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Outsourcing Accounting versus In-House Accounting

When considering the option to outsource any aspect of your business, consider that you are already outsourcing 99% of your business, with the exception of core operations.

What? 99%? Don’t believe me? Just examine your expenses from A-Z. Starting with advertising, do you own an advertising firm, or do you pay for that service to outside agencies?

What about accounting? Certainly not for year-end and tax work. You outsource that to a public accounting firm. (I will come back to internal accounting shortly).

Bank charges next? Outsourced or in-house? Clearly you let the bank manage your day-to-day banking.

Just keep going – office supplies, rent, telephone, travel, meals and entertainment, cell phones, couriers, insurance, automotive, computer costs, software, education and training, licenses and dues….

Ok, you get the idea, you would be hard-pressed to find an expense in general overhead that is not outsourced, with two glaring exceptions….

…maintenance of in-house servers and computers and accounting.

Let’s look closely at internal accounting in this Blog.

Internal versus Outsourced Accounting

I have written on this subject once before many years ago, and I think I soft-pedaled the core issues because I didn’t want to sound like I was doing a hard-sell.

After all, this is what we do, so clearly, we have a vested interest in “selling” our model to the world, right?

Perhaps, yet that is not the focus of this Blog.

I am writing about this again for three main reasons:

  1. The appalling state of internal accounting in so many businesses we have seen lately;
  2. The way that people in internal accounting hang on with a death grip to that position at the expense of not giving the company they work for a great service for their wage;
  3. That some businesses – a few years after outsourcing – forget how bad it was when the outsourced team took over and now that it is running smoothly, they think it is time to bring in-house. That is a very big mistake.

The Appalling State of Internal Accounting

How can a business owner ever let their books get to a state of disarray?

For two reasons – firstly, accounting is not their core area of expertise 99 times out of 100.

They don’t really know what makes a great set of books versus a bad set of books.

In fact, the only way that most of us know whether a professional service is good or bad is when it doesn’t work or hurts. Think dentistry – unless you have pain, how will you ever know whether one root canal is better than another. A great dentist would though!

Consider auto repairs. What makes for a bad tune-up – it sounds bad, or the car runs bad, and so you take it back. Without very obvious external factors like those, you would just not know.

Now think about accounting. What makes for bad accounting? A Canada Revenue Agency audit that costs you a lot of money in a massive re-assessment?

That could be one way, however, that may never happen!

Let us go through a scenario together. Imagine I am your internal accountant and in order to make your bottom line look better I capitalize hundreds of thousands of dollars in labour. (Capitalize means we don’t write it off against revenue on the Profit and Loss Statement, rather we place it as an ASSET on the Balance Sheet).

You are happy because all your attention, if you are like most business owners, goes to the Profit and Loss Statement. How much money did I make? What is my gross profit? What is my gross profit percentage? What is my net profit percentage?

And here I am showing you a high net profit figure because I moved a large portion of wages expense to the Balance Sheet as an asset. My rationale is that there is some kind of future value in this labour that was capitalized as an asset.

Then you ask me why the cash-flow is so poor, after all you have been spending money, the labour costs were not free!

So, the cash-flow is terrible, and you don’t really know why!

Think this is far-fetched? Many years ago I saw a business do just this.

Here’s another example…

Capitalized Inventory Led to Near Bankruptcy

A business I once helped bail out by identifying the issues and giving them some ideas to implement, almost went bankrupt due to a similar issue as above.

Also, keep in mind the owners were sophisticated business people – venture capitalists – with decades of experience.

What the internal accountant did was capitalize (record as ASSET) large amounts of inventory that should have been a Cost of Goods Sold.

This company had the same issue as the example above – great net profit and terrible cash-flow. In fact, they were close to bankruptcy!

In this case, the accountant realized their errors and came sheepishly to the owners and management to confess their errors and fix it.

My coaching was to help bail them out of a very bad situation and turn the cash flow positive.

Would These Things Happen if Outsourced?

If you outsource your accounting could those things happen as above? They could I suppose if you choose a cheap firm that is not licensed.

At ControllershipPLUS, (sorry a bit of a commercial coming) we are a licensed, fully insured public accounting firm. Just like the ones you get to prepare your year-end financial statements and tax returns.

The difference is that we ONLY do outsourced accounting for businesses doing between $1-$20 million in sales. We ONLY use cloud-based software that we are expert in.

We are very, very good at what we do, largely because of decades of combined experience doing only that ONE thing.

Because we are a licensed, public accounting firm we would not do things like the above examples because they violate good ethics in accounting and our own values and principles.

As a side note, capitalizing items that should have been expensed is exactly what took Enron down, and their audit firm Arthur Anderson.

Internal Accountants Hang on With a Death Grip

The other thing we have noticed in internal accounting is the way internal (often highly incompetent and untrained people) will fight to hang on to their roles.

Of course, part of that is natural, no one wants to lose their job!

But bad accounting deeply hurts the business!

When we get referrals it is often from businesses where the Controller is leaving for various reasons (or has left). Usually those transitions are pretty easy to manage.

Where they get very challenging is when some (even one person!) are left behind and resist the outsourcing model.

Traditionally-minded bookkeepers who do not understand cloud-based systems can be big skeptics and try to put old wine in new bottles and all know where that ends up.

Cost of Internal Versus Outsourcing

We see two things here – businesses under-paying and getting terrible accounting or businesses over-paying and getting terrible accounting.

Why would a businessperson tolerate the latter situation?

It comes back to the fact most business people are not skilled accountants. It is a foreign language to them, and they are beholden to their internal accounting Team and all the excuses for why reports are late or not delivered at all.

Accounting for them becomes a necessary evil used to file tax returns and that’s about it.

To be fair, there are situations where a firm is paying a reasonable, fair wage and the services provided are fantastic. Those will only becomes prospects for us if they leave!

The Big Mistake Businesses Make After Outsourcing

Some businesses make a fatal error after outsourcing for a few years – they bring the books back in-house!

Ok, so why is that fatal? It is fatal because they forgot where they came from before outsourcing and the state of their books.

They have years of rhythmic, routine reporting, analysis, and no issues with audits or late filings. They have had fabulous reporting.

And….then…they start to think…”this must be easy, it is simple, maybe we can save money doing this internally?”

No, no, no! We have had that happen to us once or twice in our outsourcing history and the mistake I made is twofold – not continually telling them how great we are, and not screaming “nooooo” at the point they make that error.

Isn’t telling someone how great you are bragging?

No, not if done to protect them from the error of their ways. Now, more than ever, after having attracted a stellar Team at our company and 2 decades of advanced technically focused outsourcing – we are better than anyone could do in-house.

I am more than ever certain of this because of the appalling state (and cost) of internal accounting for so many businesses.

If I don’t make the case to not leave, who will?

By the way, there are times when a client is forced to go in-house. The first is when they are in a death spiral and cannot afford anything but the cheapest accounting. The second is when they truly outgrow your capacity to provide great service. They’ve just gotten too big. That said, there may not be such a business as too big.

Accenture is a global outsourced, professional firm and they have clients with billions in sales. It is whether the outsourced firm has the capacity to perform services at a larger scale.

Thanks for reading…