Outsourced Accounting – when should you bring it In-House?

Small companies frequently will start life with an outsourced accounting function because it’s initially easier and cheaper.

However, at a certain point, this will become inefficient and the company will be much better served by an inhouse accounting team.

Management of this transition is an ideal task for a Fractional CFO or Portfolio FD because it can be complex and it will involve key decisions along the way which you can’t afford to get wrong.

Here is a summary of my experience of the drawbacks of out-sourcing finance and benefits of an in-house accounting function vs outsourced management accounts:

Drawbacks of outsourced accounts:

• It becomes expensive - outsource firms typically charge three times cost in order to cover overheads and profit. The initial monthly cost of outsourcing is much lower than hiring a full-time person. But as the business grows, more accounting time is required each month and eventually it reaches the point where you can afford to hire your own staff to do the work and realise a cost saving.

• Inflexibility - outsource firms will typically provide a simple P&L and balance sheet only, in a static Excel spreadsheet. However, businesses quickly reach the point where they need to analysis to provide business insights. At this point, more complexity is likely to be needed to facilitate analysis such as tracking income by sector or service or product, establish cost centres, perhaps set up project accounting. Equally it is likely that that business will benefit from establishing and monitoring KPIs that will help run the business more efficiently. When you need any of these techniques, it is probably time to bring your accounting in-house.

• Not close enough to the business - Accountants add most value to a business when they understand the industry and the business model. The in-house accountant will learn this from being around people in the company. Also, if full-time they will only be thinking about your company. They will be best placed to develop the analysis needed and set up the relevant KPIs to drive performance.

• Process inefficiencies - outsourced accounting will frequently result in inefficiencies such as double handling, problems obtaining transaction information, and disjointed billing and collections. In Credit Control, it may be that revised Terms and Conditions are needed to speed up cash collection. Also a joint approach may be needed with finance and the commercial team working together to apply the right level of pressure on clients. The business needs the cash to be collected…. But doesn’t want to damage important relationships.

• Coordination across a multi-national - There can be an issues if there are multiple outsourcing firms due to the company operating more than one country. For example, they will all need to use the same account codes, accounting policies and deliver the accounts in compatible formats or the ultimate owners will be unclear about relative performance.

• Communication - the outsource firm may need to communicate with multiple stakeholders within your organisation such as sales, HR, or department heads, but isn’t present to understand and develop those relationships. Outsource firms are also notorious for being unresponsive.

• Better reporting and business analysis will improve quality of business decisions.

• Better communication due to physical and cultural proximity, when the accounting staff are the same room as the rest of your team. When they need information, they can simply request it from the relevant person. Other staff often benefit from training in some basic financial areas, the company can become more commercial.

• Incentives, bonuses, can help improve results and will work best if the designed by the senior managers including head of finance.

• Process efficiency – some transactions are handled most efficiently directly through the accounting system. For example, generating supplier payment runs, customer billing.

• It will be cheaper to run an in-house accounting team than outsource, once you have reached the point where you can afford to hire a full-time bookkeeper or even office manager.

• Ambitious companies will benefit from “pro-active” planning; annual budgets and if looking to prepare for “Exit” they will benefit from a Business Plan (three to five years) with financial projections.