A 60% boost in innovation productivity and $10 billion revenue from 400 new products – this was the benefit reaped by Proctor and Gamble (P&G) after the company decided to outsource its research and development function.
Unilever, the consumer goods giant, outsourced some of its IT functions in 2005 and saved $700 million on operational costs.
The above are just two of the examples to show how outsourcing some or many of the functions can help big businesses augment their growth. While many non-core functions like HR, payroll, and accounting are the most commonly outsourced functions, there are many successful businesses that have outsourced their core functions as well. Startups like Skype, Slack, and AppSumo are some of the billion dollar companies that benefited in a big way by outsourcing key functions to skilled contractors.
Outsourcing or “contracting out” is a process where a business contracts a third party to handle some or many of its functions. The extent of outsourcing can depend on the size and type of the business, and the objectives. Outsourcing is seen increasingly as a solution to many problems that business ownersface in terms of managing employees, utilities, technology, and multiple other tasks.
Cost reduction is obviously the most important advantage of outsourcing. The second important benefit is that outsourcing non-core functions like HR, payroll frees up your time which you can utilize to focus on your core functions. Another key benefit is that as an entrepreneur, you get to work with the best of global talent when you outsource.
Outsourcing back office
A successful business is composed both of the front office, that runs the revenue generating core functions, and the back office, which manages routine tasks. The back office, while not being directly responsible for revenue generation, is increasingly seen to be as important as the front office to the overall success of a business.
Back office functions include maintenance of equipment like computer, telephones, handling payroll, accounting, and finance.
Setting up a full-fledged back office is desirable, but not necessarily beneficial. Business owners need to devote considerable amounts of both time and money to set up and manage office spaces, rentals, Internet connections, utilities, and the required manpower. Since these functions take up so much of the business owner’s time, focusing on the core business may become difficult. Besides, in today’s scenario, where the customer is the king, there can be no room for errors in any minor or major function in a business. Perfection in every single functioning area in a business may be impossible to achieve, especially for startups.
Many times, back office functions are outsourced by companies since they may not have the financial strength to hire the required resources. One more reason for outsourcing back office functions could be a lack of skill or knowledge. For example, a dentist who wants to run his/her own clinic has the technical expertise, but may not know how to operate or maintain the billing system.
Not every business owner is a jack of all trades, and attempting to do everything internally may actually impact the growth of the business.
Advantages of outsourcing
The US Census Bureau data shows a slowdown in entrepreneurial activities between 1978 and 2011, with the graph hitting the rock bottom in 2011. Entrepreneurs are essential to a growing economy since they create new jobs. One of the major reasons for the decline in business dynamism as reported by the Brookings Institution is to do with the cost factor.
The costs are mainly incurred in running functions such as:
Making an initial product inventory, advertisements, customer care, packaging, and shipping are some of the costs involved in sales.
Running the day-to-day functions including rentals, management of utilities, accounting, finance, HR, and payroll incurs a huge amount of running costs.
The hardware or the equipment used in the business space need constant maintenance and involve a huge initial investment as well.
HR functions that involve employee benefits, bonuses, leave, and recruitment also takes up a lot of time and effort.
While it may be possible for businesses to do all of these internally, it may not be a smart solution to augment your business. Hiring the right partner and contracting out such functions frees up a lot of time, saves on cost, and enables you to focus on the core business objectives.
Many times, outsourcing may be the best strategy when the entrepreneur does not have the necessary skills or financial resources to carry out certain functions. Many founders of tech companies have had huge successes by outsourcing the technology development to a skilled agency.
Outsourcing accounting services
Time is money in the business world. Outsourcing saves both time and money and in the freed up time, business owners can focus on activities that generate revenue and growth.
Accounting is one of the vital tasks for any business enterprise and needs careful attention to detail and high levels of accuracy. Many businesses find the tasks of bookkeeping, auditing, tax computation and bank statements a little overwhelming. Another area of concern is that businesses incur huge amounts of costs when they try to handle all the tasks internally.
Managing and optimizing the cash is key to driving the growth of business. While other areas such as HR, IT serve to lessen the manpower burden, accounting benefits more from outsourcing. The entire financial growth of a business depends on efficient bookkeeping, tax computation, payroll, and budgeting.
Although traditionally seen as a non-core function, accounting is increasingly being seen as crucial to making informed decisions. Companies are looking at outsourcing to offer end-to-end solutions in terms of overall financial strategy and optimization of resources.
In fact, accounting is one of the first functions that was outsourced by companies. According to a research conducted by accounting firms, KPMG and HFS Research, the finance and accounting global outsourcing expenditure was $25 billion in 2013 and continues to increase by 8% annually. As per another research published by the Everest group in 2016 on Finance and accounting outsourcing, new contracts and existing contract renewals are driving the outsourcing activities in accounting globally.
Tax and payroll accounting constitute the majority of accounting outsourcing as per a 2016 report by Robert Half and Financial Executives Research Foundation (FERF).The report also stated that more than 50% of the companies that were part of the study resorted to the manual reconciliation of accounts which increases the chances of error. It is no surprise then that a majority of companies prefer to outsource accounting to reduce errors and improve operational efficiency.
According to data that was compiled from 150 companies in the US, UK, and Canada by Ovum, a majority of the participants named efficiency as the key reason for outsourcing accounting. The study respondents also believed that an outsourcing agency can help streamline the finances of the company and help in understanding strategic functions like budgeting and auditing as well.
Outsourcing accounting has the following benefits:
By outsourcing accounting, you can save huge costs and effort involved in hiring the right experts.
Besides, hiring expert help enables the businesses owners in identifying where the cash is going, what the cash on hand is, and how to optimize the same.
For larger businesses that are spread across the world, centralizing their accounting can help manage the far-flung business better. Smaller businesses benefit too as they are in the process of growing and do not need the services of a full-time chief finance officer (CFO). The smaller enterprises can outsource accounting as and when needed and pay per project instead of incurring huge costs of hiring full time qualified professionals. The outsourced agency can also be hired part time or on an hourly basis which again translates into significant cost reduction.
The expertise and technology of the right outsourced partner can help the businesses get the advantage of data analytics. Such data can help the businesses understand and streamline the cash flow across their supply chain. The outsourcing agency which specializes in the accounting activities can help with expert advice on financial management and strategic planning
Improvement in accuracy is another major benefit of outsourcing. With a dedicated set of experts handling the accounting aspects, it is possible to achieve 99% accurate results. Avoiding errors in computation of tax and bonuses that need to be paid to employees save costly lawsuits and penalties. Efficient accounting systems also make it possible for employees to get their salaries directly deposited on time since there is a lot of time saved in processing the payments internally.
For an entrepreneur, keeping abreast at all times of the changing tax and accounting scenarios can be difficult. The outsourcing agency can handle that efficiently since they focus only on accounting.
Outsourcing to an agency which can operate 24 x 7 gives businesses the advantage of time. Deadlines can be met easily because of the time zone difference. The turnaround time is lesser and tasks are completed faster.
There are possibilities that the in-house staff can tamper with the accounting data for other motives. With outsourcing to a third party, security of the data is maintained.
How much do accounting services cost
The average salary for fresh graduates in accounting is $50,000 per year according to payscale.com. A certified public accountant gets an annual pay of $62,000. With experience, the pay package obviously is higher. Senior public accountants earn $78,000 in wages that actually add up to $1,300,000 annually when bonuses and benefits are added.
A bookkeeper earns an annual salary of $45,000. Adding up the two salaries, the annual expenditure comes to $100,000 without the benefits or bonuses
Also the annual hikes in starting salaries also have to be taken into account while looking at the cost of hiring in-house accounting services. Another factor is the location. Bigger metropolitan cities pay a higher salary than smaller ones.
The benefits or the package is what most employees look at when they weigh the offers from different companies. Health insurance, paid vacations, tax saving, and retirement benefits are some factors the employees consider. About 20 to 30% of the pay package is set aside for benefits by most companies.
Equipment, space, office supplies, and software are some of the overhead expenses involved in employing in-house accounting services. Adding up all the factors, although the wages of an accountant for example is $35,000 annually, the cost to company could be to the tune of $80,000.
Time and effort
When freshers are hired, the company has to spend a lot of time, effort, and manpower to train them to reach the desired level of competency. With evolving best practices, new software, and hardware, it is necessary to invest in regular training and upgradation which also adds to the expenditure.
According to data given by Reckenen, a monthly break up of costs of an in-house accounting service is as below:
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Apart from these, paperwork, telephone bills and the Internet, and office space are other added expenditures in hiring in-house accounting services.
While the above are the wages of a single employee, if the business is huge, there may be multiple accountants and bookkeepers needed at various levels of expertise. Managing the entire team would elicit more expenditure in terms of training, hiring, giving bonuses and so on.
Outsourcing accounting services can cost between $1,000 to $3,000 per month. In a year, this adds up to $36,000 which is just half the amount of what you would pay for an in-house accountant. Additionally, there are no overheads of bonuses or benefits incurred. Most importantly, the time and the energy needed to recruit, train, and maintain the work force can be saved.
At least 40 % of the cost is saved when you outsource accounting services. The savings can be greater when you only need the bookkeeping service.
When you can hire specialized people who deal with accounting, you also get the benefit of their expertise. The experience the outsourcing firm has in handling various client accounts is valuable, especially to a startup which has little or no experience in accounting management.
Outsourced accounting agencies handle tasks such as payroll processing, general accounting, accounts payable and receivables, invoice processing, and bookkeeping. All of these tasks are handled at one agency at the cost-effective rate of $1,000 to $3,000 per month.
If you are looking at staff leasing for accounting services at the entry level, the salary paid could be $800 and $1,000.00 at middle level. Experts and senior are paid $1,200 per month. In terms of hourly rate, this translates into $7 to $10 per hour.
If you do not need the services of an accounting agency all-round the year, you can select pay per project model, saving on huge amounts of fixed costs. You may only need the services of an accountant at the end of the financial year or for the auditing cycle. Or you may wish to partly outsource certain tasks like tax computing or form filling. In this case, a one off payment every year is more cost-effective than hiring on annual basis.
Many outsourced accounting firms offer different packages based on the business needs. A small business package may handle preparation of balance sheets, recording of sales receipts, bank reconciliation statements, filling of BIR forms, all for a monthly retainer fee of approximately $9,000. It could still work out cheaper for most businesses since it is a one-time expenditure in a year.
Many firms also offer each of the tasks at a separate costing, which means as an entrepreneur, you can choose which part of the accounting process you wish to outsource. For example, bookkeeping, tax return filing, audits, registration of business and so on are all individually priced to allow you to save on hiring full time accountants.
Financial services outsourcing companies
D & V Philippines
Founded in 2012, the Manila based D & V Philippines specializes in high end finance and accounting services. Founded by Stefan Vermeulen who was an internal auditor himself before setting up D & V Philippines, the accounting firm has clients all over the world. About 75 % of D & V Philippine’s clients are based in Australia , followed by the United States and other countries, including Germany, Sweden, UK, Canada , Hong Kong and New Zealand.
The firm handles “everything expected from an accountant or a bookkeeper” according to CEO, Stefan Vermeulen. Fixed asset register services which helps the companies keep track of their fixed assets, and expense report processing are some of the accounting services offered by D & V Philippines.
Besides handling day to day bookkeeping, bank reconciliations, payroll, payable and receivables, a range of high value services are also offered by D & V Philippines. The high value services include business and finance analysis, monthly financial close and reporting, management accounting and many other compliance tasks.