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, online 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 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 trust and feel 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 —many accountants are traditionalists by nature and haven’t embraced the cloud yet. But the market is growing fast and more and more firms are trying to offer online services.

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

Just because outsourced accounting is now feasible (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 the right characteristics and mindset, outsourcing can be a great option to consider. It’s a particularly good fit for the following scenarios:

  • Small businesses that need reliable, professional accounting on a part-time basis

  • Business owners who don’t want to hire an employee or build their own accounting department, they’d rather outsource it

  • Businesses that are at an in-between stage: past the bookkeeping phase, but not ready to hire a full-time accounting manager or controller

  • Business owners who are 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 continue to 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 handle the technical issues and back-end accounting work. This includes fun things like coding transactions, managing your bank feeds and bank rules, reconciling key accounts, making journal entries, preparing accurate financial reports, and overseeing the system. Those are the areas where solid accounting skills and proficiency with 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 90% of small businesses. Instead of trying to figure out QuickBooks on your own or hiring a Craigslist bookkeeper who has no idea what they’re doing (oh boy, we’ve seen that one too many times), you can hire an experienced accountant to help you configure your system, keep the information flowing where it needs to, and manage your accounting on a part-time basis.

This type of fractional accounting service wasn’t possible until the cloud came along, but it is now. If you’re the type of person who’s comfortable with the cloud and working online, there’s never been an easier way to get the accounting job done.

Additional resources

If you want a general explanation of what outsourcing is, here’s a good article from Investopedia and another one from Entrepreneur.