Entrepreneur’s Guide to the Accounting and Finance Industry

Nearly every entrepreneur that is building a high growth business will end up encountering the outsourced accounting and finance industry because when a good service provider is found, it'll allow you to scale faster and smarter. 

But the industry has a lot of pitfalls and poor service providers. Being able to navigate the industry will allow you to save money, time and speed up the growth of the business. 

Why Most Small Businesses and Startups Outsource their Accounting and Finance

It all has to do with risk and cost management. Hiring an employee, carries a lot of commitment and cost. Cost is obvious, you have to pay their salaries. But beyond cost, you also take a certain responsibility to maintain their employment for as long as possible. They depend on you. And firing someone isn't just uncomfortable it also carries legal considerations. 

So the commitment of hiring someone carries risk and, naturally, small businesses only hire employees that are absolutely vital to the business such as developers, customer facing personnel, etc. Since small businesses need to stay nimble and have a flexible cost structure (i.e. increasing and decreasing overhead costs in a relatively short time span) hiring expensive Accountants, Controllers and CFOs is out of the question - plus there usually isn't enough work to keep them busy full time, but there is still a need to build the right fiscal habits, systems, and processes. So outsourcing becomes a great solution.

Outsourcing is the most reasonable way to acquire the talent needed to build your financial infrastructure without bearing the burden of an in-house team. Outsourcing; however, is a tricky task. There are a lot of options in the marketplace, but very few of them will have experience with small businesses and startups, even fewer will have experience and complete understanding of financial infrastructures, and only a select few will have the skills and will be willing to present you with an offer to satisfy your needs. 

At this point, I am making it seem as if finding the right partner to outsource the accountant, controller, and CFO function is really hard and that’s because it is. To further elaborate on this, I have to explain the economics of running such as an outsourced operation, then I will analyze the different types of outsourced providers in the marketplace.

The Economics of an Outsourced Service Provider

The business model for any outsourced service provider is very simple: 
  1. find the customer (You) and convince them to pay money, ideally on a retainer and 
  2. find the talent to deliver on the specifics of the engagement
In fear of boring you with the details, remember this: the customer (YOU) has to pay more than it costs to deploy the talent. Ideally, the customer will be paying a multiple of the cost to deploy the service. The higher value the service, the bigger the multiple. 

For example, hiring a CPA in Denver, CO to deliver Controller level services to businesses like you will cost the firm 75-120K/year depending on their experience. If you're going to be using a portion of their time, don't be surprised to pay an effective rate well between $100/hr - $250/hr and above. 

Advice: DO NOT be upset at this truth - you still benefit from this because the alternative is to hire someone in house and that's way more expensive! If you run the numbers, you'll see. 

The types of outsourced providers

CPA Firms

CPA firms typically provide audit and tax services during peak seasons of the year, but they also supplement their revenue streams by offering on-going accounting services to businesses also. They typically possess the highest level of technical abilities in the industry because they hire Certified Public Accountants and are subjected to mandated peer reviews and government regulations. Ethical standards are mandated onto them as well, so you won’t have to worry about quality as much. 

The Bookkeeping Firms

Bookkeeping firms are typically small offices or individuals who provide basic bookkeeping services. They are often the cheapest option available in the marketplace, but they offer limited services with limited quality. 

Expect to receive quality appropriate to the price point. 

The Outsourced Finance Firms

These are the firms that stray toward the CFO function and focus on analytics and advisory services while also providing accounting services. 

They sometimes struggle to deliver highest level of quality but this is typically the best value for startups because they get the advisory and analytics while also getting the accounting done.

The Double Outsourcing Practices

It’s not uncommon for firms to offer you outsourced accounting and finance services then turn around and outsource part of or even the entire engagement to someone else that is cheaper. India, Eastern Europe, and Africa are the common places to turn to for double outsourcing. 

Profit margins are the clear reason for this practice. Outsourced Finance Firms and Bookkeeping Firms utilize this more than others, but CPA firms, especially the very large ones also do it. In some instances, they may disclose this to you clearly or in fine print. Sometimes they won’t tell you at all. The ethical efficacy of double outsourcing deserves a book of in itself, but I won’t dive into the topic. Your data security, confidentiality, and quality should all enter your decision to allow or deny double outsourcing. You should always inquire before engaging an outsourced provider about their practices around double outsourcing