Outsourced accounting is getting a lot of buzz these days.
In fact, it’s one of the fastest growing services in the accounting industry. If you want to know why, here’s a quick explanation of what it is, how it works, and who it is — and isn’t — a good fit for.
What is outsourced accounting?
In a nutshell, outsourced accounting is a complete monthly accounting service for businesses that don’t want to handle all their own accounting functions in-house. In other words, it’s a package of accounting services — typically including things like bookkeeping, payroll, financial reporting, and tax services — that’s designed to replace the work traditionally done by employees or staff.
How outsourced accounting works
On a practical level, outsourced accounting has two main ingredients: 1) a cloud-based accounting system (such as QuickBooks Online, Xero, or FreshBooks); and 2) an outside accountant or firm that logs in on a regular basis, completes your accounting work online, and manages the overall system.
If you already have a cloud accounting system in place, congratulations — you’re half way there. If you don’t, you’ll need to weigh the pros and cons of switching because a cloud-based system is essentially required for the type of full-service outsourced accounting we’re talking about here.
If you decide to explore outsourcing, you should look for an accountant who is proficient on the system you’re using (or the one you want to use), and experienced enough to help you choose the right combination of services for your business. In our opinion, there are no one-size-fits-all solutions — every business has slightly different accounting needs, even if they’re in the exact same industry. Support is generally included with outsourced accounting arrangements, and the service is usually provided for an agreed-upon monthly price.
who outsourced accounting is — and isn’t — a good fit for
Just because outsourced accounting is now possible for small businesses (thanks primarily to the cloud), that doesn’t mean it’s the right strategy for every situation. For example, if you have enough day-to-day work to keep a full-time employee busy, or complex workflows that would be difficult for an outside accountant to understand, or you’re not comfortable collaborating online, then outsourcing isn’t going to be a good fit for you.
However, if you have a business with the right characteristics, outsourcing might be a great option. In our opinion, the ideal scenarios for outsourced accounting include the following:
Businesses that need reliable accounting on a part-time basis.
Businesses with relatively straightforward accounting needs — no fancy systems or complex transactions.
Businesses that need multiple services (more than just bookkeeping) but don’t want to hire an employee or build their own accounting department.
Businesses that need a higher level of expertise — like Controller or CFO services — on a fractional basis.
Businesses that are willing and able to pay for a monthly accounting services.
the 80:20 formula
In our experience, there’s no such thing as “100% outsourced accounting.” That’s an unrealistic picture because, in reality, most businesses need to handle certain front-end accounting functions themselves — including things like billing customers, processing payments, paying vendors, and purchasing from suppliers.
However, those types of tasks tend to be non-technical in nature and can usually be done by non-accounting staff or business owners themselves. After all, you don’t need an accounting degree to enter sales orders or purchase more organic peanuts and honey for your peanut-butter-making machines.
Instead, the real goal with outsourcing is to shoot for an 80:20 split. In other words: You handle the front-end functions and lighter bookkeeping tasks (which usually represent about 20% of the pie), and let your accountant handle the technical issues and back-end work (account reconciliations, journal entries, financial reporting, system design and maintenance, etc.). It does take a little time to figure out the right balance, but an experienced accountant who specializes in outsourcing can guide you through the process.
the bottom line
At the end of day, outsourced accounting isn’t as unconventional as it sounds. Every business needs a strong accounting function in order to be successful, and outsourcing simply means you’re hiring an outside professional to handle that job instead of an employee. It’s the same thing businesses do for website design, IT, PPC management, and a wide variety of other things.
In fact, now that the cloud-based systems are here, a lot of people would say that outsourced accounting is a far better strategy for most small businesses than trying to handle it in-house. Instead of hiring a bookkeeper with limited skills or a full-time employee you don’t really need, you can hire a veteran accountant to work on your books for thirty minutes a day, or five hours a month, or whatever it takes. And since they do the same type of work over and over again for many different businesses, odds are they can do the job better, faster, and cheaper than you can yourself.