The Guide To Outsourcing Finance & Accounting For Investor-Backed Businesses

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If you want to grow your business as a private equity firm, lowering operational costs and maximizing ROI across all portfolio companies should be your starting points. However, as your PE portfolio grows, so will your finance and accounting needs within your portfolio. To keep up with the demands of expansion and continue to meet accounting regulations, many portfolio companies have turned to outsourcing their finance department.

When it comes time to scale your business, maintaining an in-house staff means needing more office space and equipment. It also requires full-time employment wages and benefits and constant employee training. By outsourcing accounting, portfolio companies can reduce costs, free up office space, and lessen the financial burden that comes with an in-house accounting team. 

Outsourcing to the right Finance as a Service provider that has the latest tools and software also means removing the repetitive tasks involved in accounting, which creates more time for fund managers to perform high-value work efficiently. The CFO can ensure their strategic position in the company which means more time for team management and focusing on core business issues. 

Outsourcing financial operations in your portfolio could be the key to ensuring growth for your PE firm. However, there are still some common misconceptions and unknown benefits of outsourcing. In this complete guide, we will discuss how outsourcing can help your private equity firm. We will also provide tips on how to find the right outsourced finance and accounting service for your portfolio company. 

What is outsourcing and how it can help your private equity firm

In this day and age, outsourcing has become an industry standard, and outsourced accounting is no exception. The BPO market has seen significant growth in net worth and efficiency. Their access to global talent has removed the need for local recruiting and opened a lot of new opportunities for private equity. Your portfolio’s HR staff could take months to find the right person to handle their accounting functions, and the physical location of the office makes the options very limited. Having a hiring manager handle the whole process can be costly and time-consuming, as a result.

By handing your accounting tasks to a remote team, you gain access to the full benefits of outsourcing. Timely and accurate reports are just one of the reasons you should consider using Finance as a Service. Overall, business operations are made easier, and the accounting process is automated thanks to your outsourced team. Apart from simple accounting tasks, an outsourced partner can provide you with a thorough financial analysis of your operations and, in turn, help you make better business decisions.

Outsourcing vs. Offshoring

Outsourcing is often confused with offshoring; however, these are two different concepts. 

When a company outsources a part of their operations, they hire remote teams to perform the tasks for that department. IT support, sales support, customer service, and manufacturing are just a few tasks that can be outsourced, but financial operations fall under that category as well.

Offshoring, on the other hand, requires a business to move certain internal operations to other countries. Offshore staffing is just as hard as local staffing and also has limited possibilities when it comes to talent and expertise.

Why should you consider outsourcing?

There are many reasons to outsource parts of your internal operations, but when it comes to accounting, there are three main reasons to consider outsourcing tasks.

  • Scaling
  • Reduced operational costs
  • Access to skilled experts without busting your budget

Scaling a portfolio company isn’t easy with a sizable back-office. Expanding your operations requires more office space, more tech support, and investments in equipment such as desktop computers, laptops, phones, and so on. By setting up an outsourced team, your portfolio company won’t need to spend more funds on these improvements and additions. In most cases, outsource finance comes at lower rates, which means that more funds and resources can be allocated towards scaling.

Having access to financial experts also allows for better financial planning. Outsourced solutions hire freelancers that are the best in the business. These experts can provide valuable information that can help you conduct a thorough internal audit. Outsourced financial experts help private equity firms evaluate the exact state of financial health within their portfolio and help discover new avenues of income for those companies.

Pros and cons of outsourcing company accounting

The pros

Outsourced solutions help you monitor cash flow and implement accounting rules. Financial regulations are constantly changing, and keeping up with these changes is no easy task. When you start with outsourcing, a remote team will keep track of these updates and implement them when they are needed.

The distribution of in-house tasks is simplified and focuses on efficiency. Hiring an in-house financial manager or accountant can be a costly investment but a reasonable one as well if you outsource your financial management, accounting, and bookkeeping. This leaves room for promoting your financial manager to CFO, leaving one person to overlook internal finances while other staff members focus on core competencies.

Outsourcing provides access to advanced technology and resources. Accounting software development has seen huge advancements in the past few years. These software solutions can simplify your business planning, but they also require a certain level of knowledge in information technology. Outsourced solutions often provide access to advanced software that can come at a high cost if you want to purchase it for your company exclusively. Accounting outsourcing not only comes with no added cost to access these advanced software solutions but also a talent pool that is capable of utilizing the software in the best possible way.

Outsourcing helps your organization reduce operational costs and focus on core business activities. Increasing staff numbers requires more staff managers, and this can lead to bad internal organizing. By moving your staff members around to find the best position for their skills, it is easy to lose sight of your core organizational skills. By outsourcing specific tasks, you free up more human resources. They can then be allocated to positions that best fit their level of expertise and free up a big part of your budget in the process.

The cons

Choosing to outsource may mean facing some cultural differences and language barriers. The outsourced partner you choose may have finance experts that are outside of the US, as this is a common practice. This is not always the case, as some service providers focus on local talent only. 

Another downside to outsourcing is that day-to-day control is limited. While this is not necessarily a con, it is worth mentioning that your portfolio company won’t have complete day-to-day control over the remote team. Since they aren’t physically located in their office space, they will have less influence on them. However, this isn’t an issue when you choose an experienced service provider that you can trust to be reliable.

You might end up in a locked contract. Some outsourced solutions require you to sign a long-term contract with them. As a result, you may end up paying unplanned fees if you decide to change your service provider. It is very important to pay attention to the contract details and find a reputable partner. This way, you are minimizing the risk of locking yourself into a contract.

What finance roles are most commonly outsourced?

It is estimated that financial management is the biggest sector for outsourcing globally. With constant market growth, it should come as no surprise that the demand for outsourcing is constantly on the rise. The most outsourced financial functions include claims processing, financial data management, financial analysis, payroll processing, tax auditing, financial report preparation, regulatory and reporting compliance, risk assessment and risk management, and budgeting. There are many others, but the two most commonly outsourced financial roles – bookkeepers and accountants.

Having a virtual assistant in bookkeeping can do wonders for your overall business process. Bookkeepers make sure your financial transactions are in check, they work on preparing financial reports but also take care of completing payroll and balancing ledgers. This can be exhausting for an in-house staff member and is best handled by outsourced professionals.

Accountants take care of expenses that have already taken place but aren’t recorded by bookkeeping. It is virtually impossible to complete income-tax returns without them. Accountants are also responsible for valuable consultation with business owners, helping them understand the impact their financial decisions may have and how they should be handled. Having an expert in this field can be a big bonus for a portfolio company for obvious reasons, and it should come as no surprise that this is one of the most outsourced financial positions globally.

How to pick the right financial outsourcing partner

The Finance as a Service provider’s track record reveals a lot. If their reputation doesn’t spark confidence, it is probably best to look elsewhere. Your selection process should be thorough because outsourced accounting works both ways. It can help you scale rapidly, but bad choices can lead to some serious financial problems in the future.

How much are you willing to spend? Calculating the cost of running in-house accounting should help you understand how much you can spend on outsourced accounting as well. It will almost always come with substantially lower costs, but finding the right price can be tricky. Striking a balance between affordability and the level of expertise isn’t always easy, but looking at different pricing models should give you a good sense of the outsourcing market. The ones with the lowest prices aren’t always the best service providers, but that doesn’t mean that you should dismiss them completely. Spend time on research and ask questions when you need answers. This should help you in finding the best pricing model for your portfolio companies.

Learn to value experience. As we already mentioned, a bad outsourced partner can have a negative impact on your financial situation. When looking to utilize Finance as a Service, you should have experience in mind at all times. If the company is in business for years and has a proven track record of satisfied clients, they are probably worth checking out.

Communicate and ask questions. This should go without saying, but it is worth mentioning. Communicating your needs to your potential partners can be very helpful. Define your goals as clearly as possible and evaluate their capability of handling your accounting.

Look for companies with great communication. During your Q&A sessions with potential service providers, you will be able to determine who is a good communicator. If they have the level of expertise to match their level of communication, you should consider hiring them because you want clarity and efficiency in your business operations. Getting clear and timely answers from your partners can sometimes determine the very outcome of your next investment.

How to get started with finance outsourcing

Once you have made a decision to outsource your finance & accounting tasks, it is very important to understand why you are doing it and what benefits it would bring to your company. Start by evaluating your in-house staff and calculate the cost of growing the business. Are there any additional roles that would bring benefit to your business? By making a list of skills that are needed for scaling, you will make your search for the right outsourced partner a lot easier.

When making calculations don’t overlook some very important factors:

  • Calculate how much you could potentially save by outsourcing
  • Calculate how much time outsourcing would save
  • Set clear goals and expectations
  • Outline a detailed outsourcing schedule and figure out when and how you want to outsource these roles

Once you have determined your goals and needs, it is time to start speaking to different service providers and figuring out the best solution for your portfolio’s financial management.

Understanding the benefits

It is now clear that a portfolio company can have considerable benefits from Finance as a Service, but it is important to understand them fully. Outsourcing has a big emphasis on flexibility since staffing solutions are as flexible as they can be. Depending on your scaling needs, staff members can be added or deducted by your outsourcing partner. This gives a portfolio company more time to focus on core business development rather than spending valuable resources on in-house staffing.

Software solutions allow for a streamlined process of accounting. A fully automated system causes fewer distractions for fund managers and CFOs, meaning that they can shift their attention to more important matters. As regulations advance and change, there is no need for additional spending to train your back-office team. Experienced outsourcing solution providers are always up to date with the recent changes and will provide timely updates. 

It is important to know that outsourcing partners want to understand your business policy and goals. They will provide the best resources to advance your scaling more efficiently but also take away as much responsibility as possible. By hiring only the best worldwide and local talent, you can rest assured that your outsourced partner will have your best interest in mind. A highly-skilled financial staff provided by an outsourcing solution completely removes the need for further investments in office space, training, and staffing.

Conclusion

Constant regulatory changes and increased demand for transparency can slow your portfolio growth down significantly. Keeping up with financial reports and accurate accounting can become a real hassle for in-house teams. It is more than clear that the need for Finance as a Service is on the rise, and your private portfolio companies can reap huge benefits from it. Depending on your goals and needs, outsourcing can help with scaling and overstaffing by greatly reducing the costs of back-office operations. Investments in equipment in training are minimized so you can focus on more important matters such as ROI.

It is worth mentioning that Finance as a Service doesn’t only help portfolio companies; it helps PE firms as well. By spending less time on financial reports and having a clear overview of your financial health, you can make better and more predictable decisions. Fund management is made easy by automated solutions that allow for more interaction with clients.

Whatever your needs may be, it is hard to overlook the numerous benefits financial outsourcing brings. When a company outsources accounting and finance, it creates more room for ROI and scaling. By spending less on salaries and staff training, more funds can be allocated for further investments. With the help of an experienced outsourcing partner, you will have access to the very best information that concerns your business. Skilled staff members can provide valuable consulting and help your company understand how your business decisions have an impact on the financial situation.


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