Bookkeeping and outsourced accounting for professional services firms
Bookkeeping for professional services firms is often more complex than owners realize.
You have to keep track of the deliverables you still owe. Not every dollar that comes through your bank account is profit, and not every dollar sitting there belongs to you.
There are often amounts sitting in the account that are owed somewhere else, and you need to know what those are before you assume that money is available to spend.
We do bookkeeping and outsourced accounting for professional services firms anywhere in the United States.
What I see most often
I often see trust accounting done wrong, billables improperly categorized, and compliance needs that have been neglected.
A dentist has day sheets. Essentially, they're something you reconcile daily that keeps track of insurance proceeds, patient billables, and supplier proceeds.
It reconciles all of those together so that, at the end of each day, you know how much of the money that came through your clinic belongs to you and how much belongs somewhere else.
These guys hadn't reconciled their day sheets in over a year. So when I first went in, they thought they had a lot more profit that belonged to them than was actually the case.
Money in your account isn't always money you can spend
That same dental office had about $500,000 in its bank account. Only about $100,000 of it was actually the business's money to operate with. The rest was owed to the state in taxes or to suppliers.
They thought they had half a million available. And I'm looking at it saying, no, you have about $100,000. That's more than enough. But don't treat the rest like money you can just spend. It isn't yours.
Client deposits and pass-through purchases
A design consultant we work with takes deposits from clients and then buys furniture and materials to be installed later. When a million dollars in deposits comes in during a month, the account looks like it has a ton of money.
It doesn't. Those deposits are there to buy the material for the clients. It's a pass-through purchase. Essentially, the client is paying my client to purchase specific furniture or other goods. That money does not belong to my client.
Say you get a deposit for $500,000. That's to cover the custom furniture you're ordering, the shipping, and your markup fee. The money that actually belongs to you is the markup fee. Everything else is prepaid.
It's like I gave you $100, and $80 of it needs to go to buy the stuff I'm buying, and you're making $20 on top of it.
When you don't track it, you get into this mode of thinking you can operate your business with other people's money. It's not a good practice at all.
Sales Tax
If you sell goods as well as services, you're charging sales tax. All of that money sits in your operating account, but it's not your money. You're holding it for the government.
I've seen clients get into a bind and take something like $30,000 in sales tax collected in a month and use it to run the business. Investing, making purchases. And I'm like, hey, that's the government's money. It's not yours. You're holding on to it for them.
Where the money sits and who it actually belongs to are different things. You need to account for both properly in order to keep clean books.
Selling more won't fix an unprofitable business
People usually start a business because they're good at something. They're a good contractor, a good carpenter, a good plumber, good at interior design, a good dentist. People don't often start these companies because they have a desire to do accounting and really figure it out.
On multiple occasions I've had clients who are good at sales and good at their craft, and they end up in a certain mindset. When you're good at something and you've been a salesperson before, you think: if I sell more, I'll make more.
When you become a business owner, that's not true at all.
We've had the conversation. They say, "Our numbers are down. We need to sell more." And I say, hey, pause. Put a pause on everything. Right now, every job you sell, you lose money. The more you sell, the more money you'll lose. So let's fix the accounting first, so we can make sure you're selling jobs that are profitable.
If you have an unprofitable line of business, selling more of it will not solve your issues. It will only make them worse.
Think of it like this: if you have a business line that runs at -5% net profit and you sell $100,000 of it, you'll lose $5,000 after all costs are accounted for.
Sometimes businesses think they need to sell more to pay their current obligations. That creates a death spiral that will ruin your business if it isn't corrected.
Most owners don't know which clients make them money
Most people have an idea in their mind of which clients are making them money. Often the truth is multiple percentage points off. I've frequently seen people say, "We're making 20% net profit," and I'm like, you're making -5%.
One owner had taken out a couple of loans and had a hard year. They told me, "I know we're going to lose $50,000 this year." I did the books and cleaned them up, and I said, hey, you're going to lose $200,000.
They basically said, "You're wrong. There's no way."
So I sat down with them and said, here are your bank statements. Here are your loans. Let's go over this together, because unless you have some other account I don't know about, this is what happened.
There was no more money. There was no more line of credit. If they didn't turn it around, they had about two months of runway before the company couldn't make payroll or pay for cost of goods.
It was a really hard conversation. But it was good, because they quickly realized, wait, I don't know what's going on, and I'm not able to keep on top of it, and that's why I have you. Since then, they've lost a lot less money.
Honestly, my experience is that people just usually don't know. Unless you're on top of it yourself, you're a systems-minded, analytical person, and you have really good bookkeeping, there's no way to know. I've not met a person who can do it by feel and be right on the money every time.
If you think you know based on vibes, you don't.
When your books are clean and the close is consistent, CFO and advisory is where we use those numbers to make decisions.
Unbilled work and late billing
Unbilled work is a huge one. Late billing too.
Here's how it happens. The sales rep does what they need to do. Compliance needs to happen and accounting needs to get to it, but the back end doesn't do what it needs to do. Then it's three days later, you've already done ten more consultations, and nobody remembers it. It just falls through the cracks.
Sometimes the customer never gets their first invoice, but they do get their final invoice. The first invoice was never made, so in the books it doesn't look like they owe anything.
I've seen five-figure invoices go unsent because the systems were dysfunctional.
Collections work the same way. If you don't have a good contract, if you don't tell clients up front how money is going to change hands, if you don't have a good collection process, if you don't have somebody reaching out once an invoice is two or three days past due, you're just not going to collect the money. A weekly AR aging review is a good place to start.
Many professional services firms also deal with some level of third-party compliance: insurance, a commercial client's AP department, a contract with its own paperwork. If you don't get it right and make it easy for them to pay you, you're not going to get paid. Then you're 30 days past due, then 60, and they're going to say it's your fault. You need a system that fixes that.
Your systems don't have to talk to each other perfectly
Systems usually don't talk to each other well. Your CRM, project management, time tracking and QuickBooks, and definitely your spreadsheets.
That's fine if you have a CRM that syncs well and somebody on the back end who knows QuickBooks. But it creates extra data entry for people.
Every good business I know has some spreadsheet where they're tracking profitability or job costing or whatever. That's awesome. You just need a way to pull data into that sheet that doesn't require you or an assistant to sit down for two, three, four hours at a time plugging in numbers. Having that automated is really nice if it's possible. If not, you want the simplest numbers and the simplest workflow possible.
When it doesn't talk nicely with the accounting software, that's fine. It is what it is. We just need to know how the connection works so we can clean up the data on the back end. If something gets pushed to QuickBooks and, for whatever reason, the taxable box doesn't get checked on one line item, we just need to know that, so I can build something that forces it into alignment.
I've done this for a ton of people, and the amount of admin work and friction it eliminates is incredible. That's what our Financial Systems work is.
Month-end for professional services firms
For professional services, reconciling the bank account alone usually isn't enough.
There are other components, like day sheets, insurance accounts, client deposits, trust or escrow accounts, job costing, and pass-through purchases, that need to be accounted for properly. Many owners we work with need help with these other aspects of their finances.
Depending on the business, that means questions like these:
- If you hold money in trust or escrow, does the escrow account balance properly, and is it reconciled the way it needs to be?
- If you work with insurance, are the individual insurance accounts reconciled and tying out?
- If you're a dentist, are the day sheets tying out? What patients have you seen, what insurance did they use, and are those insurance accounts updated, so that when we send the bill and collect the money there are no hiccups?
- If you take client deposits or make pass-through purchases, is it clear what's prepaid and what you've actually earned?
Our month-end close checklist for professional services firms walks through the order.
Which service do you actually need?
Simply put, it starts with one question: when's the last time you reconciled everything?
I want to pull every statement for every compliance requirement you have. The bank statements. The escrow statements. Every single thing. I'm going to make sure everything is cleaned up and ties out properly for whatever period we're starting with, usually that year.
It doesn't reconcile. Then I'm not going to tell you advisory is what you need. Some people are really confident in their accounting and just say, "I only want advisory." I'll do my best to help them. But if your books don't reconcile properly, advisory is not going to do anything for you. You're going to waste your money. So I need to clean it up first. That's bookkeeping cleanup.
It reconciles now, and it needs to stay that way. Same close, every month, on time. That's monthly bookkeeping.
The same problem keeps happening. If you're spending a ton of money and time on redundant data entry, or you're running into the same workflow problem every single month, I'm going to say, hey, let me look at your financial systems.
The machine works, and you're ready to use it. Advisory is like a cherry on top of a system that works well. If the machine is a well-oiled machine, it's like putting nitrous into the engine. It's going to help you go faster. If you're running into friction you don't need every single month, advisory will help, but it's just not going to be as great.
The people who get advisory from me love it the most when everything else is clean, regular, on time and on track. They know what the month is going to look like. It's the same close every month. The owner has to be in a position to not stress about the day-to-day stuff in order to actually digest advisory. I've done advisory for people who were busy putting out fires, and it doesn't help them as much.
You want to be in a position where you can say, okay, I think I can work on the business and make decisions with data, instead of constantly being involved in every little thing. That's CFO and advisory.
Who is a bad fit
Bad fits in this category are the same as in every other category.
If you don't want to give us access to your bank statements, your trust accounts, and everything else the work requires, we can't do it right. We're happy to sign the confidentiality agreements, NDAs, HIPAA-related agreements, or other forms that need to be signed. We do it all the time.
But if you're not willing to give us the access we need, or provide the documents we need in the time frame we need them, then you're a bad fit for us. That's really it.
We're also not a CPA firm or a law firm. If you need legal advice, an interpretation of trust rules, audit work, or tax representation, we'll point you to the right person.
Frequently asked questions
How should client deposits show up in the books?
My books are current. Why doesn't my bank balance match what I can actually spend?
Can you tell which clients or projects are actually making us money?
Do we need cleanup first?
Do we have to change software?
Can you work with my team or my CPA?
Do you work outside Washington?
Tell me when everything was last reconciled
Book a Fit Call. Bring whatever statements your money runs through: bank, escrow, insurance, day sheets. We'll figure out where your books actually stand and which service you need first. If we're not the right fit, I'll tell you and point you in the right direction.