Disadvantages of Outsourcing Accounting Services

In order for small business owners to make the most well-informed decision about their company’s accounting needs, they must first understand the advantages and disadvantages of outsourcing these kinds of functions. How will it impact the company’s bottom line? What kinds of services can be done in-house? What is the culture of the company, and is it possible to find an outsourced services firm to match?

Read more below.

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Disadvantages of Outsourcing Accounting Services

Deciding whether to take advantage of outsourced accounting services or bring in a full-time staff member is a big decision for small business owners, and one that is becoming increasingly common. Since 2017, the amount of small businesses in the United States has grown from 29.6 million to nearly 32 million. In fact, small businesses make up the vast majority of US businesses.

However, with a growing number of small businesses comes a growing need to decide when to outsource and when to hire internally. More than one-third of small businesses currently outsource at least one business process, and that number is estimated to grow. But what are the risks of outsourcing? What are some disadvantages of outsourcing? And on the other hand, what are the benefits of outsourcing accounting services? This article will explore both the advantages and disadvantages of outsourcing accounting functions to help small business owners decide if outsourcing is the right option for them.

What is Outsourcing Accounting Services?

Before we dive into outsourcing disadvantages, let’s explore outsourced accounting as a whole. Outsourced accounting services are accounting and bookkeeping services provided by a third-party firm, typically for small- and mid-sized businesses. Outsourced accounting services include: 

  • Bookkeeping: The most basic financial accounting service that involves tracking and maintaining financial records for a company, including revenue and spending. Bookkeeping is most often performed by someone with entry-level bookkeeping skills.
  • Monthly accounting: The next step up, monthly accounting is the process of closing the monthly books and providing key takeaways about current financial well-being. Monthly accounting is often performed by a financial professional such as an controller.
  • Cash flow forecasting: This is a practice that reviews and analyzes a company’s cash inflows and outflows to create short-term and long-term projected cash flows. This is a higher-level function, often performed by experienced accountants.
  • Outsourced Chief Financial Officer: Otherwise known as fractional CFO services, this provides small businesses an opportunity to utilize top-level financial professionals as a consultant on a part-time basis. CFOs bring years of finance experience with them and can help create sophisticated dashboards for strategic decision making
  • Operational support: These are various services aimed at helping entrepreneurs increase efficiency in their company through streamlined or improved processes and technology applications. Financial professionals or consultants typically provide these services.

Why do Companies Outsource Accounting?

If you’re wondering “should I outsource my accounting,” there’s unfortunately no clear cut answer. Instead, small business owners should understand why companies choose to outsource their accounting services so they can make an informed decision about their business’ future. Here are some of the primary reasons a company chooses to outsource.

  • Save money: Basic accounting services like bookkeeping and monthly accounting can cost between $3,000 and $12,000 annually. While that may seem like a large amount of money to invest, it’s certainly more affordable than hiring a full-time accountant, which will likely cost significantly more money.
  • Create and control budgets: Without the financial know-how that an accountant brings, it can be difficult for a business to create and control their budgets. However, savvy entrepreneurs understand how important operating budgets are when it comes to tracking spending and revenue to make smart financial decisions.
  • Inform major spending: Any major spending, like supplies, technology, or even a new employee can have a significant impact on a business. Outsourced accounting can provide an accurate review of a company’s books to inform these kinds of decisions.
  • Monitor financial health: It’s one thing to track revenue and spending, it’s a whole different process to understand revenue goals, projected cash flow, and a company’s overall financial health. Outsourced accounting can provide a small business with experienced experts to analyze things at a high level.

What are the Advantages and Disadvantages of Outsourcing Accounting Services?

In order for small business owners to make the most well-informed decision about their company’s accounting needs, they must first understand the advantages and disadvantages of outsourcing these kinds of functions. How will it impact the company’s bottom line? What kinds of services can be done in-house? What is the culture of the company, and is it possible to find an outsourced services firm to match?

It’s not as simple as just searching the internet for “what are 3 disadvantages of outsourcing?” The truth is, outsourcing disadvantages and advantages vary greatly based on the outsourced firm that a company chooses to work with. Let’s explore some top outsourcing disadvantages, how to avoid these common pitfalls, and what to look for when selecting a firm.

Hidden Costs

With any paid service, hidden costs can be a problem—especially if you have the wrong partner. While outsourced services are generally considered cheaper than hiring a full-time employee to do the work in-house, it is important for small business owners to be aware of hidden fees listed in contractual agreements or in the fine print. 

To avoid hidden costs, small business owners should thoroughly review every part of the contract and ask questions as they arise. Have a solid understanding of the month-to-month relationship, and set expectations at the beginning so hidden fees don’t crop up. The right professional services firm will be open and transparent about their monthly costs and any additional or recurring fees.

Scope Creep

Scope creep is the adding of additional features, functions, processes or requirements that go beyond the agreed upon statement of work. Scope creep can be a common factor in additional costs for small businesses due to going over hours. And while no one wants to go over hours—and over budget —scope creep is easy to avoid if you know how. 

The easiest way to avoid scope creep is for a small business owner to understand what functions they are paying for and what functions they aren’t paying for. For example, if an entrepreneur enters into a contract for 10 hours of outsourced CFO services a month, the eleventh hour of services would result in scope creep. The right professional services firm will look out for scope creep and communicate with their client before it happens, but small business owners should be tracking this, too.

Security Risks

Allowing another company access into your finances can seem like a potential security risk. And with the wrong company, it can be. One way to avoid a potential security breach is to ask any vendor you’re considering using for references—and follow up with them. Small business owners should also evaluate the firm’s established protocols for handling private data and gaining access to your books.

With the technology available today, the best professional services firms are educated on state-of-the-art data protection. Oftentimes, outsourced firms are actually more secure because of the stringent protocols they have in place to help small business owners maintain secure financial data.  Additionally, some outsourced accounting companies offer operational support to recommend processes and technologies to mitigate security risks.

Quality Control Concerns

It’s certainly true that outsourcing services could pose quality control issues, especially if you choose to outsource with freelancers or small firms that offer their services at unbeatable low prices. 

As with most things in life, you get what you pay for. The best outsourced accounting firms hire top-notch financial experts who can actually enhance your quality control by providing years of experience and the potential for multiple professionals to review your account.

Slow Turnaround Times

Small business owners may have concerns about the timeliness of their accounting work if they outsource their accounting functions. While having an accountant just down the hall who can drop everything to pull data is certainly useful, it’s not always practical.

It’s true that outsourced accounting firms have more than one client, but the best outsourced accounting firms will establish a schedule and stick to it to avoid missed expectations.  The good ones also know how to manage priorities and will make themselves available for emergencies when the situation calls for it.  

Time Zone Differences

When most people think of the outsourcing of services, they picture an office located in another country—potentially one with an eight or nine hour time difference. That significant of a time difference could certainly cause delays or communication difficulties.

However, many professional service firms are located within the United States. Some are likely even located in your city or state. If timeliness is important to you, seek an outsourced accounting firm that’s local or in your timezone.

Miscommunications

The potential for information to get lost in translation certainly exists when handing tasks from one person to another. But the truth is, that potential exists even between people or departments within a business. 

The best way to counteract misunderstandings is to have regular, open communication. Small business owners can establish a good relationship with an outsourced accounting firm and establish a good cadence of regular check-ins, and a structured month-end close.

Should a Small Business Outsource Accounting?

Now that we’ve discussed common pitfalls, you might still be looking for an answer to whether or not you should outsource your accounting services. At the end of the day, each entrepreneur must decide what the right fit is for their business. While there may be disadvantages to outsourcing, many of them can be mitigated by finding an experienced, professional services firm. And there are numerous benefits that can come with outsourcing, too, including:

  • Save money: It’s a common realization for small business owners that they cannot afford a full-time, experienced accountant. You can get access to these services at an affordable rate by outsourcing.
  • Access to modern accounting systems: Many outsourced accounting companies use state-of-the-art accounting software to save time and reduce risks associated with human error.
  • Smarter business decisions: Access to highly-experienced, professional accountants and CFOs can help small business owners make smart, informed decisions.
  • Reliable, accurate records: Professional bookkeepers and accountants at outsourced services firms have made a career of helping businesses maintain reliable, accurate records.
  • Reduce business risk: A good outsourced accounting firm can not only help you implement technology tools that can reduce the risk of fraud, they can also evaluate your internal controls and recommend changes when appropriate.  
  • Get expert support: By outsourcing with an accounting firm, small business owners gain access to financial experts like CFOs to help them align financial realities to business goals and create long-term growth strategies.
  • Stay on track with payroll: Ensure employees are paid accurately and on time.
  • Be prepared for a crisis:  While no one wants to consider the implications of a financial downtown, outsourced accounting services can help companies prepare for unexpected crises and weather any potential storms.
  • Fully scalable solutions: As your business changes and grows, so will your financial needs. With an outsourced accounting firm, small businesses can scale up or down their services.
  • Spend more time on your business: Small business owners spend a lot of time managing their finances. Utilize financial services experts to do what they do best, so you can do what you do best—grow and manage your business.

Milestone Offers Expert Outsourced Accounting Solutions.

Milestone is not your typical professional services firm. We pride ourselves on making a difference for all the entrepreneurs who are making a difference in their communities every day. At Milestone, we do what we do because we’re passionate about small businesses and their goals. We believe in developing business partnerships and diligently working to make our client’s lives easier. With a team of talented financial professionals, Milestone offers C-Level leadership at a fraction of the cost, because every business deserves access to high-quality strategy and expertise. Plans start as low as $250 a month, so there are service opportunities for nearly every budget. Explore our services, including foundation-level and growth-level today.

We promise no long-term contracts, no hassles, and the flexibility to scale up or down as your business needs develop. At Milestone, you’ll find professionals dedicated to service, integrity, leadership, and lifestyle—a refreshingly forward approach to professional services. With Milestone by your side, you can focus your energy on running your business and leave the bookkeeping and accounting to us. If you’re ready to unleash your back office, reach out to us  and tell us what you’re looking for.

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