What Is Outsourced Bookkeeping?

By Milja

May 13, 2023

Outsourced bookkeeping is when businesses hire outside bookkeeping and accounting firms, freelancers, or other third parties to manage their financial records.

Why should you outsource your accounting tasks? For several reasons: cutting costs, finding expert accountants for specialized and complex operations, bookkeeping for non-profit organizations and charities, replacing an absent employee, and more.

Keep on reading as we thoroughly cover the topic below!

How Does Outsourced Accounting Work?

The process of outsourcing your bookkeeping and/or accounting tasks may vary slightly depending on your exact needs and whether you hire a firm or an individual expert. That said, very similar steps apply in most cases:

Step 1: Find an accounting company that meets your exact bookkeeping and accounting needs and sign a contract with them;
Step 2: Collaborate with the outside accounting talent to set up the integration between their software and your accounting data and tools;
a) Pulling the required financial data from your sources will most likely be automatic and won’t require your input.
Step 3: The third-party bookkeeping and accounting firm will record, categorize, and settle all your transactions to review your performance;

Step 4: The outside company will prepare and send you clean, accurate, and up-to-date accounting statements each month or quarter;
Step 5: You can utilize the data contained in the report to enact positive changes regarding your finances before the next reporting date.

Throughout the process, the accounting business will regularly communicate with you to update you on their progress and request further input if necessary. Most also provide ongoing support and adjust your services based on your changing needs.

Although used interchangeably in this and other articles, bookkeeping and accounting are complementary professions with subtle differences. Therefore, bookkeepers and accountants work together as their careers significantly overlap.

How Much Does It Cost?

While outsourcing your bookkeeping needs typically costs less than hiring a full-time employee, determining the exact price is rather difficult since it varies from client to client based on numerous factors, including but not limited to the following:

Your exact accounting needs—the type and complexity of your accounting tasks determine the overall costs; while small businesses with straightforward needs can get by cheaper, larger firms with complex workflows will have to pay more;
Type of payment scheme—some companies base their prices on the number of transactions, others charge by the hour, and others still by the project;
The reporting frequency—the more frequent reporting you require, the more resources (and consequently money) are needed for it; therefore, regular weekly or semimonthly reports cost more than monthly or quarterly reports;
The provider’s location—overhead costs like equipment and rental fees also affect the overall prices offered by different accounting companies; for instance, experts from major metropolitan areas charge more than rural firms.

Considering all of the above, small businesses can expect to pay around $500 to $1,500 per month, whereas medium companies with advanced accounting needs have to cover around $1,500 to $5,000 every month. Finally, large businesses with multiple locations will easily be charged over $10,000 on a monthly basis.

When Do Businesses Outsource Their Accounting?

So which businesses need outsourced bookkeeping services?

First of all, small businesses lacking resources often look for a cost-effective alternative to hiring an in-house full-time bookkeeper and/or accountant.

Similarly, rapidly growing businesses also outsource their bookkeeping since their needs change regularly, and they apply their valuable time and resources elsewhere.

Firms struggling to hire a competent full-time accountant to handle their specific books can consider outsourcing to a third-party provider as well.

Companies looking for expert bookkeepers who can handle their very niche needs may also have no other option but to leverage outside bookkeeping firms.

Accounting for non-profit organizations and charities differs considerably from accounting for profit-based businesses, as it involves complex concepts, such as donations, tax-deductible receipts, and grants, requiring expert accountants. Plus, such organizations need expert knowledge of annual reporting obligations with regulatory bodies.

Lastly, some companies may need a temporary accountant as a replacement for an absent employee, for year-end accounting, or for audit purposes.

What Bookkeeping Services Are Typically Outsourced?

When hiring an outsourced accounting firm, businesses need something more than the processing of day-to-day transactions. Some of the most requested features and bookkeeping and accounting services include:

Retrieving the client’s financial data from bank statements, payroll records, and other applicable sources through the successful integration of tools;
Reconciling transactions to ensure data accuracy;
Managing accounts receivable and accounts payable;
Paying out the company employees;
Keeping up-to-date and accurate books;
Generating accurate financial statements at the end of the accounting period, including profit and loss statements, cash flows, and balance sheets;
Submitting the report to all interested parties, including the business itself and relevant authorities, interested investors, tax preparers, and others;
Helping companies interpret their financial statements and advise them on making informed business decisions based on facts.

Note: Always inquire with accounting firms you are looking to hire whether or not they have the expertise needed to handle your every bookkeeping and accounting function.

Things to Consider When Outsourcing Your Accounting

To facilitate the transfer of accounts between your company and the outside bookkeeping and/or accounting firm, keep in mind all of the below.

1. Compose a Detailed Service Agreement

Setting clear requirements and expectations right from the start is essential to avoiding future disputes. For that purpose, write up a document containing all agreed-upon terms and conditions before handing over your accounts to an outsourced firm.

2. Employ Data Security Measures

Examine and strengthen your company’s data security policies, especially those about parties requesting outside access. That way, you’ll protect your property and the reliability of your internal processes. Also, discuss the relevant data security measures with the accounting service provider to ensure they employ proper safeguards.

3. Set Up Safe Channels for Information Exchange

You must establish a safe and secure data exchange method with the outside accounting firm, preferably a modern cloud-based approach. That way, the accountants can quickly pull the necessary information without wasting your time and resources.

4. Digitalize Your Financial Documents

In order for an outside company to easily access all your financial records, you must digitalize them and upload them to the cloud. Hence, gather, organize, and upload every financial document, including bank statements, invoices, receipts, tax returns, etc., via the online service you agree to use for your accounting purposes.

Pros and Cons of Outsourcing Your Bookkeeping

Below, we summarize the pros and cons of outsourced bookkeeping and accounting, which will help you see if this type of service fits your business structure:

Pros

Cons

Cost-effective since you don’t have to hire and train an in-house accounting team; Experienced and knowledgeable professionals who know how to manage every kind of financial record, create detailed statements, and comply with relevant laws; Adaptable to your company’s changing needs and supportive of growing businesses; Increases your company’s overall productivity by allowing workers to focus on core business functions and strategic processes; Useful in identifying internal fraud risks and developing strategies to minimize or eliminate them; Equipped with the latest accounting software and tools, ensuring absolute accuracy and efficiency in managing records; Versed in all relevant tax laws, regulations, and reporting requirements, mitigating the risk of fines and penalties.

Potential loss of control over your financial data and processes; Increased risk of data breaches and cyber-attacks since you are sharing sensitive data financial data with external entities; Communication challenges due to time zone differences, language barriers, or limited access to your accounting service provider; Hidden costs may be involved in the service, or you may have to pay upfront to set up the required technology or software.

Bottom Line

Selecting an accounting service provider is a critical decision that can significantly impact the financial health of your business. So, find a firm with experience and expertise in your industry, check their credentials, and review testimonials from past clients. Then, consider the exact services they offer, their technology, and their prices.

Key Takeaways

Outsourced bookkeeping is a service provided to a business by an outside entity specializing in bookkeeping and/or accounting functions;
Small businesses, growing companies, and firms looking for an expert accountant or a replacement employee can all benefit from outsourced accounting;
Third-party bookkeepers and/or accountants can handle everything from reconciling daily transactions to generating regular financial statements;
Before signing an accounting outsourcing agreement, businesses should strengthen their data security policies and digitalize their documents;
The pros outweigh the cons of outsourced bookkeeping since companies typically spend less time and money managing their books.