As your business evolves, there will come a point in time when you need to hire an expert to help you with money management. So, who do you turn do? Should you hire an accountant or a financial planner?
First, it’s important to understand that while accounting and finance are two forms of managing the money of the business, they are used for vastly different purposes. A financial advisor deals with investments, stocks and 401(k)s while an accountant is concerned with things like filing taxes and showing you how your business is performing through reports.
Keep reading to learn more about the differences between the two disciplines and the circumstances that will lead you to hire an accountant versus a financial planner.
When to Hire a Financial Planner
A financial planner will act as a trusted advisor for you and your small business in several ways. Here are the top five reasons to hire a financial planner.
Note: We will sometimes use the terms financial planner and financial advisor interchangeably throughout this blog post. “Financial advisor” is the broader term used to refer to almost every type of financial professional.
When you want to properly manage your assets
A typical small business owner is deeply involved in the day-to-day operations of their company, leaving little time to conduct investment research. According to Investopedia, this often leads to “capital build[ing] up in checking and low-returning accounts, earning little on [the business’] accumulated cash.” However, a financial advisor will put together a comprehensive strategy based on your risk tolerance, investment horizon and investment objectives.
They will help you to select from the many investment options available such as stocks, bonds, mutual funds, ETFs, CDs and more. Plus, they will also rebalance your portfolio in response to changing market conditions or other variables such as valuations and correlations.
When you need help with insurance planning
Insurance planning is another critical aspect of financial planning. A financial planner will work with you to determine what type of insurance you need, how much and at what cost. This is usually driven by examining the events that present the highest degree of risk to the business.
Examples of the different types of business insurance include:
- Liability insurance
- Key person insurance
- Property insurance
- Life and disability insurance
- Health insurance
- Worker’s compensation insurance
When you need to create an employee benefits plan
Offering a solid benefits package is a great way to attract and retain quality talent. The most popular service that a financial advisor offers in this space has to do with retirement benefits. He or she can help you to choose the right retirement plan that takes into account employee concerns as well as the constraints of the business. They will also explain the tax advantages that each offers.
There are four types of small business retirement plans, with the first three being suitable for companies with fewer than 100 employees:
- Self-Employed 401(k) Plans
- Simple IRAs
- Simplified Employee Pension (SEP) IRA Retirement Plans
- 401(k) Plans (for larger companies)
A good financial advisor will also set up and maintain proper procedures to ensure your company remains compliant with federal, state and local regulations.
When it’s time to create an exit strategy
Knowing your exit is a key part of planning for the future as a business owner. An “exit” is really the answer to the question, “What will I do with my business once it’s built?” In other words, determining whether you want to keep or sell your business once it gets to a certain stage in revenues or some other metric.
In terms of the second option, valuing the company seems to be one of the hardest discussion points. Another involves succession planning or how the owner wishes to see the business continue after they’ve left. This will often be a key consideration if the business is being sold to a family member.
Before you get to the sales table, working with a financial planner or a CFO who is well-versed in valuations, tax consequences and negotiation tactics will help to ensure positive outcomes across all aspects of your exit.
When you need to plan for retirement after your exit
One of the big benefits of working with a financial advisor is that they can plan your personal finances in coordination with your business finances. This is especially useful after selling or transferring a small business to help you manage your assets for retirement.
According to Investopedia, “At this point in the financial relationship, an advisor is likely to assume the more traditional role of managing investments, developing a plan for the ex-owner’s estate and replacing income that was generated by the business.”
When to Hire An Accountant
There are several scenarios in which you will need a professional who can handle your small business accounting needs. Keep reading to learn when to hire an accountant:
When you’re forming your business
Advice on legal structure: If you are just starting your small business, then you’ll need to understand the six main types of small businesses. These structures relate to how taxes, ownership, finances and liabilities are handled. For instance, a sole proprietorship is by far the most common type of small business, with ownership falling to one person or married couple. Sole proprietors have greater flexibility and fewer tax responsibilities than other business entities, but they are held liable for all potential debts that the business may incur. As a result, they sometimes have trouble raising funds.
Another type of legal structure is the LLC which combines the concept of a corporation with the concept of a partnership. This hybrid structure means that the owners of the company are protected from liability to a certain point. In an LLC, owners are referred to as “members” (which can be one or more individuals, other corporations, or even other LLCs). It is one of the most flexible entity forms and is usually a good option for new businesses as the cost to maintain an LLC is very low.
As you are forming your business, the best choice isn’t always the most obvious. And this is where the expertise of an accountant can prove invaluable. He or she can advise you on the most appropriate legal structure that provides you with the most tax breaks and protects your assets.
Writing your business plan: Think of a business plan as a roadmap that helps you stay focused on where you want to go. The Small Business Administration says that a successful business plan will be clear about what you have to offer and will help you to identify your niche market. You can use this knowledge to plan how to grow your business and to project future figures and plans.
An accountant can assist with putting together this part of the business plan to ensure that your estimates are realistic and that calculations are accurate. This will give you a strong foundation for the future. In addition, a proper business plan is often required when applying for bank loans or leasing office space.
Setting up your accounting software: Having an accounting system that supports your needs is crucial to business growth. Without it, you can't scale. Instead of having a well-oiled machine, you'll be struggling with what the program can or can't do.
For example, At Ignite Spot, we love QuickBooks, which is widely considered to be the gold standard when it comes to accounting software. But we also recognize that it might not be the right fit for everyone. Sometimes it’s necessary to select industry-specific software that is tailored to the needs of the business.
After choosing the best software for your business and industry, your accountant can also set up your chart of accounts to ensure that you properly categorize transactions from the get go.
When you’re ready to delegate
As you’ve probably already learned, trying to DIY everything can be the death of your business. As an entrepreneur, it’s up to you to identify what you do best, then delegate or outsource the rest.
While you may be perfectly capable of managing your own books and making sure the bills are paid on time, an accountant can help take your business to the next level financially. They will help you identify areas for improvement to boost your bottom line and point out problem areas that may be costing you cash without you even realizing it.
Overall, by transferring back office small business accounting tasks like managing accounts receivables and payables to this role, you can focus on wowing your customers and growing your business.
When you want to have peace of mind
The prospect of being audited is stressful for any business, but especially small businesses. If the IRS comes knocking, the burden of proof falls on you as the small business owner to provide evidence of earnings and expenditures. But the good news is, you don’t have to go it alone.
Having a tax accountant in your corner to provide audit support will help ensure the process is resolved in the most efficient manner. Think of he or she as a trusted advisor working on your behalf in dealings with the IRS.
Your accountant can also help you to reduce the potential for an IRS audit in the future by ensuring that you follow the IRS guidelines for tax deductions. For example, at Ignite Spot, our team can work with you to find every deduction you are qualified to claim.
Which to Choose First? Accountant Vs. Financial Planner
Now that you have a good understanding of the differences between an accountant and a financial planner, what are your next steps? We recommend starting with an accountant over a financial planner because they provide key functions required to ensure your business runs smoothly.
Your accountant will ensure that you have accurate financial reports to inform better decision making. This includes building awareness of your cash position, profit and other lifelines, in addition to gaining a better understanding of the financial foundations of your business. Your accountant will also develop a tax strategy for your small business, prepare and file tax returns on your behalf, and provide audit support as needed.
Once you have these responsibilities taken care of, then you can look to hire a financial planner to drive your other objectives like investment goals, offering employee benefits and insurance planning.
How much does an accountant cost?
Many small businesses might think that hiring an accountant is out of reach. And it can be if you hire someone full-time. With an in-house accountant, you will be responsible for paying a salary and payroll taxes in addition to providing benefits such as health insurance. This adds up to tens of thousands of dollars per year.
However, more and more entrepreneurs are choosing virtual accounting services for their small business accounting needs instead of hiring in-house since they usually charge a fraction of the cost. For example, Ignite Spot is typically 60% more affordable than hiring in-house staff.
In addition, with Ignite Spot, you won’t have to worry about getting locked into a long-term contract. We offer a month-to-month service to meet your needs. This is especially useful as you look toward future business growth. You can scale up or down your virtual accounting service as your business needs change.
We also make the onboarding process as seamless as possible to ensure that you can get up and running in the shortest amount of time. For example, depending on the condition of your books, it could take as little as 2 weeks to set up your bookkeeping services online. During this setup phase, we will help you maintain your current accounting tasks as well.
Overall, by choosing virtual accounting services, you will have access to an entire team dedicated to making your success a priority. Ignite Spot offers a full-range of services to meet your needs including bookkeeping, financial reporting, tax advice and profit coaching. Contact us today to see how we can meet your small business accounting needs.