Outsourced Accounting: Should a startup hire in-house financial staff or outsource to an accounting firm

Posted June 27, 2024

Accurate and timely financial accounting guides businesses towards sustainable growth and profitability. However, many organizations need help in this area. Financial statements often appear unclear, resembling a complex puzzle that requires extensive deciphering effort. More data clarity is needed to ensure quality decision-making, compliance, and accuracy efforts are maintained.

Furthermore, essential financial reports move slowly through the approval process, reaching decision-makers when there is still time for effective action. Adhering to Generally Accepted Accounting Principles (GAAP) can be difficult, and mistakes can lead to issues with investors and regulators.

Is it better to build and hire an accounting and finance team or find a qualified CPA firm and outsource some of these functions? Outsourced accounting services have many pros and cons compared to hiring in-house accountants and finance professionals for startups and mid-sized companies. Is accounting crucial enough to your business to manage internally? Consider hiring in-house financial staff or outsourcing to an accounting firm based on your specific needs and resources.

Outsourced accounting is gaining popularity as businesses face talent shortages. When implemented strategically, it can drive growth by improving efficiency and allowing companies to focus on their core strengths.

Critical considerations for successful implementation include:

Understanding the benefits
Timing the transition effectively
Choosing the right level of service coverage

By carefully evaluating these factors, companies can make informed decisions about outsourcing their accounting functions to maximize potential advantages.

What is the difference between outsourced and in-house accounting?

Business size, operations, and goals should guide accounting choices. Small firms may prefer the personal approach of in-house accounting and the immediate responsiveness of an in-house team, while larger companies often benefit strategically from outsourcing. The decision to outsource is not merely a cost-saving measure but a calculated investment in efficiency, expertise, and adaptability.

Some Pros or Advantages of Outsourced Accounting

Access Specialized Team Expertise: Outsourcing accounting gives access to a CPA firm’s team of diverse professional experts, overcoming the limitations of small in-house staff. This approach provides access to a broader range of specialized skills than typically available with a few full-time employees. Collaborating with internal and external teams can enhance the organization’s overall productivity and effectiveness. Outsourcing provides cost-effective access to top-tier financial expertise. You only pay for the work you need, and you share your CPA firm with other clients. That helps you get expert advice at a fraction of the cost.

Flexible Task Management: Efficiently handle varied accounting tasks that don’t fit standard job descriptions. Outsourcing enables the efficient distribution of accounting and bookkeeping tasks among part-time specialists. This approach optimizes workload, ensures task-specific expertise, and delivers high-quality results.

Industry Best Practices: Outsourced accounting experts bring industry knowledge and innovative technologies to your organization, enhancing efficiency and competitiveness. Their up-to-date practices keep your business current in a rapidly evolving financial landscape.

Adaptability: Accounting technology and regulations evolve quickly. Outsourcing provides agility, enabling organizations to adapt swiftly without extensive internal retraining or restructuring costs.

Clean Financial Statements: Raising capital is a major accounting challenge for startups. An experienced accounting firm can ensure your financial records are accurate and up-to-date. They also offer valuable consultation during fundraising, such as determining how much capital you need based on your burn rate, financial due diligence and providing business valuation to understand your company’s worth. These insights are difficult to obtain from an in-house bookkeeper.

Cost-Effective Training: Small Business owners often need help to accurately assess the accounting expertise of potential new hires due to their limited knowledge of the field. Hiring and training new employees is costly and time-consuming. Shift the burden of keeping staff up-to-date to the outsourcing partner.

Scalability: Outsourced accounting provides the scalability and flexibility necessary for businesses undergoing growth or change. Easily adjust support levels to match business growth or contraction.

Advanced Tools: Access the latest financial technologies and real-time reporting capabilities.

Outsourced accounting offers more than just keeping books current. It’s a strategic decision that can enhance efficiency, expertise, and adaptability while allowing businesses to focus on core competencies.

When to Build An Inhouse Financial Team as a Startup?

Many early-stage startups choose to have their finance function outsourced. In the beginning, the financials of any company aren’t that complicated. The critical things are bookkeeping, the audit trail, approval for security, and basic systems for good health. Popular fractional options include accounting, finance, and tax. Outsourced accounting typically suits most startups and is recommended as soon as it is incorporated, though some situations may warrant an in-house professional. The choice depends on the startup’s specific needs and circumstances.

According to an article published in Stripe, in today’s competitive funding landscape, startups often prioritize finance hires with investment banking or venture capital backgrounds. These professionals excel at:

Managing capital efficiently
Building robust financial models
Cultivating strong investor relations

This shift from internal bookkeeping to external financial strategy is crucial in securing scarce capital. The quality of financial presentations to investors can significantly impact a startup’s ability to thrive in volatile markets.

As a startup business matures and reaches the $10 to $20 million ARR revenue level, it often becomes necessary to build an in-house accounting and finance team. The complexities of financial management at this stage require a dedicated internal team with a deep understanding of the business’s specific operations. Other factors when companies are preparing for an audit, a fundraise, or both. Back in 2021, I wrote an article about when to hire a CFO. The VC firm Bessemer Venture Partners wrote a comprehensive article about this topic.

Generally if your startup is has any of the following criteria:

VC funding – Your business is looking to raise a seed round (or future rounds)
Acquisitions – You are actively acquiring other businesses
Global expansion – You are scaling quickly and building warehouses in different countries

Niche or Unique Needs: In-house accountant might be preferable if your industry has unique financial practices or if outsourced firms struggle to grasp your specific needs. These specialized circumstances could justify hiring an internal bookkeeper.

Optimizing Operational Costs: An inhouse accountant’s cost is often justified by their ability to optimize operations. They can identify unnecessary expenses and uncover new revenue streams, making their expertise a valuable investment in your business’s financial health.

Factors to Consider When Evaluating Potential Outsourced Accounting Firm Providers

To find the right outsourced accounting provider for your organization, evaluate the following criteria:

People: Assess in-house expertise and fulfilled roles to identify gaps in your accounting team. Collaborate with your provider to determine how the outsourced team and its skills can address these needs.

Process: Review the accounting responsibilities and processes that require attention. Stress the importance of working with your provider to ensure the outsourcing approach aligns with your organizational goals and procedures and to instill confidence in the audience about the strategy.

Technology: Evaluate what are the current technology systems being used. Talk to potential partners to learn how the outsourced team can implement the latest technologies to enhance efficiency and accuracy.

Management Decisions: Define how management will make critical decisions when working with an outsourced accounting provider.

Internal Points of Contact: Designate internal contacts to ensure smooth communication between your organization and the outsourcing provider.

Proper Controls and Segregation: Reiterate the importance of establishing appropriate controls and segregation of duties to maintain data integrity and security, to make the audience feel secure about the process.

Common Accounting Job Roles and Duties

The following sections detail various outsourced accounting services, including their scope, tasks, benefits, and potential drawbacks. This overview will help your team make an informed decision about which services best suit your needs.

Outsourced Bookkeeping

Outsourced bookkeeping involves delegating basic financial tasks, such as:

Recording transactions/data entry
Reconciling bank and credit card statements
Sending and paying invoices
Running payroll
Gathering information for tax filing

Pros:

Ensures accurate and timely transaction recording
Frees up internal resources for strategic activities
Often more cost-effective than hiring a full-time bookkeeper

Cons:

May lack the in-depth understanding of the business that a full-time employee might have
Communication and data privacy can be concerns depending on the chosen vendor

Outsourced Accounting

Outsourced accounting services cover a wider range of complex financial duties, including:

Preparing financial statements and reports
Budgeting and financial planning
Preparing financial forecasts
Closing books on a monthly basis
Customer billing and collection
Establishing and monitoring monthly key performance indicators (KPIs)
Setting up and managing accounting systems

Pros:

Access to higher-level financial expertise without the cost of a full-time accountant
Better financial reporting and insights for decision-making

Cons:

May lack the personal touch and depth of understanding of business operations
Possible communication barriers and time zone differences if outsourced offshore

Outsourced Controller or VP of Finance

An outsourced controller or VP of Finance oversees the entire accounting process, including:

Overseeing month-end close procedures
Producing financial reports, including profit and loss statements, cash flow statements, and balance sheets
Coordinating with tax accountants to prepare filings
Overseeing bookkeeping tasks such as recording and categorizing transactions
Monitoring accounts payable and receivable
Sending invoices and paying bills

Pros:

Ensures compliance with financial statements and regulations
Provides a higher level of oversight for financial processes

Cons:

Costs can be higher compared to lower-level accounting services
May not have the same level of control and immediate access as an in-house controller

Outsourced CFO

Fractional, on-demand or Outsourced Chief Financial Officers (CFOs) offer comprehensive strategic financial leadership, such as:

Building internal accounting and finance frameworks
Establishing budgets for new projects
Supporting capital raising and managing investors and lenders
Reviewing tax work and financial statements for distribution to investors

Pros:

Strategic financial leadership to guide business growth and investment
Often brings a wealth of experience and network connections across different business sectors

Cons:

Can be expensive, although usually far more cost-effective than a full-time CFO
May not be fully integrated into the company’s culture or day-to-day operations

Conclusion

Accurate and effective financial management is crucial for sustainable growth and operational excellence. Outsourced accounting provides a cost-efficient way to access expert financial guidance for rapidly growing businesses, those facing complex compliance issues, or established companies undertaking intricate financial projects. If you are a small business startup that interested in learning more feel free to reach out to Huckabee CPA for free consultation.