Are Outsourced Accounting Services Right for Your Business? Understanding the Key Factors to Consider
Outsourcing has gained significant popularity as a solution to a variety of needs in the business world. Outsourcing is the business practice of acquiring certain services from third-party vendors instead of performing them in-house in an effort to reduce operational inefficiencies, cut costs and drive business success. Outsourcing has numerous benefits for businesses, including the following:
- Greater dedication to key business goals
- Improved adaptability to emerging business conditions
- Up to a 60% reduction in operational costs
- Gaining access to a broader talent pool
- Accessibility to sophisticated tools and uncommon resources
The adoption of outsourcing by small service-providing businesses has skyrocketed over recent years due to its great benefits. In fact, in a report published by Grand View Research, the global outsourcing market is valued at $56.42 billion and is expected to grow at a CAGR of over 9% up to 2023.
However, outsourcing isn't suitable for all businesses despite its countless benefits. If you're considering acquiring these services, you ought to consider several factors to determine its suitability. Let's take a look at some of these factors.
The revenue generated by a business helps in determining its size. By definition, revenue size is the gross amount of money made by a business throughout its operation, and it is usually measured on an annual basis. Based on their year-over-year revenue, businesses are categorized into small, mid-sized, and large. Let's take a look at each of these categories when it comes to financial outsourcing.
Regarding small businesses (companies with annual revenues of between USD 1 million and USD 4O million), acquiring outsourcing services may be challenging due to its financial implications. Third-party accounting services are often quite costly, with set-up costs of up to $7,500 and monthly charges starting at $1,500. If your firm is ready to take on these charges to reap the benefits of outsourcing, you should go for it! If not, external accounting services may not be for you.
According to Gartner, midsized businesses have yearly revenues of between $40 million and $1 billion and between 100 and 999 employees. These mid-sized businesses are often in a better place to acquire outsourcing services compared to smaller businesses, as they're more likely to afford them.
In line with Penpoin.com, large businesses are corporate giants with over USD 1 billion in annual revenues and workforce sizes of over 2,000 staff. These organizations typically have complex financial structures that include the following:
- Diverse revenue streams
- Multiple subsidiaries
- Mergers and acquisitions
- Sophisticated financial reporting and analysis
- Complex tax and regulatory requirements
Because of these financial intricacies, outsourced accounting services might not be the best option for major organizations as they can't offer the degree of in-depth research and strategy that they need. Therefore, in this case, an in-house CFO is better suited compared to an outsourced CFO.
Type of Business
The nature of a business and its operational specifics help determine the viability of outsourced accounting services. Some industries, such as retail and e-commerce businesses, professional services firms, tech startups, non-profit organizations, etc., are better suited for third-party financial services as they are more in need of cost-effective solutions.
However, external accounting services may be inappropriate for certain organizations, especially governmental institutions and other highly regulated industries, for a number of reasons. These include the following:
- Regulatory requirements: Compared to other businesses, government institutions have stricter regulatory compliance requirements, which need a level of oversight third party services may not provide.
- Transparency requirements: Fiscal accountability is viewed as a way to enhance economic governance in government. This contradicts the operation of outsourced financial services that seek to keep an organization's finances private.
- Public perception: The general public, who receives services from these agencies, may find it inappropriate for such institutions to spend taxpayer money on acquiring external financial services instead of investing in in-house solutions.
- Security concerns: Governmental organizations deal with sensitive and confidential. In a 2022 Wall Street Journal Report, the Internal Revenue Service (IRS), America's tax-processing body, accidentally released confidential information of over 120,000 taxpayers. Such security concerns make it increasingly difficult for state institutions to acquire outsourced financial services.
Therefore, if you're the founder of a small business, third-party vendors may be appropriate for you due to the cost-effective and resource-efficient solutions they provide. However, if the constraints of your business limit the efficacy of outsourced financial services, external vendors may not be for you.
What are our long-term growth goals? Do we intend to expand internationally? Will outsourced third-party services meet our business needs as we grow? These are the questions business owners should consider when planning on future growth and expansion in regard to outsourced financial services.
Businesses that want to grow across borders may need specific expertise and skills that may not be available via outsourced services. International expansion's intricate tax and accounting regulations necessitate specialist knowledge that external providers might be unable to offer.
Here are some complex international accounting and tax considerations for oversees growth:
- Adherence to local accounting norms
- Local Value-added tax (VAT) laws
- Currency exchange, e.g., hedging currency exposures, managing currency risk, and other local currency laws
- Permanent Establishment (PE)
- Double taxation
Data transfers and the globalization of digital companies, each crucial to businesses growing across borders, are causing consumers increasing concern. These concerns include everything from privacy violations for information-based services to unfair business conduct.
To mitigate consumer tension, foreign authorities have shifted toward data localization laws, which restrict the movement of data across international borders, and tight domestic data handling regulations, which severely restrict third-party financial service providers.
Dillon Business Advisors: Your Trusted Partner in Outsourced Financial Management Services
While outsourced accounting services can provide many benefits, it is essential to carefully consider your business's unique needs and goals before deciding to outsource financial services. Factors such as revenue size, type of business, and growth goals should be taken into account to determine whether outsourced accounting services are a good fit for your business.
If outsourced financial management does fit your needs, finding a reputable company with a proven track record of success is essential. At Dillon Business Advisors, we provide outsourced financial management services to small businesses in Texas and nationwide. Contact us today to learn more about how we can help your business thrive!
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