For many US businesses, keeping books in house may become challenging as it grows since it entails many transactions, expenses incurred by the workers, money paid to suppliers, bills sent to customers, and many more financial transactions that have to be handled by the business. This may make the owner spend more time handling such transactions rather than managing the business.
The second way through which businesses may keep books is through outsourcing it. Outsourcing refers to assigning the task of keeping books to outside organizations who provide accounting services. Moving from in house to outsourcing of books involves planning and organizing finances and clearly laying down of duties without interfering with the business operations.
Understanding how to transition to outsourced bookkeeping can help businesses make the change smoothly while maintaining financial accuracy and control.
Why Businesses Are Moving Toward Outsourced Bookkeeping
Companies usually implement the internal accounting method at the very beginning because of its convenience; however, it is quite complicated to use this method as the company's processes become bigger.
It will be the duty of an internal accountant to do accounting transactions, reconciliations, billings, payments and accounting reporting. With the increasing amount of work, daily activities may interfere with the financial tasks.
Outsourcing accounting enables the companies to use the professional services of accountants without having to worry about the details. Furthermore, outsourcing allows greater flexibility in case of increases in financial load.
Here are some reasons why businesses think of outsourcing accounting:
- Increasing amounts of financial transactions
- Lack of professional accountants in the company
- Costs related to the internal financial personnel
- Delays in financial reporting and reconciliations
- The need for clear financial records
Before moving to the outsourcing of accounting, a company should find out what the expectations and needs concerning accounting are and what tasks are going to be performed by the outside provider of services.
Evaluate Your Existing Bookkeeping Process
The first step is to conduct an analysis of the existing accounting processes in the company. The reason is to be aware of any issues in the process and ensure that no important process is forgotten during the outsourcing process.
The next step is to conduct an analysis of the financial transactions performed by the organization in a week, month, and quarter. This may include sales, payment of invoices to vendors, expenditures, banking account reconciliation, accounts payable and accounts receivable management, and preparation of financial statements.
There is also a need to understand how the flow of information occurs in the organization. This may include sales giving invoices to the client, operations recording the expenses, and HR department providing payroll information.
This ensures that the outsourced firm is aware of how the organization conducts its business internally.
Identify Tasks That Can Be Outsourced
All obligations need not necessarily be outsourced to another entity. The company is in a position to know what type of obligations are to be done by themselves and what other obligations are to be handled by the external bookkeeping firm.
Some of the obligations, which include transaction postings, bank reconciliation, classification of expenses, handling of invoices, and monthly reports, are normally outsourced.
Decisions on finance, authorizations on expenditures, and budgeting can be left to internal management.
A clear demarcation of duties can help to ensure control of processes, while providing the freedom for professionals from the outside to do the bookkeeping work.
Organize Financial Records Before the Transition
Disorganization in financial documentation will lead to problems once the outsourced company takes over the financial process. Missing invoices, inaccurate transaction details, outdated vendor information, and imbalanced bank accounts are just a few of the problems that will make the entire process very complicated.
Before the transfer of financial responsibility, companies need to organize their financial documentation.
Some of the financial records that may be useful in the outsourcing process include the following:
- Past financial statements
- Statement of accounts and payment
- Bank and credit card statements
- Customer invoices
- Vendor bills and accounts payable
- Payment records
- Payroll and employee expenses
- Tax documentation and schedule
- Records in accounting software
It is important for companies to state all open transactions, open invoices, imbalanced accounts, and other accounting errors.
This makes sure that the outsourcing company will start with legitimate documentation and not inaccurate ones.
Starting Balance
A starting balance is extremely important during the transfer process. Bank accounts, credit card, accounts receivable, accounts payable, loans, and other balance sheet accounts should be examined before the outsourcing of the firm’s bookkeeping process.
If the opening balances are incorrect, financial reports prepared after the transition may also contain errors.
Where necessary, an internal finance professional or qualified accounting advisor should review the balances and resolve significant discrepancies.
Choose the Right Outsourced Bookkeeping Provider
Selecting the right provider is another important step in the transition process. The company has to evaluate the experience of the provider, services offered, ways of communication, technologies used and data security measures.
The provider has to be knowledgeable about the industry and types of financial transactions conducted by the company. Construction companies will need project-level accounting, while online retailers will require payment gateway reconciliation and sales platform data.
The following factors should be considered during analysis of the providers:
Experience of the Provider in Regards to Your Bookkeeping Needs
Choose a provider, who is knowledgeable about your business model and volumes of financial transactions. It is important to know what kind of bookkeeping activities and platforms for accounting the provider uses.
Ability to Work with Your Accounting Software
It is essential that the provider could integrate with your current accounting software, or at least help you to develop a proper accounting system.
Some examples of such platforms include QuickBooks Online, Xero, Zoho Books and others.
Data Security and Confidentiality
The bookkeeping process involves working with confidential financial information. It is important to analyze the access rights, confidentiality agreements and data security measures of the provider.
It is also important to understand the storage and handling of financial data.
Communication and Reporting
Define how frequently the communication will take place, who will be the account manager, and how the reports will be sent.
Effective communication will help avoid any misinterpretations and solve all the financial problems in time.
Access to Accounting Software and Duties Transfer
Once the best service provider has been selected, it is time to provide access to the accounting software and finance documents.
It is recommended to not share any personal passwords with the third party. It is important to assign the appropriate permissions wherever the accounting system allows it.
Thus, the provider will have access to all necessary information and functions.
At this point, it is also essential to define:
- Who will make the entries and categorization of transactions
- Who will perform the bank and credit card reconciliations
- Who will work on customer invoices and vendor payments
- Who will review the financial reports monthly
- Who will approve the payments and make any corrections
- Who will work on communication with other departments within the company
The approval of the payment and any financial actions should remain under the responsibility of the business unless there is an alternative agreement.
This will ensure efficient work of the outsourced provider while maintaining financial control of the company.
Start With a Gradual Transition
It will not be prudent to shift all the accounting functions at once because it could result in too much pressure on the organization. The process should be done in stages in order for the organization to test the process and correct any mistakes before it shifts all the functions to the new service provider.
For example, an organization can start with transaction posting and bank reconciliations. When this has been done successfully, it can move its other processes such as accounts payable, accounts receivable, expense recognition and reporting to the service provider.
It is important for the internal staff to be around during this period to assist in answering questions and advising on the existing process.
The first period of reporting is very important since it needs to be analyzed for reconciliations, allocation of expenses, aging and financial statements.
A proper planning for the transition of bookkeeping can ease the administrative burden, ensure consistency in bookkeeping, and give business owners some time to focus on running their businesses.
The Fino Partners is an outsourced accounting and bookkeeping firm that offers assistance to firms wanting to streamline their financial operations. Businesses can contact our team to discuss bookkeeping and transition.
