Utility Of Financial Outsourcing – Definition, Types, Advantages

When the work gets too hectic in the office, companies usually prefer to outsource certain tasks and jobs to third-party vendors. This takes the heavy workload from employees enabling them to concentrate more on other important tasks that will help in the business growth and expansion. Let’s see the financial and accounting side of this – financial outsourcing. Today we will discuss the utility of financial outsourcing along with its various advantages, functions, and more. 

Definition

When companies hire an outside organization or a third party outside their own company for performing and completing various tasks, it is called outsourcing. And when these tasks are of a finance and accounting nature, it is called financial outsourcing. This third party will be responsible for all finance and accounting sides of the business which includes noting down all financial transactions, bookkeeping, creating a budget, VAT returns, evaluating business performance and financial growth, etc. 

Types of Financial Outsourcing

The Financial Tasks That Can Be Outsourced Can Be Broadly Divided Into 7 Categories. They Are as Follows:

Accounting Services:

This entails all financial transactions occurring in a business. It is among the most common type of financial services to be outsourced. The services coming under this are:

• Bookkeeping: This service has an organized account called ledgers where all financial transactions of the company will be recorded thoroughly. It also involves the preparation of all financial statements, monthly reports, source documents, and other necessary documents. This task is often outsourced as it is a rather repetitive and mundane job.

Some of the Other Functions of Bookkeeping Service Are:

• Ledgers: creation and proper maintenance
• Cash management
• Payroll management: This helps to create a well-established profile to make sure all employees and workers are paid on time and as per the amount set by the employer with the help of the data given by the client. 
• Managing maintenance or subscription renewals
• Managing expenses within a time period
• Processing all invoices
• Processing all employee expense
• Setting up a bookkeeping system with modern technologies and software 
• Creating consolidated reports of multi-currency and multi-entities 
• Managing procurement and pay/ e-payments

Bookkeeping services make sure to keep all financial data of a company/ business updated accurately which in turn helps in making well-informed decisions about the future of the company, whether it be selling or investing or anything else.

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Account Management:

This includes calculating and analyzing accounting data of account receivable (AR) as well as accounts payable (AP). The functions included in this that are usually done by a management accountant are as follows:

• Imaging and storing all invoice records
• Getting invoices approved
• Approving necessary online payment
• Check to process
• Reporting all expenses
• Handling any queries by vendors or customer
• Managing customer billing and payments
• Managing collections
• Cash forecasting and its due reporting
• Revenue projection
• Managing debts
• Timely financial reporting 

Outsourcing this task not only frees up the valuable time of your employees, but the professionals who do this job will have all the latest technologies involved to ensure the data provided is as accurate as it can be. This in turn can help you to plan well for your business growth. 

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Tax Accounting:

This involves tasks related to preparing, filing, and claiming tax returns and payments. This is an essential task as most funds in a business are assessed thoroughly to determine whether the fund used will be considered taxable or non-taxable. The accountant also ensures that all financial reports for tax filing will be in compliance with local, state, and federal tax laws. This also helps in reducing any vulnerabilities in accounting and removes the chances of financial computation errors that can adversely affect your business growth. The accountants responsible for this task will be continuously checking and learning the laws to keep note of any sudden changes in the tax laws.

The Main Functions Included in This Task Are:

• Study tax laws
• Remove any cases of unnecessary tax payments
• Proper tax planning to reduce a business’s tax payment and reduce the risk involved
• Preparing state and federal income tax returns of the business
• Giving assistance in collecting, filing, and remittance of tax and also ensuring that tax returns are in compliance with the latest tax regulations.
• Tax support
• Ensuring collection, filing, and payment of payroll tax
•  Proper reviewing of financial statements for compliance

 Accounting Audit:

Audits are held to analyze and ensure that a company’s accounting and financial statements are in accordance with the applicable laws and regulations. This also ensures the transparency of the company’s financial health and business practices. Good auditing will reduce and eliminate the chances of malpractice, fraud, and corruption in the company since they gather all information and evidence to assess whether the financial reports and accounting statements have any sort of mistake or misstatements.

Forensic Accounting:

In case of a financial crime like fraud or embezzlement, investigations are conducted regarding the finances of the company. This is known as forensic accounting. Outsourcing this task is preferred as it will ensure that your documents and financial statements are safe and kept confidential, while also helping you to recreate any missing documents or destroyed business records. The forensic team will analyze all internal processes to improve security to protect your assets and important documents from any future attempts at fraud and destruction, while also ensuring maximum productivity. 

Payroll Services:

This can be part of bookkeeping or given as a separate task. The outsourced firms will have the latest software that ensures accurate processing of payroll. Outsourcing reduces the risk of occurrence of any liabilities or mistakes in tax returns and payrolls, which can adversely affect the company due to heavy penalties.

The Functions Included in This Are:

• Tallying the pay cycle of the company
• Accounting of all on-demand services 
• End-of-month services
• Year-end services
• Studying payroll management rules of the company and ensuring the timely amount paid to the employees is in accordance with the management regulations.  

Statutory Reporting and Compliance:

This service ensures that the financial statements submitted to the government are in compliance with all related federal, local, and state laws. This also includes payroll processing compliance, adhering to IFRS and GAAP, tax reports, consolidations, etc. Proper compliance shows the transparent financial health and stability of your company and this can be appealing to any future potential investor. 

Cost Accounting:

This service is required by companies involved in product manufacturing and service rendering. To make profitable pricing decisions, the cost accountant often works with people in the supply chain, manufacturing, marketing, and Research and development (R&D) wings. This also helps you decide whether to scale up or scale down the resources required for business growth. 

Financial Planning and Analysis:

This service provides an in-depth evaluation of the company’s financial state and health so as to make good decisions for the company.

The Functions Included in This Financial Service Are:

• Preparation and management of financial reports
• Process mining
• Collecting and interpreting relevant data
• Audit support
• Acquisition integration support
• Reporting bank and board data
• Analyzing the company’s financial data
• Communicating and reporting to the investor
• Planning, budgeting, and forecasting finances 
• Creating reports of cash flow predictions

Industry-specific Outsourcing:

The industries that go for financial outsourcing the most are commonly real estate businesses, banks, insurance companies, and lending organizations.

For Real Estate Businesses, the Specific Services Required Include:

• Sales support – while real estate agents have on-field or on-road work, the sales support team helps them remotely. From setting up meetings with the clients, booking time for inspection, and delivering proposals, anything that is required for the support of the agent, it is the responsibility of the sales support team.
• Property management – These managers are responsible for collecting rent, advertising, organizing maintenance, and required repairs for the site they are overseeing, whether it be commercial, retail, or residential properties.  

For Insurance Companies, the Services They Require Most Are:

• Policy management –

Policy management involves tasks like policy checking, renewals, issuance, etc., and is one of the most important jobs in an insurance company. Outsourcing this task is preferred as it can be a time-consuming and complex task, and the professional team will be able to work efficiently to save time and costs and minimize risks.

• Insurance data services –

Insurance companies always have a large amount of data being entered which requires processing work, hence why it is outsourced.

• Claims administration –

The main function of an insurance company is to report claims, process the claim, and upon settlement, provide the necessary claims and releases. This can also be outsourced to reduce overhead costs without affecting the company’s productivity.

• Annuity –

These are long-term investments made where purchase payments are turned into regular payments. This can be used to help with your retirement, legacy planning, spousal protection, or any other specific goals of an individual. 

• IT support –

Technology and technical support have become a crucial part of any industry, and for insurance companies, this support ensures support for the insurance data. Outsourced firms can create apt technical strategies to prevent data breaching, improve data security, etc. 

• Insurance software and productivity tools –

Most outsourced firms will always have the latest software to ensure data accuracy and prevent data loss.    

• Lending organizations and Banks – the financial services these companies will outsource are:

• Account servicing – this involves managing client accounts, acting as a liaison between the client and the company in terms of finances, etc.
• Consumer and commercial lending – This service ensures that all consumer loans, commercial loans, and funding made based on debt, are in compliance with relevant rules and regulations.
• High-value functions – Although not very common, this service includes creating budgets, maintaining regulatory returns, forecasting, and capital management. 

Financial Controller services – they provide strategic guidance for your business and the most common functions included in this are:

• Reporting the Key Performance Indicator (KPI)
• Analyzing cash flow
• Overseeing transactional processing
• Ensuring proper guidance to various policies and procedures and adhering to it.
• Preparing and reviewing performance indicators
• Reviewing the product line or services efficiency
• Looking after the overhead expenses and implementing cost-reduction methods
• Compliance management
• Ensuring good employee-to-vendor and vice-versa communication
• Management reporting
• Audit reporting  

•  Unit Pricing –

Unit pricing is offered as a service as it helps customers to identify and compare the prices of similar goods with ease. This is commonly employed by traders, merchants, and some online shopping sites. This is outsourced to provide good unit price and custody arrangements to products and unit-linked funds.

• Investment management –

The service involved in this are customer-specific but commonly include portfolio management, stock selection, allocating assets, etc. Outsourcing ensures time and cost saving while receiving great portfolios and strategies for asset allocation.

• Underwriting and claims payment –

Underwriting occurs when a company/ business encounters a financial risk by taking a loan or investment. Outsourced firms will process any insurance claims, and also accepting some underwriting on behalf of the company

• Financial analysis –

this helps in making good financial policies for the company based on the current trends, and identifying and accepting new projects, and making investments based on the company’s financial and business goals. Analysts will thoroughly analyze the financial data of the company to help make these decisions. 

Pros and cons of financial outsourcing 

While it is easy to give the mundane task to someone else, it is also important to consider all sides of actual advantages and disadvantages of giving your financial data to a third party. 

We’ve already seen some of the pros in the initial part of the article, but let’s pinpoint the advantages of financial outsourcing. 

• Low expenses – financial outsourcing is cheaper than hiring permanent staff as you’re only required to pay for the services offered for a specific time period. This also allows you to cut back on hiring and recruitment efforts and money. 
• Increased efficiency and productivity within the company – outsourcing certain tasks allows your employee to concentrate and work hard on projects that will bring in more income and revenue. By outsourcing financial tasks, these tasks are also ensured to be completed on time.
• Accountability and accuracy – KPIs and other financial outsourced firms uses the latest technologies and software which ensure maximum report accuracy as well as data integrity and security. These are pretty common standards mentioned in the contract and requirements met by outsourced firms and KPIs. 
• Saves time – for start-ups and small rapidly growing businesses, time is of great value. They can work more towards their overall financial and business goal to stay afloat or bring in more revenues if most of the repetitive work is outsourced to experts. 
• Expert advice – outsourcing ensures that your tasks can be carried out by as many specialists as you require without having to worry about additional expenses. This is also more affordable than having experts hired in your company. The in-depth knowledge of these experts makes sure that your data is in accordance with all respective laws as well as noticing and avoiding and countering any risks and liabilities. 
• Data-driven technologies and analytical insights – Technological advancements in data engineering and data analysis have paved the way to more real-time data-driven business decisions being made strategically for better business growth. Nowadays, it’s mostly about which business/ company can make the best decisions based on this data. The better the financial outsourced firms are the better and more operationally transparent the financial reports will be, containing major analytical insights that will help in the decision-making process. 
• Less workforce pressure – When most financial workloads are outsourced, it eliminates the need for recruiting high-level qualified individuals to do the same task. This in turn reduces the workload of talent acquisition teams. In recent years, it has become quite time-consuming, costly, and often frustrating to recruit outstanding individuals if most of the bright candidates are already hired by someone else and the average candidates have higher demands and expectations. 
• Swift reports – as most outsourced firms are based on contracts, the speed at which the reports are expected by the company will be met. If this is done internally, the speed will be rather decreased as they are also swarmed with multiple other projects with their own deadlines. 

• Less control – when a task is outsourced, there is a loss of control over how things are done and managed. Since the tasks outsourced are not being overlooked directly by the client company, there could be changes made in doing things that could affect the quality of the data, and contractual disputes can occur. Control can be an issue when the distance is great if proper communication is not happening, especially if the vendor is offshore. Then monitoring the performance and ensuring productivity can be difficult. Depending on the location where the financial data is outsourced, cultural and language-based differences can also spark troubles between vendor and client. 
• Financial risk – Risk is part of any business but when it comes to critical financial outsourced data, risk can be more because you’re sharing the data that is essentially the backbone of a business – asset information, financial reports and statements, intellectual property, etc. There is always a risk of data leaking/ loss due to security breaches. The data can also be tampered with in a way it can affect the company negatively.
• Extra costs – Any contract should be well prepared and managed. This is to avoid any extra costs from suddenly popping up. All outsourcing costs should be properly calculated and accounted for to prevent any additional loss later on.
• Time management – Sometimes, it may be difficult to achieve a proper working time harmony between client and vendor. If the outsourced finance and accounting firm is not giving back reports at proper times or does not meet the set deadlines, it can cause the business operations to decline or affect negatively. Hence the morale of the internal team can also depend on the vendor’s proper reports and financial statements. 

Frequently Asked Questions (FAQs)

1. Is it possible to outsource data for a few financial tasks or should the entire work be given?

This is totally up to the company’s decision, whether it is a few tasks or all financial and accounting tasks, the company can decide what to be outsourced. 

2. Is financial outsourcing a good idea?

Yes, financial outsourcing is always a good idea as it can save time, money, and employee resources for other work. Outsourcing also allows your financial data to be analyzed by industry experts and veterans for the best results.

3. What is the best time to start considering financial outsourcing? 

Financial outsourcing can be considered as soon as you start a business, as this is the point where you’ll need maximum sound financial advice and reports to kick off the business and stay in the industry. Well-established companies also consider outsourcing their financial and accounting tasks. 

Conclusion 

Here, we’ve seen what financial outsourcing is in general, the types of financial outsourcing services available, and its advantages and disadvantages. Risk is inevitable in businesses, but rather than hiring so many people for a single task, it is more advisable to outsource such tasks to be completed by a group of experts. But it is also important to know your financial outsourced firm well and to prepare a good contract entailing all necessary rules and guidance for the best financial reports as well as to avoid any data leakage or security breaches.