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The pros and cons of outsourcing financial services for small business owners
Posted by Kanika Sinha
April 25, 2023
A growing number of small businesses are bringing in outside help to manage their financial needs. In fact,statistics suggest that accounting is one of the most popular outsourced processes for small businesses.
Partnering with an outsourced finance department presents an opportunity to take advantage of the most effective team of accountants and finance professionals, and larger-scale technology. At the same time, it helps small businesses reap the benefits of higher efficiency, expanded capacity and significant cost savings.
Clearly, outsourcing can have endless benefits!
But, should your small business invest in outsourced financial services? Let’s get a deeper understanding of financial services outsourcing and its downsides to see if it’s the best option to grow your small business.
What is financial services outsourcing?
Outsourcing refers to the strategic use of external resources to perform tasks traditionally handled by internal staff and resources. Correspondingly, outsourcing financial services implies using a third-party service provider essentially acting as your own financial team. They handle all or some of the financial processes of your business depending on your needs — from bookkeeping, account reconciliation, financial data analytics and taxes to CFO services.
Advantages of outsourcing financial services
Outsourcing your financial services to an external provider can help your small business streamline its financial and accounting operations while benefiting from significant cost savings. Here’s a comprehensive look at the primary benefits of outsourcing financial services:
Reduced cost. When you outsource your finance and accounting tasks, you don’t have to pay the same salary or benefits as you would if you had hired an in-house employee to handle the finance functions. This can significantly reduce your overhead costs and increase profit margins.
Plus, since you are only paying for the work that’s done, you don’t have to worry about extra costs associated with having an in-house employee, such as PTO, taxes, insurance, and other related expenses. In short, outsourcing your financial services is much cheaper and more cost effective than creating a dedicated in-house finance department.
Access to experts and new technologies. Partnering with a dedicated financial services provider generally provides you with a higher level of experience and expertise than in-house employees can provide. This can be especially beneficial if you need specialized financial and accounting skills, or expertise that isn’t readily available in your area or country.
Additionally, an outsourced solution gives you access to cutting-edge technology and systems which your growing business couldn’t otherwise afford.
Improved efficiency and decision-making. By outsourcing, you can free up your finance team to look beyond transactional activities, and focus on resolving risks and pursuing opportunities as well as value-added activities. Thereby supporting dynamic decision-making and sustainability in the long run.
Scalability. Opting for an outsourced solution offers your small businesses a high degree of flexibility in the fulfillment of current needs. Giving you access to a larger pool of finance talent and resources, outsourcing can help your business to scale up quickly — with just a minimal incremental increase in costs — without having to worry about retaining year-round staff members or hiring additional employees, or taking on additional overhead expenses like office space and equipment rental fees.
Lack of control. Although you can provide direction to the external agency about what you need to accomplish, you give up some control when you outsource. And there are many reasons for this. Firstly, you’re hiring a contractor instead of an employee. Secondly, since the person is not working on-site, it can be difficult to maintain precise control.
Communication issues. Third-party financial providers may have a different schedule — operating in a different time zone or have a different preferred method of communication — that can interfere with instant communication resulting in work delays.
Erodes company culture. While outsourcing financial services may seem like a cost-effective solution, doing so may harm employee morale and company culture. The in-house financial team may feel like they are being replaced — leaving them frustrated and upset.
Plus, outsourcing can lead to confusion over which tasks remain in-house and which are the responsibility of external service providers — adding challenges to the daily workflow of your organization.
That said, outsourcing doesn’t always have a negative impact on company culture. However, you need to safeguard against this before you decide to outsource your financial services. This typically means holding open discussions about organizational changes with your finance team.
Hidden cost. If an outsourcing contract is not well crafted and managed, there can be hidden costs or scope creep that can lead to you paying more than you expected.
Elevated risk. While inherent risk is a part of any partnership, this risk increases with an outsourced financial services provider. Sharing your business assets with an outside partner — financial data, intellectual property, etc. increases the risks of security breaches and data loss.
Want more? In addition to taxes, accounting, bookkeeping and CFO services through its FinOps, Escalon’s Essential Business Services include PeopleOps (HR, benefits, recruiting and payroll) and Risk (business insurance). Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact ushere.