May 12

May 12 How To Charge For Bookkeeping Services

A long time ago, I wrote about how to charge for bookkeeping services. It felt like it was time to revisit that topic.

One of the primary challenges I face is the "money talk". As an introvert, I struggle with discussing my rates. It's a silly hangup, but I always want to find a way to skip past my hourly rate or the total cost of my first invoice and get straight to the work. I think a lot of employees dislike asking for raises. The thing you forget when you go out on your own is you've now got several bosses. If you need to raise your rates, you're suddenly asking a dozen bosses for a raise.

How to charge for bookkeeping services.

This is different from your bookkeeping services pricing. There's no one answer to that question. Where you live, what type of bookkeeping services you offer, and what type of clients you work with affect that answer. A full-time bookkeeper in a major city providing advanced bookkeeping services means a different pricing structure than a part-time bookkeeper working in a small town for a local diner.

Instead, let's talk about the different ways to charge for bookkeeping services.

Charging an hourly rate.

This will be the way most bookkeepers get started. For context, here's my brief history. I got my first bookkeeping job as a teenager. My hourly rate was a sweet $4.00. To add insult to injury, I got paid $5.00/hour to clean the office over the weekend.

I'm going to let you in on a secret. Ok, it's not much of a secret if you're a bookkeeper. Most business owners don't want to pay you. They will appreciate the work you do, and some will even tell you so. There just seems to be a visceral objection to paying for things that don't directly improve sales. I've got many stories to illustrate my point, and some even involve family.

Instead, I'll just say this. If you let someone else set your rates, you will always be underpaid.

I think choosing an hourly rate is a good place to start, and it's also a good strategic choice for other situations later in your career. So, when should you choose hourly rate pricing over another option?

You have to use an hourly rate.

Obviously, if you're an employee working as an in-house bookkeeper, you can't offer value pricing. You're either going to be paid an hourly rate or a salary. While you're waiting for your chance to branch out and start your own small business, you can use this time to practice your negotiation skills. Making a strong case about why you deserve a raise will get you used to the process when it's time to raise your rates with your clients.

You don't know how long a bookkeeping project will take.

When you're just starting your bookkeeping practice, you may not know how long it will take you to complete regular tasks. This is also true if you start working with a new client in a new industry. Just because it takes you 10 hours per week with your construction client doesn't mean it will take that long with your restaurant client.

Even if you plan to charge a fixed rate eventually, it can be a good idea to bill by the hour for the first few months. The client may require additional services from you in order to set them up on a new system or clean up the mess left by the previous bookkeeper. I find cleanup projects always take longer than the client expects.

You want to set a premium on certain services.

Even if you switch to fixed fees or a value pricing structure for your main bookkeeping services, you may have additional services that command a premium.

Hourly rates are a double-edged sword. All bookkeepers provide a certain set of tasks, so it's hard to charge a premium for something other bookkeepers are also offering. You can quickly get into a race to the bottom.

On the other hand, there are times you can charge a much higher hourly rate.

You offer premium services (analytics, training, etc.) that other bookkeepers don't.
You want to discourage certain requests.
Extra tasks that were out of scope from the initial work agreement.
After-hours or last-minute emergency requests.

Thoughts on hourly pricing.

Pros:

Most clients are comfortable with this model.
It's easier for newcomers to figure out what to charge.
There's a simple way to steadily increase what you charge.

Cons:

There's no incentive to get more efficient. If you do your work faster, you have to charge less.
It's much easier for clients to simply price-match, which leads to a race to the bottom.
There's definitely a ceiling to how much people will pay as an hourly rate for basic bookkeeping services near me.

Opinion:

I like this method when getting started with a new client. It's hard to know how much time a job will take you until you're in it. Once I've spent some time in their books, I usually like to transition to the next method.

For another great article about billing for bookkeeping services by the hour, check out this post over at Fit Small Business.

Charging a fixed rate for your bookkeeping services.

This is a broad category and can be achieved in a few different ways.

A fixed monthly rate based on time.

When you decide to switch away from your average hourly rates to a flat monthly fee, your instinct is to still base it on your time. You discover that it takes around 40 hours per month to complete your monthly bookkeeping tasks. Then you multiply 40 by your old hourly rate of $40, and you decide to charge a flat $1,600/month.

Pros:

You have a consistent amount of revenue coming in each month.
You are incentivized to improve your efficiency. If you can get the work done in 25 hours, you've effectively increased your hourly rate to $64/hour.

Cons:

You are capped at $1,600 until you renegotiate the monthly rate.
If you underestimated the workload and it's taking you 50 hours most months, you have decreased your hourly rate.

Another spin on this model is the retainer. The typical way this works is you charge the client a minimum monthly fee that guarantees them a certain number of hours of your services. You charge this amount whether they use the hours or not. Lawyers more often use this, but bookkeepers and accountants can use this method too.

There are two additional benefits if this method will work in your situation.

You get paid the same amount even when they don't use up all of your allotted time.
You would charge an hourly rate if you go over that allotted amount, so you're no longer capped at your fixed monthly fee.

I don't think this is as viable for someone doing a regular set of recurring services each month. However, if you provide less recurring services such as consulting, analysis, and accounting software support, this could be an option for you.

Value pricing structure.

While this isn't a new concept, the term value pricing has been more popular lately with bookkeeping and accounting professionals.

Instead of setting an hourly rate, or an equivalent recurring charge, you set your prices based on the value they will provide. Not only does that mean your prices could vary depending on the services you're providing, they could also vary from client to client.

You can do this in one of two ways. You can discuss your prices in advance based on the work you've been asked to do. Or, you can determine your prices after the work is done.

I read a good post on this over at Sage's website. Here's an excerpt that illustrates my point.

For example, calling the tax office to negotiate lower penalties on tax arrears may only take 15 minutes of your time, but could save your client thousands of dollars.

This is where value pricing really shines. Not all hours are created equal. The hour I spend reconciling your bank account does not provide the same value as the hour I spend analyzing historical data to find out that you'd save thousands by hiring an employee instead of contracting out the work. As the business owner, you'd be willing to pay more for those insights too.

Pros:

You're getting paid what you're worth, not just based on how many hours it takes you to complete a task.
You're able to focus on the value you're providing rather than making sure you log enough time to pay the bills.
Raising your "rates" is easier since the prices are based on the value you deliver.

Cons:

It's going to take time and practice to get the pricing just right. You may undercharge and hurt yourself or quote too high and lose a potential client.
In the beginning, it will be a more difficult conversation to have with potential clients.

Opinion:

Once you put together a good system, including a pricing list and some standard bundles, this is a great way to bill for your services. I'm no expert here, so let me share a few books. These are written by experts in value pricing, and can help you it all out.

Implementing Value Pricing: A Radical Business Model for Professional Firms by Ron Baker

Value Pricing for Accounting Professionals: A Complete Guide for Accountants and Bookkeepers to Find the Right Clients and Increase Profitability by Mark Wickersham

Bundling your bookkeeping services.

A big tip, if you're going to any type of non-hourly billing, is to work out a price list for your services. This can be something you share or even display on your website, but it doesn't have to be. The important part is to figure out what services you provide and how much you want to charge for them.

Start with a bookkeeping service price list (which is a great excuse to build another spreadsheet) and write out all of the services you provide.

Bank reconciliations
Accounts receivable
Accounts payable
Client invoicing
Cash flow management
Financial statements
etc.

Next to them, figure out a price to complete each task. For recurring tasks, set a monthly rate. For one-off tasks like "QuickBooks setup" or "Create annual budget", set a price to complete that task.

Now that you have your list, create a few bundles. Basically, a handful of common tasks that you might encounter on a regular basis. I think 3 or 4 is the ideal number. It's the "good, better, best", or "bronze, silver, gold" approach.

You don't need a bundle for every scenario. They are just a good way to compare common services. Here's an example.

Bronze Package - $500/month - includes:

Reconcile 2 bank accounts
AR and AP tracking
Basic financial reports
Payroll for up to 2 employees

I like the simplicity. If you post them on your site, a potential client can choose your services like they’d choose a combo at a drive-thru. For another great article about using pricing bundles, check out this post over at FinePoints Bookkeeping.

There are some issues with this example.

Do you limit the number of transactions? I have clients who have 10 transactions running through their account each month and others who can have more than 300 transactions each month. That's a big change in workload.
Do you set transaction limits in your tiers?
How do you charge for overages?
What if those 10 transactions require 5 phone calls to get clarifications from your client?
Do you charge extra for the back and forth?

It's a good idea to plan for these scenarios now. Add footnotes to the bundles to mention limits and overage rates.

Final thoughts.

There isn't one good answer. Any of these options might be perfect for you right now, and the best option will change throughout your bookkeeping career. Here are some final tips.

Get in the habit of tracking your time. You can use apps like RescueTime or Timing that track this in the background. It's good to know how much time you’re spending on all of your daily tasks. The more you know, the better you can estimate future projects.

If you're just getting started in bookkeeping, consider charging by the hour for at least the first month for new long-term clients. You can’t know how complex a project will be until you get started. Most business owners don’t know how long they spend doing their own books, so the estimates they give you are rarely accurate. Plus, the work they’re doing might not be the same as the work you need to do. Get to know their system and then (optionally) quote them a fixed rate going forward.
If you're charging a flat monthly rate, base your rate on the full year. Don’t forget about the extra work you’ll be doing during busier seasons. For bookkeepers, don’t forget about year-end, quarterly reports, and tax filings throughout the year. Add up the hours you think you’ll work in a full year, and then split that up over 12 months.
Be very clear about what work is included in your rate. If you are presented with work that will be outside of the scope of your regular fees, be upfront about potential overages and get the client's approval before proceeding.
Give yourself a bit of breathing room with your rate. If you set your prices too low, you won’t have time for small surprises that will (and they will) come up.

As you might have figured out from the sheer volume of this post, it’s a topic I spend a lot of time thinking about. Based on my research with fellow bookkeepers, there isn’t one (or two, or three) answers either.

What about you? If you are a bookkeeper or anyone who charges for their time, how do you do it? I’d love to hear your opinions. What’s worked, what hasn’t, and what does your ideal system look like?