2 February 2023

7 Common Accounting Outsourcing Mistakes to Avoid In 2023

Accounting has always been an essential function of any business and will continue to be so. In order to make an informed business decision, financial statements about income and expenses are essential. Accurate and timely accounting ensures that these financial statements are reliable sources of information for decision-making.

Outsourcing accounting to an external firm can be a great decision for business owners and entrepreneurs, as it can free up time and resources that could be better utilized elsewhere. However, even the most experienced business owners or entrepreneurs can make mistakes when outsourcing accounting. This article will discuss these common mistakes and also suggest how to avoid them.

Let’s begin!

1. Outsourcing without defining the goals:

Companies rarely define their outsourcing goals before outsourcing their accounting, which is one of the most common mistakes they make. Defining the goal of outsourcing will ensure that businesses get the most out of their outsourcing project and that they are able to achieve the desired results.

The goal of accounting outsourcing can be to save money, access specialized services, or save effort on time-consuming accounting functions like bookkeeping. Many companies outsource its accounting operations when they lack talent, budget, and experience to hire a strategic CFO, which may adversely affect its valuation.

It is also essential that a company is able to convey this goal effectively so that their outsourced team can understand what is expected of them and work towards achieving it.

Ultimately, the type of accounting outsourcing services a company chooses must depend on what they want to accomplish.

2. Creating a loose outsourcing agreement:

Outsourcing agreements are a great way to ensure that the company and the outsourced accounting team are on the same page. It helps to clarify roles, responsibilities, and expectations. It can also help to create a more efficient workflow by providing guidelines for communication, deadlines, payment terms, and more.

There’s a high probability that certain service providers will pressurize the company to outsource services that they don’t need. This is particularly true if the business is still growing and is new to outsourcing. This outsourcing error is typical and frequently made. Unreliable outsourced accounting services can occasionally add hidden expenses in the form of extra activities that weren’t originally part of the company’s agreement. This problem can be alleviated if policies and procedures are clearly laid out in the contract that is established during the early phases of the engagement.

3. Overdependence on Outsourcing Partner:

If the outsourcing partner goes bankrupt or is faced with a security issue, it can spell disaster for those companies that have become overly dependent on the outsourcing partner. It is important to understand the potential risks associated with outsourcing and take steps to mitigate them. This includes having backup plans in place in case of an emergency, ensuring that all sensitive data is securely stored, and regularly assessing the performance of the outsourced team. By taking these precautions, companies can reduce their risk of being left high and dry when something unexpected happens.

If a business chooses to employ an outsourced accounting department, it should be cautious in the recruiting process, make it a point to map out its goals, and ensure that they are doable without jeopardizing the company’s financial stability.

4. Opting For the Lowest Cost Solutions:

One of the common objectives of outsourcing for any big or small business is to save money. However, it may not necessarily mean that a business will get good service by paying less.

In fact, considering cost as an only hiring criteria or hiring an accounting freelancer to save money can be one of the biggest outsourcing mistakes.

Wonder why?

For instance, hiring an accounting freelancer instead of a professional accountant, they may only be trained to take up a part of the outlined accounting work. Consequently, their services may be subpar, and their deliverables of financial reports can get delayed.

A company may also face issues like:

Inaccuracies in financial data like cash flow errors.
Non-compliance and regulatory concerns.
Lack of transparency.
Lack of proper communication.

5. Overlooking Data Security Risks:

In today’s digital world, it is essential for companies to implement robust security protocols in order to protect the misuse of their data and information by outsourcing service providers. Outsourcing service providers have access to a company’s confidential data and information, making it more vulnerable to malicious activities. Companies must ensure that they have strong security protocols in place that will prevent unauthorized access, misuse and manipulation of their data and information. Furthermore, companies should regularly monitor the activities of the outsourcing service provider and make sure that all security protocols are being followed properly.

The service provider should also have robust data security measures and infrastructure installed so that there is no breach of data security within their organizations.

6. Not Having Clear Communication Channels:

It is easier to communicate with an in-house accountant when there are finance-related questions. The situation is different when an outsourced accounting team is involved, since the company doesn’t have a direct control over how things are handled.

Having a smooth channel of communication is essential for successful outsourcing of accounting services. It helps to keep in touch with the outsourced accounting team and ensure that the work is being done according to the agreed upon schedule and budget. With a good communication network, a company can easily communicate any changes or updates that might be needed, as well as get timely feedback from the outsourced accounting team. This will help the company to stay on top of any issues or problems that may arise during the process, and ensure that the work is completed on time.

7. Not Having Standardized Systems and Performance Metrics:

It is crucial that a company provides clear instructions and expectations for their team so that they can deliver the best results possible. Additionally, having a well-defined set of processes and procedures in place will help streamline the workflows of outsourced accounting team, allowing them to work more efficiently. A company can streamline and manage their outsourced functions effortlessly with various tools like Google Drive, Microsoft teams, ClickUp, Trello etc.

In the same way, failing to establish Key Performance Indicators (KPIs) can prevent the company from identifying poor performance from their outsourced accounting team.

Conclusion:

There’s no doubt that outsourcing accounting services of any scale is a substantial decision that shouldn’t be taken lightly. The goodwill of a company can be significantly impacted by a small outsourcing error.

Whether it’s a small business new to outsourcing or a big corporation, it’s easy to get carried away by the perks of outsourcing and make hasty decisions.

Making best use of these 7 common accounting outsourcing mistakes in mind, a company can protect their business from losses and maximize their outsourcing relationships.