There’s no question that the practice of accounting outsourcing has become much more common for small businesses in recent years. The only real question is why? Why are so many small companies outsourcing key financial services with such frequency these days?
In a way, the answer to this question is relatively simple. Small companies engage in accounting outsourcing more often today because they understand the advantages it brings. Once reserved for larger companies, the benefits of outsourced financial services are now available to smaller firms as well.
Unfortunately, things get a little more complicated after that. While it’s true that small companies are outsourcing accounting at historic rates, they sometimes get mixed results. Just like any other business trend, outsourcing financial services has its own set of pluses and minuses. We’ll have a look at both in the following sections. First, let’s look at some of the other reasons behind the outsourcing trend.
Why Do Small Businesses Outsource in the First Place?
There are many different reasons that a business chooses to outsource certain services. For each company, the reasons depend on their specific situation, but here are six of the most common:
- Reduce overall costs
- Sharpen business focus
- Access to the best talent from all over the world
- Increased efficiency by streamlining tasks and effective division of labor
- Capitalize on internal resources more effectively
- Overall improvement in consumer products and services
These are the most general reasons that businesses choose to outsource processes and services that are outside their core functions. Companies are outsourcing accounting services for similar reasons. This practice gives business owners access to an expert team of accountants. These accountants can perform the same functions as an in-house team would, but the cost of outsourcing is typically much lower.
Clearly, outsourcing has worked for many companies. The question is: will it work to serve your accounting needs? Just as with any important decision, answering this question starts with comparing the pros and cons of outsourced accounting.
The Advantages of Accounting Outsourcing
1. Increased cost-effectiveness. Typically, outsourced accounting comes at a lower price than hiring a team of full-time financial experts. Just as importantly, the best outsourced accountants are just as productive as an internal team. When outsourcing accounting, you don’t have to pay the secondary costs that come with hiring people directly. This includes things like paid time off, insurance, retirement benefits, and workers’ compensation.
Lastly, outsourced accounting distributes your company’s financial duties instead of putting them in the hands of one or two people. This reduces the possibility of compliance problems and more generalized accounting mistakes. All this comes in handy, especially for small businesses or startups.
2. Improved focus on core functions. You didn’t start your company to become an accountant. Nor do you have the time to monitor your daily transactions or write up financial statements. Your interests are best served when you and your staff focus on the products and services your business offers. Outsourced accounting gives you the opportunity to do just that.
3. Less risk of fraud. When one person is in charge of your accounting, you run a greater risk of embezzlement and other types of fraud. This risk is greatly reduced with outsourced accounting. Outsourcing your accounting means there are many sets of eyes on your financial situation. It’s much easier for a team of expert accountants to read the signs of fraudulent activity.
The Disadvantages of Outsourced Accounting
1. There can be hidden costs. Like with any service you purchase, simple tasks can become more complicated than they need to be. This can lead to unexpected and unnecessary costs. However, there are ways to counter this possibility in advance. Make sure you’re totally clear on the outsourced company’s fee structure. It also helps to revisit fees every month or so and make your expectations very clear.
2. Hands-off accounting means reduced control. When outsourcing accounting, you don’t have the same level of access to your finances as you would with an in-house team. Sure, you can contact the outside company for updates, but this is much more difficult than going downstairs and speaking with your accountant directly. Giving up this much control can cause great discomfort for the average business owner. To offset this, make your policies clear from the start of the relationship. Lastly, make open communication a part of these policies.
3. Distance makes for slow response time. In-house accountants will typically answer any questions you have immediately. This is often not the case with outsourced accounting firms. Even though you can contact your company’s account manager at any time, this doesn’t guarantee the rapid response that most business owners need. Research your chosen company’s communication policies before entering into an agreement with them.
Accounting outsourcing is a boon for many small companies. The benefits for your company depend on a maze of different factors. No one knows your company better than you do; it’s up to you to arm yourself with the knowledge you need to make the right decision.
About Ivan Popov
Ivan has been counting for the past eight years for small and medium sized businesses helping owners with tax planning, financial covenants, financing and tax optimization.
Email: [email protected]
License ID: MA-32053