A critical question asked by founders and executives of tech firms – especially those companies in the early stages of growth – is whether they should hire one or more accountants, or whether it would be wiser to outsource the accounting function to third parties.
At Laurentian, we’ve frequently seen this issue arise – and we’ve seen it handled in different ways by different companies. For some firms, it may be that their fast rate of growth makes the decision to hire an accountant seem like a no-brainer. And yet, there can be additional factors that make such a decision less of an open-and-shut case than it’s sometimes perceived.
And there’s another group of companies for which it’s clearly a very difficult decision whether to hire an accountant or outsource the role. For these types of firms, as well, there can be important factors to consider before making the choice.
For everyone wrestling with the issue, here are what we consider the top seven benefits of outsourced accounting for tech firms:
1. Lower Cost of Outsourced Accounting
The potential for cost savings is the benefit most often cited as the decision driver for contracting out the accounting function. And in fact, there are significant savings from the reduced employee compensation. However, the savings don’t end there: administrative costs related to employee benefits, payroll and unemployment taxes, staff training, recruitment, office space and IT equipment and software are also reduced.
As CPA Practice Advisor makes clear, starting with cost efficiency, there are significant advantages for clients who decide to outsource. And according to a survey conducted by Northwest Staffing Resources:
… an employee can cost approximately 57 percent more than the stated wage due to the cost of benefits and the amount of time they are actually focused and on task. For example, a $50,000 employee could actually cost the company almost $78,500 a year. An outsourced firm, however, can provide complete accounting services for roughly $3,000 per month or $36,000 per year.
Therefore, even though the accounting service provider is unquestionably in business to make money, economies of scale and efficiency can reduce the provider’s per-transaction cost compared with that of a typical small business.
2. Greater Flexibility of Outsourced Accountants
Closely tied to the point, described above, that the total cost of using outsourced accounting is less than that of hiring a full-time, in-house accountant, is the second benefit to tech firms of outsourced accounting: the greater flexibility it offers.
This benefit works both ways, not only during busy periods or when the company is expanding and needs more accounting help, but also when times are slower or the company needs less accounting expertise. In these situations, the flexibility of outsourced talent will allow the firm to either scale up or scale down quickly, easily and temporarily, as the situation demands.
3. Lower Chance for Fraud with Outsourcing
Most business owners couldn’t imagine that their trusted, in-house accountant would steal from them, but just a look at the local news is enough to prove that it happens again and again.
In a study conducted by the Association of Certified Fraud Examiners (ACFE), it was determined that that 77% of occupational frauds were committed by employees working in accounting, operations, sales, executive management, customer service, purchasing or finance. Additionally, the study found that 53% of those committing fraud had been with their company for more than five years.
Additionally, an article by QuickBooks entitled “Fraud Statistics Every Business Should Know” describes how smaller companies tend to get hit by fraud more often than larger companies, and that the amount of the fraud tends to be larger for the smaller firms. The article goes on to state the following:
… the ACFE found that companies with fewer than 100 employees are particularly vulnerable compared to their larger counterparts. Whereas larger companies were more likely to have anti-fraud practices in place – such as hotlines, employee fraud training and internal departmental audits – smaller companies were less likely to implement similar anti-fraud controls that typically detect fraud sooner.
Again, while no company founder or executive wants to imagine that their apparently devoted, in-house accountants would commit fraud against their company, it happens much too frequently – and provides yet another reason for why outsourced accounting has proven so successful in recent years.
4. Better Maintenance of Financial and Legal Documents
In our experience, more than a few tech firms struggle with maintaining up-to-date financial and legal documents. As you can imagine, this presents a real problem when a new round of financing is needed or if a potential acquirer suddenly appears. In these situations, the company then has to scramble to get their due diligence documents in one place and up to date.
For tech firms in particular, things can suddenly move very quickly, so always being ready is critical, whether it’s for the totally unexpected or the long-hoped-for event. At Laurentian, we have found that even competent, full-time staff do not necessarily have the knowledge or bandwidth to keep these documents in order. This can lead to more than just a mad rush when they’re needed; it can result in a greater chance that they won’t be done correctly.
5. Expertise in Subscription Management and Revenue Recognition
With the dramatic rise of SaaS (Software as a Service) over the last decade, more and more software firms have been finding that their revenue model includes subscription-based pricing. And although the recurring revenue aspect of this model is valuable, such an approach requires special accounting management so that revenue is properly recognized in the right period.
Of course, companies can start using spreadsheets to manage this revenue, but as the company grows, much more sophisticated tools are required. This can mean having to use software programs such as SaaS Optics, TrueRev or Zoho for reliable subscription management and proper revenue recognition. Ultimately, we have found that an outsourced accounting firm is more likely to have special expertise in this area than an in-house employee.
6. Proficiency in Handling State Sales & Local Tax Issues
Given the recent (2018) U.S. Supreme Court decision in Wayfair, businesses that sell software online now need to address state sales tax issues. Previously, most service firms did not have to deal with sales tax, but that has changed dramatically, and there’s a fairly high level of complexity involved.
The essence of the case South Dakota v. Wayfair, Inc. is that states can now require companies to collect and remit sales tax from customers, even if those companies may not have any physical presence in that particular state. This is a dramatic change from what’s been the rule since 1992, and many companies have been caught scrambling to adapt to the new standard.
In a nutshell, this change means that many technology companies will start having to charge state sales taxes. This would be an obstacle all by itself, but making it much more complex is that any and all additional local or county government tax obligations must be collected, as well – and there are thousands of types of taxing jurisdictions across the U.S.
Of course, there are state and local tax software programs that can be set up to take care of this issue, but as always, the questions are: 1) Which one is right for my company?, and 2) How do I set it up with my online sales software?
Once again, this is the type of issue that an outsourced accounting firm can help you solve much more easily than an in-house accountant, if only because many outsourced firms specialize in just these types of issues.
For more on the issue of state and local tax collection for SaaS firms, see our earlier post, “SaaS Firms and Sales Tax: The Supreme Court Has Mandated the Collection of State Sales Tax for Many Online Companies.”
7. Expertise in the Latest Accounting Tools
Last but certainly not least, in our experience it seems evident that outsourced accountants typically have a better handle on new technology and the latest tools than in-house accountants. This is not meant to take anything away from the many dedicated and hard-working in-house accountants out there, but most technology companies don’t invest in their accountants at the same level as outsourcers. And this is for a simple reason: The focus of most tech companies is not accounting.
On the other hand, the focus of outsourced accounting firms is just that: staying on top of all the constant changes in accounting rules and new accounting tools. Accounting firm employees continually attend finance and accounting conferences to learn about the latest tech that’s coming to accounting, along with what tools work best, and which ones to avoid. New tools are always coming online that can reduce the administrative burden, increase automation, lower cost and greatly assist with analytics, planning and forecasting.
For instance, accounting outsourcers will know about new, automated bookkeeping tools that are already proving valuable to companies. Tools such as Pilot, ScaleFactor and Botkeeper are changing the face of bookkeeping. Your accounting outsourcers likely will be more than willing to introduce you to them, and help you decide which, if any of them, might be best for your company. Ultimately, your accounting outsourcer wants to help make your firm as efficient as possible in the accounting space – and whatever might assist in that process is worthy of consideration.
Given these seven significant benefits of outsourcing one’s accounting, the evidence is strong that technology firms making use of outsourced accounting are able to derive significant advantages over those firms that stick with the traditional route of only hiring full-time accountants.
From cost, efficiency and flexibility benefits to the decreased chances of fraud, to the advantages of having access to accountants who are well versed in the very latest accounting software, accounting tools and legal decisions, the benefits are not only varied, they are significant.
Don’t hesitate to reach out to Laurentian CFO Services to have a conversation about how outsourced accounting could benefit your company.