OUTSOURCED BOOKKEEPING

Is It Really Necessary to Outsource?

Despite the well-documented benefits of outsourcing, it’s natural to be wary of strategies that ask you to give up control of your critical business functions. Those type-A Business owners who need to have a hand in every single one of their business operations may even question whether outsourcing is really necessary. Why trust someone else when we can do it ourselves?

• Do I really need to outsource?

  You might be surprised to hear this, but we’ll tell it to you straight. Outsourcing isn’t necessary. Not really. Most business owners are perfectly capable of finding ways to do their own books, as they did for hundreds of years before outsourcing entered the mainstream.

  But let’s be clear: Outsourcing is unnecessary in the same way that technologies like Optical Character Recognition (OCR) are unnecessary. Can a CPA manually record each client’s receipts, documents, and files into Word? Of course. Would any self-respecting CPA choose to do this process by hand when a time-saving technology like OCR exists? No way

  Such as it is with business owners and outsourced bookkeeping — a strategy that was once considered a luxury but is fast becoming an essential business function. 

• The opportunity cost of outsourcing

  The question of whether outsourcing is right for your particular business comes down to your circumstances:

  • What capabilities do you have, and what do you hope to gain?

  • Is your company sustainable in its current form? Or is your team working nights and weekends trying to stay afloat?

  • How much financial flexibility do you have for new solutions?

  • What’s the risk of hiring an outsourced provider — and what are the risks of not bringing one on board?

  All of these questions boil down to the opportunity cost of outsourcing. What are you getting for what you’re giving? If you’re neglecting revenue-generating tasks in favor of accounting, then outsourcing is certainly necessary to maximize your business’s growth.

  For example, if you’re a struggling small business owner who’s growing the business by day and doing the books by night, then outsourcing is absolutely necessary — for your business and for your sanity! 

  But even if you have an in-house team doing your books for you, you should consider how a well-selected MSP could expand your capabilities. Outsourcing lets you tap into a sustainable and scalable accounting operation for less than the cost of a basic in-house team of bookkeepers. The question of what’s “necessary” for your business is abstract. The value of outsourcing is real.

Pros and Cons of Outsourced Bookkeeping

A survey by the National Small Business Association found that 38 percent of small businesses spend over 80 hours per year on federal taxes alone. 80 hours! That’s two full work weeks of time needed just to process your business’s annual taxes, never mind financial reporting, account reconciliation, payroll processing, and every other task that bookkeepers handle.

For struggling small business owners trying to balance their own bookkeeping with business growth, this time investment is completely untenable. In situations like these, outsourced bookkeeping comes to the rescue.

Pros of Outsourced Bookkeeping

Bookkeeping is the perfect task to outsource: It’s time-consuming, specialized, and when handled poorly, a serious liability for a small business. Let’s review the biggest benefits of outsourcing this task.

• Save time

  The primary benefit of outsourcing is time. This is obvious is you’re still doing your books on your own, but even when compared to in-house teams, outsourced experts offer a level of convenience second to none. As MSPs, outsourced bookkeepers have experience working with different systems and aligning their team’s skills with the needs of each client. As such, they’ll provide guidance on what you’ll need to provide to guarantee quick and seamless financial services. 

• Minimize risk

  Outsourcing minimizes risk for small business owners. The expertise of MSPs typically far outweighs that of in-house teams, meaning that businesses will reduce their liability and the ever-looming threat of audits.

  And if that’s not enough, consider this: Outsourced service providers are contractually obligated to perform up to a certain standard. If they don’t, their business suffers as much as yours. With this partnership in mind, business owners can trust that their accounting MSP will perform at the highest level every time.

• Reduce costs

  Small businesses with limited capital might shy away from the up-front costs of outsourcing, but in fact, outsourcing is often the cheaper option. Obviously, business owners will save on staffing expenses (payroll, insurance, taxes, and such), but they’ll also benefit from the flexible payment models that many MSPs offer. Many outsourced providers offer pay-as-you-go plans wherein businesses only pay for the services they use, while others offer with comprehensive plans that offer unlimited support for a flat monthly fee.

• Scalability

  The problem with in-house accounting is that its costs skyrocket as your business grows. It’s difficult to find the perfect balance between staffing and demand; businesses almost always end up either paying more than they need to for excess labor, or paying less to keep staff low, leaving employees overworked.

  Outsourced accounting lets businesses customize their service plans to meet the exact needs of the business at that point in its lifecycle. There’s no worry of overstaffing or understaffing during periods of transition — the available pool of talent will always be ready and waiting.

• Gain a valuable partnership

  Outsourced accountants are more than just a way to hand off your books — they can be valuable partners for your business. Quality MSPs don’t just do what’s asked of them, they offer proactive support and identify potential problems before they arise. As they prepare your financial statements, budgets, and forecasts, they can raise red flags that could be problematic in the future. And while any in-house bookkeeper could offer this type of guidance, outsourced accounting services don’t involve just one or two individuals — they comprise a full team of accounting experts who provide multiple sets of eyes for every report.

Cons of Outsourced Bookkeeping

Outsourced bookkeeping does come with a few drawbacks that business owners should be aware of.

• Less control

  By its nature, outsourcing means handing control to someone else. This can be a tough pill to swallow for entrepreneurs who have slaved to bring their business to life. It takes trust to give such an important business function to a third-party, and business owners who need to have a hand in every operation may struggle with the thought of losing this agency.

• Onboarding time

  While it doesn’t compare to the extensive recruiting and onboarding process inherent to hiring in-house teams, outsourced bookkeepers will need to be onboarded in an organization before work can begin. It’ll take some time for the MSP to understand the policies, procedures, and workflows you’ve established in your company. 

• Availability

  A common complaint with outsourcing is that staff won’t be available when they’re needed. While this can be a concern, it’s a drawback that’s easily mitigated through communication early in the partnership. The expectations and responsibilities of both parties should be clear, including when services will be available, who will manage each account, and fallback options in times of emergency.

• Distance

  A common complaint with outsourcing is that Alongside concerns of availability are concerns of distance — it’s quite a bit different to have your accountants work in another state rather than the second floor of your office. This complaint ties back in to availability and trust; while it’s true that business owners won’t have in-house teams of bookkeepers to fall back on, effective communication with the MSP can guarantee they’re never needed.

The Cost of Not Outsourcing is Higher Than Overhead Expenses

Today, smart business leaders lean towards outsourcing important administrative tasks in order to focus on what the business does best — provide a quality product or service to the consumer. Outsourcing business practices to reliable third-parties has become such an effective and popular practice that in 2017 the global outsourcing market amounted to almost $89 billion.

One critical-yet-complex administrative task that tops the list of those most outsourced is accounting and bookkeeping, and for good reason. The cost of not outsourcing your business’s bookkeeping is higher than just increased overhead and in-house expenses. Here’s why outsourcing accounting is less taxing on your sanity and your bottom line.

• It’s not always easy to justify in-house accounting expenses

  One of the benefits of outsourcing finance and accounting is increased business efficiency and a reliable, consistent monthly financial commitment. Many third-party accounting options and platforms offer package deals to help meet and exceed your bookkeeping needs, and it’s up to you to determine which price point and service options are best for business. Streamlining everyday operations by trusting your bookkeeping intricacies to a professional firm, or better yet an automated accounting platform, frees up valuable in-house resources you can invest elsewhere.

  On the flipside, dedicating time and money to in-house accounting can be impractical and inefficient depending on the size of your business and the natural fluctuation within the industry. In-house bookkeeping might be cost effective when business is booming and your accounting department is always busy, but justifying the full-time expense is harder when things slow down during the year and bookkeeping tasks begin to thin out. It’s wise to understand and plan for your company’s accounting needs both now and in the future. Is the “full-package” investment for in-house finance management necessary, or is it smarter to outsource essential bookkeeping responsibilities?

• You get what you pay for

  Both efficient small business bookkeeping and intricate, accurate big business accounting rely on the expertise and experience of qualified professionals, whether those professionals are in-house or outsourced. That said, entrepreneurs and small businesses that outsource their accounting often find that they weren’t doing nearly as well on their own as they thought.

  In order to establish and maintain a well-run company, your goal should be to simplify and standardize finance and accounting processes wherever possible. But remember, you get what you pay for. Taking shortcuts, investing in untested and ill-advised in-house solutions, or paying for inexperienced third-party accounting services can cause more stress and financial loss than you’re willing to risk as your business grows. Do your research, find a reliable partner at a reasonable price with whom you can trust your outsourced bookkeeping, and sleep easier knowing your numbers are in good hands.

Beyond the Books: The Benefits for SaaS Companies

SaaS companies face a unique set of challenges when compared to the average business. Unlike business models that allow accountants to recognize revenue as soon as a sale is made, SaaS arrangements typically involve recognizing revenue over contracted time periods. These determinations expose SaaS companies to numerous clerical and compliance risks, although as we’ll discuss, these risks can be eliminated through outsourced accounting services.

• Revenue recognition

  The primary benefit of outsourced accounting for SaaS companies is in revenue recognition compliance.

  As we touched on above, revenue recognition involves conditions and timetables for when an organization can record (or “recognize”) its revenue. It’s a simple enough concept on the surface, but as anyone in a SaaS enterprise can attest, it can be one of the most challenging aspects of SaaS accounting. 

  Revenue recognition rules vary depending on what services are being offered, the subscription terms of each contract, individual mandates in Service Level Agreements (SLAs), and more. To further complicate things, the Financial Accounting Standards Board (FASB) frequently updates its revenue recognition policies that require companies to produce more accurate and honest financial reports.

  To accommodate these challenges, outsourced SaaS accounting begins with a thorough review of each company’s business model and the current revenue recognition standards. This is an essential first step towards actuarial health, even for business owners who believe they don’t need it.

  According to research by the accounting experts at Bloomberg BNA, in 2013, U.S businesses received nearly $7 billion in IRS civil penalties due to inaccurate revenue recognition reporting. Outsourced bookkeeping services can guarantee that your business isn’t among these groups in future reports!

• Revenue analysis

  To further illustrate these benefits, let’s examine one of the most important financial metrics for SaaS companies: Monthly recurring revenue (MRR).

  MRR involves how much revenue a company takes in from month-to-month based on the total value of the company’s active contracts. It’s a basic SaaS metric that all companies monitor, but the catch is that there are multiple ways to interpret the information.

  MRR can be calculated per individual customer, by subscription type, by account, and more. Businesses also have to account for the details of each MRR determination, including how much of the income is new, how much revenue comes from expansion services, and how much revenue is lost from churn. Each of these determinations offers a different perspective on financial performance. 

  And while SaaS companies with in-house accounting teams are certainly capable of running these numbers, it takes a trained eye to analyze the data and factor each metric into the company’s overall performance. This is where outsourced accountants come in. Third-party bookkeepers won’t just run the metrics; they’ll apply the data to your organization and use the data as a foundation for strategy. This type of financial guidance is helpful for any organization, but is absolutely crucial for SaaS companies with varied and complicated revenue streams.

• Customized financial planning

  But beyond the metrics, outsourced accounting is the perfect way for SaaS companies to mitigate their reporting risk and guarantee that their books accurately represent the company’s financial profile. To accomplish this, MSPs analyze every aspect of the company’s business model to answer several key questions:

  • Do sufficient software elements exist to qualify the arrangement as a service contract?

  • Can the customer take possession of the software without significant penalty?

  • Are initial set-up fees considered a non-refundable deliverable?

  • Are there multiple elements in the service arrangement that further complicated revenue recognition from month-to-month?

  All of these questions influence how a SaaS company records its profits and thus, how the company is perceived by the public as a whole. This is a significant factor for companies that may eventually seek outside investment or their own IPO, as potential shareholders will need to be sure their investment has a spotless history of record-keeping before signing on.

  But even SaaS companies without these long-term goals need to take agency over their accounts. As noted above, revenue recognition errors cost companies millions each year, and the increased complexity of SaaS revenue recognition puts SaaS companies in even greater danger.

  To mitigate this risk and ensure efficient, accurate bookkeeping, business owners should consider whether they’re capable of handling their books on their own — or if a team of outsourced experts might be a better fit

Reporting and Analytics: The Financial Side

Software as a service companies that provide outsourced accounting and bookkeeping solutions instill trust in customers with both the up-front marketing pitch and the after-the-action analytics and reporting. The promise of efficient finance management by experienced professionals draws you in, but it’s the precision and presentation of the bookkeeping data that makes you stay with an outsourced accounting provider.

• The devil is always in the real-time details

  Whether you’re looking for information related to categorizing expenses, paying bills, invoicing customers, accruing revenue and expenses, reconciling accounts, or entering data into your own accounting software, the right automated bookkeeping platform can drastically influence on-the-job efficiency and out-of-office finance management. It’s the devil in the details that tells you just how well your business is doing in real-time and where you can focus to make effective improvements. That’s why it’s important to be able to trust your bookkeeping reporting and analytics, especially if you’ve chosen to outsource or automate.

  At minimum, accounting analytics data and outsourced software should:

  • Provide synchronized reporting

  • Act as an information hub

  • Contribute to improved productivity

  • Enable faster, higher quality decision support

  A Reliable accounting software and services, either provided by or managed by an outsourced third-party, should offer a multi-faceted analytics dashboard through which you can customize real-time reporting and filter for desired data points or trackable benchmarks. Make sure you know what kind of detailed reporting will be available before you trust your numbers to an outsourced provider.

• Financial statement analysis musts

  Many finance outsourcing businesses will pre-determine reporting criteria and areas of interest as part of their package offering, but it’s also important to establish your own techniques for financial statement analysis. Being able to interpret the reports presented to you is well and good, but having the foresight to learn how to set goals and track progress is necessary for continued success.

  Here are three financial statement analysis techniques worth learning more about in order to better optimize important reporting and analytics information.

  Trend Analysis: One of the simplest methods used to analyze financial statements, but also one of the most revealing if done thoroughly, trend analysis compiles data on a horizontal axis to compare and measure success over time. How do the numbers add up today compared to yesterday, last week, last quarter, or last year? Pay attention to spikes and dips and analyze how and why different data points influence revenue over a set period of time. Complete the circle by creating future goals informed by expected trends, and use the available data to visualize growth in real-time.

  Benchmarking: Comparing your financial health to businesses within the industry is a financial statement analysis technique called benchmarking. Assessing your financial health as it compares to other companies can help you determine if you’re on track with expected industry growth and where you can improve to catch up. Important data points to consider are what you’re measuring, how the units will be classified, what information should and shouldn’t be included, and how comparison calculations will be made.

  Ratio Analysis: Measuring financial performance in one area of your business against another (income statements against balance sheets, for example) provides insight into how efficiently your assets are utilized. Ratio analysis is a slightly more complex financial statement analysis technique, but mastering its intricacies can prove invaluable when presented with outsourced bookkeeping reports and intricate analytical data. There are plenty of ratios worth investigating — growth rate, liquidity, sales revenue, etc. — and it’s up to you and your outsourced accounting provider to determine which figures are most important.

• The future of financial reporting is automation

  A need to prioritize big-picture business strategies outweighs spending finite in-house resources on high-volume, low-value-added tasks as your company continues to grow and diversify. Given the scope of technological influence on the financial services industry at any given time, it’s easy to understand why the evolution of crucial-yet-time-consuming finance management tasks is automation. Fortunately, innovators within the outsourced accounting industry are finding ways to automate these types of tasks in order to address common outsourced bookkeeping challenges like comprehensive real-time reporting and analytics.

Addressing Challenges to Outsourced Bookkeeping

Outsourced bookkeeping and accounting probably sounds like the goose that laid the golden egg. Less in-house stress and overhead resource drain, improved efficiency, and accurate reporting provided by experienced professionals. Win-win, right? 

While it’s true that outsourcing your accounting and financial tasks to a responsible third-party can considerably influence the way you do business, there are challenges companies face when first setting sail on outsourced waters. Here are five common outsourcing challenges and how to overcome them.

• 1. Selecting the right partner

  The most beneficial outsourced partner, platform, or service is the one that meets and exceeds your needs on a regular basis. That means accuracy, dependability, and an ongoing commitment to mutual success. Unfortunately, you can’t tell an outsourced bookkeeper is going to be the perfect fit simply by looking at the label on the box. Finding the right outsourcing partner takes time.

  Solution:
  Do your research. Too many businesses jump into outsourced relationships after a quick online search or because the price sounded like a steal at the time. You can’t understand what an outsourced accounting service can offer your company without conducting thorough research and speaking to representatives about your subjective needs.

• 2. Security

  Trusting your bookkeeping to an outside source comes pre-packaged with an expectation of complete data security, and rightly so. Company accounting can be the most closely guarded and reluctantly shared information, so trust between business and outsourced accounting service is essential.

  Solution:
  Ask the important questions. What kind of physical (on-site) and digital (online) security is in place? How about encryption methods for login portals? File storage and cleanup once they’re done with your data? And lastly, what protocol and policies are in place in the event of a data breach?

• 3. Training and supervision

  While outsourced accounting takes the majority of bookkeeping busy work out-of-house, training and supervision still plays an important role in facilitating a healthy working relationship. It may take time to acquaint a new outsourced partner with the way you do business as well as the expectations you have in regard to accounting and reporting. Additionally, it’s hard to let go of your books without wanting to always peek over the shoulder of your accountant.

  Solution:
  Trust the experts, and don’t micromanage. Outsourced accounting servicers worked their way to the top of the competition ladder by being the best at what they do and knowing how best to adapt their offerings to your expectations. Tamp down the urge to micromanage, and instead get acquainted with the software, dashboards, and representatives that will help shape your accounting landscape.

• 4. Miscommunication

  In “The Cost of Poor Communication” for The Holmes Report in 2011, David Grossman laid bare a few shocking results that stemmed from poor communication in the workplace. Four hundred companies with more than 100,000 employees were surveyed. The average cost per year due to miscommunication (“including actions or errors of omission by employees who have misunderstood or were misinformed about company policies, business processes, job function or a combination of the three”) was $62 million, or $37 billion in total for the companies surveyed. It’s safe to say miscommunication has a substantial dollar value attached to it these days

  Solution:
  Schedule dedicated, focused time for requesting and reviewing bookkeeping information and provide specific, detailed feedback. Your time is your money, so spend it wisely. Keep the line of communication open and goal-oriented.

• 5. Requirements versus package options

  One perceived benefit of hiring an in-house accountant is always having a bookkeeper at your beck and call so that any numbers problem or opportunity can be explained and addressed immediately. Outsourced accounting servicers, on the other hand, often offer package deals that bundle together different services available and the attached price points. Because of this, businesses are quick to assume outsourcing accounting means losing options.

  Solution:
  Remember, communication is crucial. Be upfront about your needs and concerns. You’ll be surprised how willing and open to customized accounting plans, digital platforms, and even automated bookkeeping options most outsourced providers will be when they know how best they can help out

A Perfect Match: Deciding on an Outsourced Bookkeeper

Of course, all the benefits of outsourced bookkeeping are locked behind one decision: The MSP you choose.

Every outsourced bookkeeper will rattle off the benefits of third-party accounting services, but how can you be sure they know their stuff? And what type of working relationship will you have when you partner with them? 

Let’s review some of the key considerations that business owners should keep in mind before choosing an outsourced bookkeeper.

• Start with experience

  Experience is one of the most important factors to check for before making your decision. There’s no standardized accreditation for outsourced bookkeeping services; just about anyone with a calculator can offer the service. Because of this, you need to make sure your outsourced team is prepared to handle the tasks your business will throw at them:

  • Does the team include CPAs and other certified accounting experts?

  • How long have they been in operation?

  • Can they provide financial guidance and strategy in addition to their bookkeeping services?

  • Will your account be handled by a single individual or a team?

  Keep each of these questions in mind as you review candidates. Your goal is to find a provider whose experience and cost matches the needs and budget of your business. 

• Move into reliability

  If there’s one aspect just as important as experience, it’s reliability. Can the outsourced team provide consistent, reliable reports as they’re needed? Do they communicate efficiently? Or does the way they operate give you pause?

  Reliability boils down to trust. You should feel comfortable handing off your books to your MSP. Of course, this can be tricky to learn ahead of time; if possible, research previous clients on the provider’s social media page and learn about the MSP’s history of service. You’ll learn a lot about what to expect in your upcoming partnership.

• Guarantee security

  Given that the MSP will be handling your sensitive financial data, security is a must. Don’t take their word for it, either — every MSP out there claims to maintain the highest standards of security. If you really want to understand the risks, you need to get the details.

  • Is the organization ISO 27001 compliant?

  • How many users will have access to your business’s data?

  • What type of security tech investments has the MSP made to protect user data?

  • Is there a contingency plan in place for emergencies?

  A reputable MSP should be happy to share these details with you. If your MSP isn’t open about security, look elsewhere.

• Check out their tools

  Depending on the size and needs of your organization, the MSP’s software and available tools can be an important factor.

  Is the provider familiar with common accounting software platforms, such as QuickBooks Online? Do they have standardized ways for tracking and reporting billable time? Can they leverage their technology to identify opportunities for cost-saving improvements to your current bookkeeping system, such as account processing automation? While most small businesses won’t need extensive functionality, make sure your MSP has tools and training to do the job.

• Consider the cost

  Naturally, cost is another factor to consider, but there’s a reason it’s so low on our list.  Despite what bottom-line focused executives think, cost is one of the less important factors in your decision. This is because there is no correlation between the cost of an MSP’s service and the actual quality of the service. A high price tag offers no guarantee of a sustainable or effective working relationship. What’s more important to focus on is the other factors listed above — performing your own assessments of the provider’s performance will give you a much better idea of outsourcing success than the cost alone.