Are you considering finance and accounting outsourcing? Did you already offload a portion of your work to an outsourced professional? Whether you are in the process of transitioning certain roles to an outsourced accountant or you are trying to determine the effectiveness of existing services, understanding how to calculate the financial payoff is important. In this article, we'll explore the fundamentals of finance and accounting outsourcing, focusing on the importance of accounting outsourcing ROI and how to effectively measure it. Remember, every company will have a different approach to tracking financial outsourcing results, making it important to reach out to our team with any questions.
What Is Finance & Accounting Outsourcing?
Accounting and finance outsourcing is the process of moving tasks and responsibilities to an external team. Outsourcing is a great solution if you are looking for expert insight, have too much work for existing employees, want an independent opinion, or are looking to save costs. Here are some of the main roles that CFOs outsource to accounting and finance professionals.
Financial Statement Preparation
Most companies follow Generally Accepted Accounting Principles (GAAP) when issuing financial statements. GAAP regulations are constantly changing, which is why financial statement preparation is a common role that CFOs outsource.
Accountants with a CPA license are allowed to issue financial statements with assurance to lenders, investors, and other third parties. If you need reviewed or audited financial statements or are looking for an independent analysis of your accounting records, an outsourced accountant is indispensable.
Accounts Payable and Accounts Receivable Management
Accounts payable and accounts receivable management are other tasks outsourced by CFOs. Managing these ledgers, including following up with customers and vendors, isn't a good use of your time. By outsourcing this task, you can focus on other value-added activities, such as planning for strategic growth.
Tax Return Compliance and Filings
Tax return compliance and filings can be a major burden for CFOs, especially if they don't have an extensive background in IRS regulations. Outsourced accounting professionals can manage your payroll function, file annual reports, and assist with tax returns, allowing you to direct your attention to other important areas of your organization.
Financial Forecasts and Projections
If you're like most CFOs, you have a strong working knowledge of different financial concepts, like forecasts and projections. However, having an independent set of eyes looking over your reports and suggesting areas of improvement makes all the difference. Outsourced finance professionals can catch items you might have missed, such as the fact that shipping costs have slowly been increasing over the past five years or that bringing on another warehouse employee might improve your margins by 2%.
Risk Management and Oversight
Just like outsourced finance professionals can help with preparing and analyzing forecasts, they can also help you manage risks. Every organization faces risks, from changing customer demand to increasing financing costs. Effectively managing these risks allows your organization to reach its long-term goals, which is why many CFOs enlist the help of outsourced finance professionals.
For a comprehensive overview of finance and accounting outsourcing (FAO), check out our guide: Discover Outsourced Accounting: Finance & Accounting Outsourcing (FAO) 101
Why Is Measuring Financial Outsourcing Results Important?
Now that we've covered common accounting and finance tasks outsourced by CFOs, let's explore why it's important to measure outsourcing return on investment, known as ROI. Outsourcing ROI evaluates the financial return from investing in outsourced professionals. It tracks the CFO's cost-benefit analysis, weighing the benefits received in relation to the cost of using outsourced services. Here are three reasons why it's essential to measure accounting outsourcing ROI.
Generates Tangible Benchmarks
The first reason why measuring financial outsourcing results is important is because it generates tangible benchmarks. When you know the cost-benefit analysis of outsourcing certain roles, you can determine if outsourcing is a viable strategy for your company.
For example, you might find that having an outsourced accountant prepare formal financial statements costs $10,000. However, with those financial statements, you are able to secure a $100,000 business loan that helps your company increase revenue by 10%. In this situation, the benefits outweigh the costs, indicating that outsourcing is a good strategy for your company.
Optimizes the Process
Measuring ROI also helps you make more informed decisions surrounding process automation. Maybe you find that you are spending hours pulling reports for your outsourced accountant, which is taking time away from other important tasks. As a result, you decide to give your accountant access to your accounting software to pull their own reports, streamlining the process.
Calculating ROI forces you to think about what areas could be improved with outsourcing. Without a review of your current processes, you will struggle to maximize value from your outsourced professionals.
Future-Proofs Your Organization
Technology and business processes are constantly changing. Take cloud accounting software, for example. Cloud accounting software wasn't introduced to the business world until 2011. Today, studies suggest that 94% of all worldwide companies use cloud computing in their operations.
Future-proofing your organization relies on adapting to the current business landscape. Maximizing the ROI of your outsourced services gives you the ability to pinpoint where changes might be needed, allowing you to maintain a healthy and profitable company.
How to Measure Accounting Outsourcing ROI
Measuring financial outsourcing results can be done in a few different ways. Let's explore some common methods in more detail.
Analyze Productivity Gains
The first way to calculate outsourcing ROI is to analyze productivity gains. Effective outsourcing leads to quicker project delivery, higher outputs, and more manageable workloads for your employees. Comparing timelines before and after outsourcing is the best way to assess productivity gains.
For example, how quickly are you able to close out the month? Let's say that before outsourcing, it took your team an average of 14 days. Now, with outsourcing, you have final reports in your hands within 7 days. This translates to a 50% increase in productivity.
Let's take this example a step further. With reports seven days sooner, you are able to make more informed decisions about cost controls and resource allocation. This results in an added 10% savings each month. In this cost-benefit analysis, you are improving productivity margins and saving money, creating a positive ROI.
Calculating Cost Savings: A Key Metric for Accounting Outsourcing ROI
The next way to measure outsourcing ROI is to calculate cost savings. What is the cost of hiring an internal staff member to handle the tasks that an outsourced professional is taking on? How do these costs compare to what you're paying?
Let's say that it costs $85,000 to hire an internal staff member, which includes a base salary, payroll taxes, and benefits. Now, let's say that you paid an offshore finance professional $40,000 last year. That's a savings of $45,000!
Cost savings can also come in forms other than just wages. What is the impact on your cash flow from collecting receivables two weeks quicker? How does production benefit from having accurate inventory and asset reports? Many of the tasks that an outsourced professional helps with trickle down into cost savings in other areas of your business.
Uncover Total Revenue Growth Through Accounting Outsourcing ROI Measurement
Total revenue growth is an important component of a CFO cost-benefit analysis. How much additional revenue was your business able to generate by taking tasks off your plate? Maybe you had more time to focus on customer relations, were able to direct more attention to a new product launch, or had the ability to better support employees to increase production rates.
Whatever the case, calculating revenue growth is a crucial factor when pursuing outsourcing in your finance and accounting department. Effective outsourcing will almost always lead to revenue growth by giving you and your team more support, time, and operational insights. Compare revenue prior to outsourcing and after outsourcing. Do you notice any changes?
Consider Intangible Benefits
The benefits of accounting and finance outsourcing aren't always tangible. In fact, most companies realize benefits that go beyond the financial numbers. For example, with an independent outsourced accountant, your lender might feel more confident in your financial statements. Although this might not directly result in a benefit, it does positively impact your business.
Other intangible benefits to look for include access to specialized skill sets, more flexibility in operations, and a greater focus on the core competencies of your company. Evaluate your company's overall market position, performance, and flexibility pre-outsourcing and post-outsourcing.
Evaluate Customer Satisfaction
Financial outsourcing ROI also leads to improvements in customer satisfaction. Customer satisfaction directly connects with your financial statements. After all, happier customers are more likely to become repeat customers and generate referrals. This is especially true in your finance function.
Let's say you enlisted an outsourced accountant to handle your accounts receivable function. How has customer sentiment changed from receiving same-day invoices compared to a lag of a few days? Are customers happier having a dedicated person to turn to with any questions?
Although the financial impact of customer satisfaction might be difficult to uncover, you can calculate churn. Is your company retaining more customers with the help of an outsourced accounting or finance professional? Diving into your customer satisfaction can generate valuable outsourcing ROI insights.
To effectively measure outsourcing ROI, it's essential to establish clear KPIs. Learn more about key performance indicators for the accounting department in our guide: How to Measure Success in the Accounting Department: What Are the Top KPIs.
Summary
Calculating outsourcing ROI is an important metric for CFOs engaging in a cost-benefit analysis. The financial outsourcing results of your company can determine where changes might be needed and how outsourcing benefits your organization.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
