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 an all-inclusive, cloud-based monthly accounting service for businesses that don’t want to handle all their accounting functions in-house. It’s typically a package of different services — including things like bookkeeping, payroll, financial reporting, and tax compliance — that’s designed to perform the work traditionally done by employees or staff.

How outsourced accounting works

Broadly speaking, outsourced accounting has two main components: 1) a cloud-based accounting system (which allows people to work on the books from any location); and 2) an outside accountant who 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 and it’s been set up properly, you’re half way there. The other thing you’ll need is an accountant or firm that you can afford and will be comfortable working with. Ideally, you’ll want an accountant who a) specializes in doing this type of work and b) is proficient on the specific system you’re using (QuickBooks Online, Xero, FreshBooks, NetSuite, etc.). This isn’t always as easy as it sounds — the accounting industry is old-fashioned by nature and many accountants haven’t embraced the cloud yet. However, the market is growing fast and more and more firms are striving to offer online services.

who outsourced accounting is (and isn’t) a good fit for

Just because outsourced accounting is now possible (thanks 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, outsourcing probably isn’t going to be a good fit for you.

However, if you have relatively straightforward accounting and the right mindset, outsourcing can be a great option to consider. We think it’s a particularly good fit for business owners who are a) looking for professional accounting on a part-time basis, b) not interested in hiring an employee or building their own accounting department, and c) tech-savvy and like doing everything online.

the 80:20 rule

We’ve been doing this type of work for a long time and one of the biggest lessons we’ve learned is that there’s no such thing as “100% outsourced accounting.” Instead, the real goal is to shoot for an 80:20 split.

In other words, most businesses will handle front-end functions like entering sales orders, billing customers, and paying vendors themselves. After all, you don’t need an accounting degree to do those things, and they can easily be handled by regular employees or business owners themselves.

In turn, your accountant’s job will be to take care of the technical issues and back-end accounting work. This includes fun things like: reviewing and coding transactions, overseeing your bank rules, reconciling key accounts, making journal entries, preparing accurate financial reports, and managing the system. Those are the areas where solid accounting skills and knowledge of the software are required, and that’s where you want a real accountant in charge.

the bottom line

In our opinion, outsourced accounting is now the ideal strategy for most small businesses. It’s ten times easier than trying to hire and vet an employee, and it’s inherently flexible because you can throttle the workload up or down as needed.

More importantly, it allows small businesses to get the type of accounting help they really need right from the start: an experienced pro who can help set your system up correctly, oversee the flow of information, prepare accurate financial reporting, and provide helpful advice and recommendations.

If you’re the type of person who’s comfortable working online and you don’t want to build your own accounting department, outsourcing might be that perfect pair of shoes you’ve been looking for.

Additional resources

If you’d like a general explanation of what outsourcing is, here are a couple of boring but readable articles: one from Investopedia and another one from Entrepreneur.