Pros & Cons of Outsourcing Accounting
Pros & Cons of Outsourcing Accounting: A Guide For Every Business Owner
Outsourcing was first recognized as a viable business strategy more than three decades ago. Companies the world over were discovering the boon of hiring third-party providers for specific needs like accounting, human resources, marketing, and IT assistance. They found that outsourcing helped them save on costs and double down on their core efforts.
There were—and still are—detractors, though, who fear that communication gaps and security threats are inherently tied to business outsourcing, making it too risky of a practice to pursue.
Below, we’ll detail the methodology behind outsourcing, homing in on the pros and cons of one of the most frequently outsourced resources for businesses: accounting.
What Is Outsourcing In Business?
Business outsourcing is when a company decides to hire third-party providers for services typically held or performed by in-house employees.
The work of these third party companies or contractors will often be performed under the name of the main company, so that the workflow and product quality remain seamless for the small business owner.
There is no rule book detailing what services you can and cannot outsource. While some entrepreneurs may choose to outsource something tangential to their enterprise, like customer service, others may outsource fundamental practices, like software development for tech startups.
One example of a prolific startup that used outsourcing to their benefit is Slack. The business communication platform hired third-party design firm MetaLab to assist them during the early stages of development. After all their collaboration, it worked. As more and more professionals are working from home, Slack has become an integral form of communication for countless businesses.
Commonly Outsourced Processes
A common thread of this business practice is that whatever process a small business owner chooses to outsource is one which typically—if tackled in-house—would be time consuming and or very pricey.
Processes that companies may outsource include:
- Human resource management – As your company grows, so too will your human resource needs. Staffing an HR department—and hiring a qualified director—can be one of your more costly business endeavors, especially given that HR doesn’t provide a direct ROI. Outsourcing this practice, including hiring a third party to write and edit your employee handbook, will save you time and money daily. Plus, having a third party handle HR concerns is likely to make your work environment more peaceful as there’s an objective ear to receive inner-office concerns.
- IT services – IT services are critically important for every modern business that needs their network infrastructure to run quickly and efficiently. A benefit of outsourcing this process is that third-party IT service companies are the experts in the field, often with more varied real-world experience than an in-house IT staff. No matter the hiccup in your cloud computing or pesky bug in your content management system, an outsourced IT team will have a larger bag of tricks from which to pull.
- Accounting – One of the most important and painstaking processes for any business is bookkeeping. As the saying goes, close only counts in horseshoes and hand grenades—when it comes to business accounting, there is no room for error. This means countless hours spent by in-house employees checking and rechecking the books. Outsourcing this essential process is enticing for business owners, for good reason. Yet, due to the intimate nature of a business’ finances, there are also concerns.
Why Outsourcing Accounting Is So Attractive For Businesses
To better understand why outsourcing accounting is so appealing to businesses we first must understand and appreciate how taxing the job of a traditional in-house accountant or accounting team can be.
Eight-Step Accounting Cycle
Traditionally, accountants manually organize all business expenses. This means time, money, and more spreadsheets than any human should have to endure. The system accountants follow is commonly referred to as the accounting cycle, or the eight-step accounting cycle.
The eight steps include:
- Transactions – The bookkeeper must first identify all business transactions, whether this is money coming in or going out. Transactions can include everything from payroll to reimbursements.
- Record transactions – Just like it sounds, this step involves entering all of the transactions into a physical or virtual journal, listed chronologically. Depending on the scope of the business, there may be multiple journals kept specifically for different transactions like one for purchases and one for sales.
- Posting – Once transactions are recorded, all information is then also posted in the company’s general ledger. This comprehensive document allows the bookkeeper to glean important financial information in one sitting.
- Trial balance – At the close of an accounting period, the bookkeeper will determine if the ledger is balanced, meaning the company’s debts (amount owed in a transaction) and credits (amount coming in from a transaction) are equal. If the ledger is not balanced, the bookkeeper will determine what needs to be adjusted on the balance sheet.
- Worksheet – This is the written evidence (the scrap paper of accounting) of where and how a bookkeeper makes adjustments to the ledger.
- Adjusting journal entries – Once the worksheet is complete, the bookkeeper will go back and adjust the journal entries and enter in the ledger accordingly.
- Financial statements – The penultimate step involves the bookkeeper creating a financial statement that summarizes all the transactions involved in the latest accounting period.
- Closing the books – Finally, the bookkeeper makes a closing statement, offering their expert opinion on how the company performed financially during this accounting period. After the books are closed for one period, the slate is wiped clean and the bookkeeper has blank worksheets and journals ready for the next period.
The accounting cycle can be completed manually, or the accounting team can choose to use an automated accounting integration system to manage their financial data.
Many accountants and accounting teams are forgoing manual expense management in favor of an automated expense management system. The latter cuts out human inefficiency and error—according to the Global Business Travel Association, approximately 19% of manually submitted expense reports are delivered with errors or omissions.
Using an integrated accounting system means no more separate journals for different transaction types, and automation makes keeping track of company spend in real time a daily reality.
Whether your third-party contractor uses a manual or automated system, by outsourcing all of these nuanced steps a business owner can save money and valuable company time, allowing the enterprise to focus on its core mission.
The Pros of Outsourcing Accounting
As detailed above, the accounting cycle is tedious, with room for human error depending on which management system your bookkeeper uses. Outsourcing this time-consuming process to the experts or a bookkeeping service can be a lifesaver for your business.
- Avoid an expensive in-house team – Small businesses may not be able to afford an in-house finance team’s salaries and benefits. Depending on the scope of your team and business, there may be associated training costs, too. Outsourcing allows you to fine tune your financial resources, putting money toward trained experts with ample experience.
- Trust the pros – Third-party providers have years of experience to draw from, knowing which financial planning tools to use and how to avoid costly errors. Whether the contractors are using a manual system or an automated system, they'll know how best to approach either method.
- Double down on your core efforts – Saving time every month by not having to track transactions, enter details into a ledger, and close your own books allows you to focus on your company’s core mission. Instead of putting out financial fires, you’ll be able to harness your saved energy to pursue new projects or onboard new clients.
- Avoid in-house manipulation – Though the risk is low, there is the possibility that an in-house accounting team can manipulate the books for their own gain without the company knowing. Outsourcing ensures an objective third party is handling this delicate information.
The Cons of Outsourcing Accounting
Sometimes outsourcing accounting isn’t the right avenue for your business depending on your size and offerings. Some potential downsides of outsourcing accounting include:
- Lack of control over your books – It can be difficult to hand over total control to a contractor, especially if they’re accustomed to preparing your books in a different way. There’s the risk that the time you hope you will be saving by outsourcing is negated by the time you spend trying to decipher what your third party has produced for you.
- Lack of real-time visibility – Sometimes you’ll need access to your books ASAP. When the accounting team is not onsite, there may be a delay in you getting the information you need, which could result in strained relationships with clients.
Automate Your Accounting Workflows with Ramp
Most modern businesses explore the option of outsourcing services as their companies grow in order to save time and money and streamline their mission. Whether you decide outsourcing accounting is best for your company, or you prefer to keep it in-house, using an automated expense management platform like Ramp can help your accounting team streamline bookkeeping service, avoiding costly human error and omission.
With Ramp, you can track your company spend in real time, assessing where and how to save on transactions within minutes, no shuffling through multiple journals required. Plus, Ramp comes with automated receipt collecting and matching, unlimited 1.5% cash back, automatic cost-saving opportunities, and more.