Insider Secrets for Starting a Successful Business

Starting a Bookkeeping and Tax Business

Allen Bostrom, CPA, president and CEO of Universal Accounting, reveals his advice about starting an accounting business. He talks about choosing the right tax preparation software, where to find the right accounting courses, becoming an Enrolled Agent, which professional organizations to join, and more. [21 min.]

Can you start off by giving us kind of an overview of the accounting business. What kind of services does a bookkeeper usually provide?

Well, Matt, this is a topic that I’m really passionate about, so I love talking about it, and I want to just mention that there’s a lot of misunderstandings out there about what accountants and bookkeepers provide, and what makes them separate. In other words, a lot of people just freely intermingle those two different titles, and so technically the difference is a bookkeeper does mainly the data entry work, the day-to-day recording of transactions, and then the accountant prepares and analyzes the financial statements. I’m a certified public accountant, and still, sometimes people refer to me as their bookkeeper. So there are a lot of misunderstandings as to what the definitions are. Certainly, a bookkeeper can do a lot more than just data entry. If they just know a little bit more about the software, they can prepare the financial statements. But once they get into the actual understanding, and explanation, actual consultation of the financial statements, they’re taking over the role of an accountant, which is perfectly all right.

Why is bookkeeping and tax preparation a good business to start?

Well, it can be started very inexpensively. There’s no degree necessary. People get to work out of their home if they prefer. You’re not tied to a specific work schedule, so if you want to work just a few hours and maybe maintain a full-time job, or you want to work between 8pm and 2am in the morning, because that’s when you find you are at your best and you just like working during those hours, you can do that. There’s just a lot of variety in what people do and where the start-up cost is so low, it makes it very attractive home-based business for a lot of people.

Allen, you’ve seen a lot of people start this type of business, and like any business, long-term success is more often than not directly related to how much time and effort you put into it. To the folks who really work at this kind of business, what kind of income potential is possible?

A lot depends upon what services a person wants to offer. If all you were doing is just offering data entry services, and maybe passing that on to somebody who knows how to pull together the financial statements and consult on the financial statements, you’re probably looking at $35-$40 an hour is what you’d charge. But if you include consulting on those financial statements, you have them comfortable enough that you can help businesses understand them and give them some ideas of what to do, or if you add taxes, and do tax returns, your income potential really increases substantially. Just to kind of give you an idea, Matt, the average client today pays about $400 per month. And it takes about 6-8 hours a month to do a client’s work. If you’re able to fill your schedule full, it’d probably be about 20 clients, then you’re probably looking at around $8,000 if you do both the data entry and the consultation. Taxes area a little bit different, because we usually charge based on the form, so it depends upon how many forms a person has, whether or not we’ll charge them $150 or $500 or whatever that fee is. But the potential income is much greater when you’re looking at an hourly charge. The problem is, it’s a very short window of opportunity. The tax business really runs from the beginning of February to April 15th, so during that time, you could make some very good income. We have one associate that made over $200,000 in just that very tight window. Now she didn’t sleep much, and she worked her tail end off to get it done, but once she had it done, she was able to enjoy the rest of the year. Now I would say that that’s not typical — most people are going to make good income during that time, but they’re not going to make that level of income, but it is a nice burst during those two and a half months which, we here in Utah, that two and a half months is pretty cold weather anyway, so we’re usually inside and it works out well for us.

How much does it cost to start an accounting business preparing taxes and providing general bookkeeping?

The equipment that you need today, most people already have. I mean, it’s a computer, it’s a printer, it’s Internet access, scanners becoming increasingly important to bookkeeping and tax businesses, so that’s really the core equipment. Then if you want to have a desk and so forth, there’s a cost there. A lot depends, too, upon whether you do it out of your home or you do it out of an office, because there’s a cost to rent an office whereas your home is pretty inexpensive rent, in most cases. Software for a bookkeeping business typically is going to run you under $200, and that might be for several years, or some people might choose to upgrade every year. The tax business, most people choose to start out on a pay-per-return basis. There’s about a dozen popular tax packages out there, and almost all of them offer pay-per-return, which means that you pay the software provider for each return that you do, and it usually runs around $20 a return. That way you don’t have to fork out $1,200 to buy the whole package, when maybe your client base isn’t large enough yet to support that kind of an investment, and you can just buy it as you need it.

What are some of the popular software packages out there that are used in bookkeeping and tax preparation. Can you name some?

ProSeries is probably one of the most popular professional packages. Now, a lot of people think when they’re going to start a tax business that they’ll go buy tax software off the shelf. One, the licensing agreement doesn’t permit you to charge for the tax returns you’re doing. Besides that, they just take longer. They’re usually built into an interview-type schedule, and that takes longer to go through than a lot of returns once you get into a system and a process of preparing them. So there are professional packages that you would buy online, and there are demos and so forth that you can purchase, and ProSeries is one of those. It’s put out by the same company that does TurboTax, called Intuit. There’s another company, Drake Software. TaxWise is another system that’s become increasingly popular. There’s one that’s called Saber, and we could go on, but I think probably the two or three most popular are the Intuit, Drake, and TaxWise. They run usually around $1,000 to $1,200.

Can you open a bookkeeping business right in your home, or do you need to find some sort of commercial space? Do you think it’s more important to have a commercial location if, for example, you’re providing tax preparation to businesses and individuals?

That’s a great question, Matt. Almost everybody that I’ve worked with has started out and picked up their first few clients just working from home. It just makes sense, because they’re already paying for their mortgage or their rent, it doesn’t cost any more to get started, and certainly there’s no specialized equipment, there’s no walk-in traffic. At some point in the growth, this will be a natural process, or a natural decision. At some point, they’ll decide I would rather do this away from home where I can lock up at night and I can go home and have my home life and my business life separate. When they get to that point, and its different for different people — they will choose to go rent a space. And as far as what type of space you choose depends upon the types of services you’re offering. In most cases, I recommend that you look at a professional office type space, it just works better. In most cases, you don’t have walk-in traffic. The one exception of that is that if you plan on offering tax preparation services to the general public, meaning if you’re going to go into competition with some of the large houses like H&R Block and Jackson Hewitt, their main focus is on walk-in traffic which is a lot of lower-income returns, and that doesn’t mean all of them will be, but it will be a lot of returns that are fairly simple, uncomplicated returns. They don’t pay as much as some of the larger, more professional, more sophisticated returns, but you can do a lot of them, and that’s what they’re looking for, is the quantity. And if that’s the case, you probably want to be where there’s a lot of foot traffic, and that might be in a retail type environment. But if you’re going to concentrate on business returns or professional returns, more sophisticated returns, then a business site is probably a better place to be. It just works out better and they usually have a better hookup system for you with the Internet.

What are some of the different ways people can learn the bookkeeping business? Do you have to take college classes, for example?

You know, college classes are a terrific way to learn it, but most universities and colleges — and I say most, I haven’t found one that’s different than what I’m going to suggest — so in my opinion, its all of them — there are probably exceptions out there — most business courses are really taught for the Fortune 500 business. You have people who have an accounting degree who’ve had five or six years of accounting in school, and they’ve never done a payroll. They’ve never set up a set of books from scratch. They’ve never worked with collections of accounts receivable or some of the daily processes that go on within the small business. In other words, they’re trained to work the more analytical side of business. Small businesses have recognized that they need more the day-to-day understanding and they need to have people who can come in and do that for them, roll up their sleeves and do the work, and that’s really where our training comes in. I’m a firm believer that all education is valuable. I very strongly believe that if you want to go work with medium and big companies in accounting, I recommend you get an accounting degree, because that’s what that training is suited for. If your interest isn’t working with small business, frankly, you’ll get done with that four or five year degree and sit down and wonder, could I really pick up a set of books? I call it the shoebox — can I pick up the shoebox from a small business and start from scratch and do the books, and you will find that the training was not suited for that, as far as the colleges go.

You hear the term Enrolled Agent a lot lately. When is it necessary to become an Enrolled Agent?

That’s a good question. It’s somewhat technical, but I’m going to try to make it simple. There are two professional licenses that are recognized in the US — there’s the CPA and then there is the EA, or Enrolled Agent. Now the EA is a license endorsed by the IRS specifically to give the EA the same ability to represent a client as a CPA has, which a CPA gets by their license. So it’s for those tax preparers who say, you know, I don’t want to be a CPA, I don’t want to do what CPAs do as far as the auditing and accounting for businesses, but I’m a very good tax preparer, so I would like to have the same right as the CPA to represent my client in front of the IRS — how can I do that? So years ago, the IRS created a test and a designation and license called the Enrolled Agent. So it’s specifically related to just tax preparation. The test is fairly rigorous, just like a CPA test is, but it’s only on taxes. When people say, should I become an EA, I typically suggest that they wait, that they do taxes, they start up, they get very proficient at taxes, and then there’s some EA test prep classes that they can take, sit for those, and then after 2-3 years of experience, usually the test is really within their reach. So I first recommend that they just start doing taxes. They don’t have to have that designation in order to do taxes, nor is it that beneficial as a lot of people think it is. It will certainly help you, you can go into the IRS and represent the client in front of the IRS, but in most cases, you want to have your client with you anyway, and then you’ll just go in as more of a consultant. So that’s the difference. Of course, the client can sign a power of attorney and give you the right to go in and be them in almost any event without the EA.

Allen, how do you find bookkeeping and tax preparation clients? What are some of the ways to market an accounting business that you’ve seen as being successful?

Most people start with their friends and neighbors. I don’t know of any bookkeepers whose first client wasn’t someone they knew. So it might be a business associate, someone that they’ve known before and they just happen to mention I’m doing accounting and bookkeeping, and just want to know if I can help you at all. My first five clients came from that group. And I think that’s most bookkeeper’s position. Now, when you want to grow beyond that, or if you want to speed that process up, because sometimes that’s a very passive way to advertise and market, but if you want to speed that up, there are a lot of other different resources like participating in your Chamber of Commerce is a terrific way, and networking through them, and developing relationships with your bank and looking for referrals from them. You can even put up a sign in front of your home if that’s permissible given your particular neighborhood. I’ve got one friend, and he’s got a sign on the side of his car, and he’s gotten business from it. There’s all sorts of public relations things you can do with newspaper, radio, that are relatively no cost and can really make the difference. Now that is one place, Matt, where that free newsletter, if you go to our website, comes in real handy, because every week it comes in with new strategies and tips and ideas on how to market your business. That’s really one of its focuses, is to help people market, because frankly, most accounting people, that’s the place they struggle. They’re great with numbers, they’re great with their ability to do the accounting, but when it comes to actually going out and getting the business, that’s what frightens them the most. That’s where the newsletter tries to focus on, giving them some ideas and thoughts, inexpensive ways to get the business going.

It seems like across so many industries, specialization is the buzzword that you hear a lot. Should you focus on just bookkeeping or just preparing taxes and try to maximize that business, or does it really make sense to offer both, and what other services should you offer for additional profit, maybe in the off-season?

That’s probably one of the more common questions I get, because we offer programs in both, so people ask me, where do we start? And a lot depends upon the season of the year and what you want to accomplish. But let me just give you some general guidelines for your listeners. First, I usually recommend that you start with the bookkeeping. Now the reason for that is because that is income all year round. And as far as your earnings, because you’re earning every month, that really adds up to a higher income for the full year. I mean, your average tax return is going to be about $300. Your average client that you bill for is $400 a month or almost $5,000 a year, so the potential is there, of making more money by starting at bookkeeping first. However, if we were just coming into the tax season and you have a very good foundation in taxes already, I might say, well, start with the tax stuff, because you only have two and a half months a year to work on that, let’s get started there, but if it were too late to really get your business going, I’d say start with the bookkeeping — get your clients, get the income coming in, in preparation for the next years’ tax season, start looking at preparing yourself to do taxes during that two and a half months. Bookkeeping first, taxes second.

What professional organizations do you recommend belonging to, and in addition to your newsletter, which sounds like a great resource, what other resources are available, such as web forums and accounting magazines, that sort of thing?

If one of your listeners is a CPA, they’re probably already a member, or should be a member, of the American Institute of CPAs, which is the AICPA — that’s the largest accounting organization in the world, but it mainly emphasizes those practices that a CPA performs, which is auditing and very sophisticated tax returns, its highly technical and so forth, so it wouldn’t be as valuable to a small business practitioner. For the small business practitioner, there are two organizations that are terrific to join. The National Society of Accountants, or NSA, has some terrific resources that you can access. It’s more designed for the small business accountant, similar to what our tools are and our programs are, they’re really designed to focus on the small business. And for taxes, there is a number of different organizations, but the one that I am closest to and that I appreciate the most is the National Association of Tax Professionals, or NATP. They probably have the largest following and largest organization. They have some terrific publications that you receive as a member, and they have tax support and help, so you have that type of organization backing you up. So the NSA and the NATP.

What are some of the biggest mistakes that people make when they’re getting started in the bookkeeping, accounting, tax preparation business?

Here’s the number one problem when people get started, and I don’t think that this is unique to just bookkeeping and accounting services. So many people saw somebody else do it, they see them excited and successful and they think, oh they can do it, I can do it, and so they might put an ad in the yellow pages, or put an ad in the newspaper, or they might just send out a quick flier, and then they just sit by their telephone and wait for calls. We have training in different types of marketing techniques. And not one of them says to do that, because we have found that doesn’t work. Accounting is a relationship business, in essence. Business owners do not look for their accountant by looking in the yellow pages. They don’t look for an accountant even by looking on the Internet. Most of the people we send the fliers out to don’t even know that they need an accountant, so what we have to do is go out and educate people and educate the public, and we do that through networking, we do that through getting to know people, and either hoping that they need our business, or that they know somebody that needs our business, and today, most small businesses — now, when I refer to small businesses, I’m saying businesses with 20 or fewer people — 92% of the businesses out there have 20 employees or fewer — so 92% of businesses, most do not have anyone doing their accounting. And they think that their accounting is being done by their tax preparer. But that’s not the tax preparer’s responsibility, and when they get the accounting all done, all they’re doing is looking at a tax return, and it isn’t built to help them make decisions better. So most people do not have accounting done, which is a tool they can use to run their business more effectively and more profitably. All it takes is some education and getting that word out.

Allen Bostrom, CPA, is the president and CEO of Universal Accounting in Salt Lake City, UT. Universal offers many products including accounting, bookkeeping, and tax preparation courses. Allen is also the author of several books including In the Black: Nine Principles to Make Your Business Profitable and Red to Black in 30 Days.