, depending on your needs and operations. For solopreneurs and freelancers not expecting much growth in sales and teams, DIY Bookkeeping is better suited while small business owners and startup entrepreneurs looking for expansion and building teams will certainly benefit more from a DFY approach.
However, what if you are a business owner who would appreciate a bit more involvement in your financials? Well, look for a hybrid approach, using DFY bookkeeping for day-to-day accounting and complex tasks like timely tax filing but also educating you on financial statements, KPI dashboards, cash flow forecasting and most importantly aligning your financial story with your overall business goals and strategies.