Payroll processing and maintenance of accounting books are two distinct business activities; however, both rely on similar information. Salaries, payroll taxes, benefits, reimbursement, and contributions from employers can have an impact on accounting books. This is why certain small firms prefer having one service provider for outsourced bookkeeping services and payroll services. An integrated approach simplifies the process and allows businesses to communicate better, but it is not necessarily the best decision for everyone.
Businesses should take into account several factors: the size of the company, the complexity of its payroll, expertise of employees, and capabilities of the chosen providers when making a choice between separate and integrated services.
What Combined Bookkeeping and Payroll Services Actually Offer
The combination of bookkeeping and payroll services involves placing together two similar financial functions under a single vendor or service delivery system. Depending on the contract, the services offered by the vendor may involve routine bookkeeping, payroll processing, payroll related record keeping, reconciliation, and financial statements preparation.
However, each vendor provides different coverage of services, hence businesses need to take care and ensure that the bundled service does not cover all the accounting and payroll activities.
In this case, bookkeeping involves recording financial transactions of the business. Payroll involves payment of salaries and handling of other payroll related activities.
A combined bookkeeping payroll bundle may include services such as:
- Recording business revenues and expenses
- Bank and credit card reconciliation
- Processing employee payrolls
- Recording payroll expenses in the accounting system
- Tracking employer payroll expenses
- Keeping payroll-related records
- Preparation of financial statements
- Facilitating payroll reconciliations
- Providing necessary information for payroll tax reporting
Nevertheless, it is advisable to verify the exact services provided prior to entering into an agreement.
Where the Two Functions Naturally Connect
Payroll being one of the biggest expenses incurred by the company affects the financial statements and the cash flow of the company.
The accounting records will need to show accurate details regarding the payroll expenses and liabilities of the business firm. In case the payroll information is not fed appropriately into the accounting records, the financial statements may become erroneous.
Let's assume that the business incurs $30,000 in the processing of employees' payrolls within a certain month. There should be an accurate depiction of the payroll expense and liabilities in the accounting records of the business.
In case there is no appropriate integration of payroll information in the accounting records, there is a likelihood of the expenses and liabilities not being accurately shown.
Here, coordination will prove important.
The company handling both these services will have access to all the necessary information required in the reconciliation of the two processes.
The link may also assist in providing month-end accounting services. Instead of having the bookkeeping company wait for the payroll details from another service provider, the process can be done within the same workflow.
That does not eliminate the need for review. Businesses should still check payroll reports and accounting records regularly.
Why Some Businesses Prefer Bookkeeping and Payroll Services Together
One of the main reasons why small businesses would consider merging these two services is convenience.
Having separate providers will require dealing with different people, different systems, different timelines, and different processes. A small business owner might have to communicate the same changes or information regarding payroll to different providers.
In case the services are merged, there could be fewer communication channels.
This will be especially handy for small firms that do not have a finance department.
Another positive point could be better communication as well. Payroll and accounting services are interrelated to each other, which makes it easier for one provider to notice differences between payroll data and accounting data.
For instance, if the compensation of the employee has changed, then it is necessary to change this information in payroll. Payroll expense should be reflected accordingly in the firm's financial accounts.
It will be easier for the merged provider to identify this information.
It could be also helpful to have only one person to talk to.
Other possible benefits might include:
- Easy communication: Only one person will need to be coordinated for financial dealings.
- Linked documents: Payroll data could be included as part of accounting procedures.
- Reduced administrative effort: Business owners will be able to devote less time to coordinating among different vendors.
- Combined analysis: The two sets of data will be analyzed in conjunction with one another.
- Streamlined problem-solving: Any questions arising in connection with both the accounting process and payroll would be handled by one group.
- Simplified vendor management: It will be easier to coordinate only one arrangement than several separate ones.
For businesses looking for integrated financial services, these advantages can make a combined arrangement attractive.
When Separate Providers Might Still Make Sense
However, the combination of bookkeeping and payroll services is not the only option in dealing with such functions.
A lot of companies work well with separate providers. At times, separation of such services can offer more opportunities.
For instance, a company might have its trusted bookkeeper familiar with all of the intricacies of its accounting system at the same time utilizing a separate payroll provider for its particular workforce.
At other times, separation of the providers makes sense because of the complexity of the payroll functions.
Companies with various states, different types of employees, commissions, bonuses, benefits, contractors, etc. may require a provider experienced in complex payroll systems.
In the same way, companies with complex accounting needs may need a specialized accounting firm offering accounting services in addition to bookkeeping.
Other reasons for separating the providers can include:
- Established relations with trusted specialists
- Complex payroll needs
- Complex accounting needs
- Various technology needs
- In-house finance departments handling one of the functions
- An opportunity to independently evaluate specialized providers
- Different levels of services needed for accounting and payroll
The cost should also be carefully considered.
A combined service provider may not necessarily be cheaper than having individual providers for different tasks. What really matters is the entire process of services rendered, quality, technologies used, communication, assistance, and administration.
Entrepreneurs should not overlook the consequences of breaking the relationship. When a business has both its bookkeeping and payroll provided by one agency, changing this provider becomes more difficult when the decision is made.
Everything depends on the needs of each particular enterprise.
It is not about identifying which of two options is better, but rather about choosing such an option that will ensure accurate record keeping, proper payroll processing, and communication.
Questions to Ask Before Combining These Services
Before settling on a combined provider, it’s best for the business owners to get a good idea of how the bookkeeping and payroll processes operate.
Some questions to ask first include:
- What do I get with the engagement?
- Though a provider offers bookkeeping and payroll services together, they may be very different from those offered by other providers.
- Ask what’s included in each of the processes.
Bookkeeping should include things like reconciliations, monthly financial reports, transaction classification, management of accounts payable/receivable, and year-end preparation.
Payroll should cover process, payroll tax responsibilities, employee onboarding, payroll changes, reporting, and payroll year-end documents.
It’s equally important to know how the processes interact.
Questions that may prove helpful include:
- How is the payroll information entered into the accounting system?
- Who oversees payroll related entries in the books?
- How are payroll discrepancies identified and addressed?
- How often are bookkeeping and payroll data compared and reconciled?
- Who is my main contact person?
- Which bookkeeping and payroll systems are supported?
- How are employees’ and financial data safeguarded?
- What if payroll information is provided late?
- What is included in the monthly payment?
- Is year-end accounting and payroll preparation included?
- How are additional services/unique payroll needs charged?
Additionally, businesses should also determine how the provider manages changes.
Payroll services are dynamic. There can be changes in the number of employees, there can be changes in payment amounts, there can be changes in the payroll schedule, etc. The accounting process has to reflect these changes as well.
It is very important that the provider explains the process of managing changes in their workflow.
It is essential for businesses to make the choice based on their business requirements, and not the other way around.
For small businesses, there will be no problems when combining these services from The Fino Partners. However, what businesses should do is compare everything mentioned above. A well-structured process for choosing a bookkeeping payroll provider should focus on accuracy and accountability as much as convenience.
