Assembling the right accounting team for your business can be costly and challenging. Do you need a full-time accountant and a bookkeeper? How about a controller? The accounting function is critically important (we will show why later), but it is not a core competency for your business unless it provides accounting services!
So, as with many support functions, it makes sense to consider outsourcing versus maintaining a staff in-house. While cost is not the only consideration, we will start there.
As of June 2022, the average staff accountant in the U.S. earns slightly below $59,000 per year, while the average controller’s salary is about $120,000.
However, those figures are only part of the out-of-pocket cost – you have to add in benefits, overhead costs, perhaps profit-sharing, the time and resources involved in recruiting, and the opportunity cost if the people you hire are not a good fit or leave abruptly.
Considering all the costs of an in-house accounting team, a company can often save money using outsourced accounting services. But the cost is not the only issue, and it is frankly not the most crucial factor to consider in making this decision.
What is the cost of outsourcing accounting services in 2022?
The hourly cost of outsourced accounting services should be compared to the all-in cost of maintaining and accounting staff in-house- including salaries, benefits, overhead, etc. But more important is the outsourcing firms' ability to provide the expertise that can prevent expensive and even fatal business errors.
The critical question to ask is, what could it cost your business if you do not have access to the know-how that expert accounting and controller professionals can provide? Unless you plan to hire an accountant and a controller with decades of experience – and are willing to pay the high-end salaries that level of experience would justify – you will not have the breadth and depth of expertise an outsourced accounting firm can offer.
If your needs are basic and routine, you may decide you do not need more than basic, routine capabilities from an accounting staff. The problem is, that no one can anticipate when or how a “routine” situation will change.
Here are some real-life examples of what it can cost a business if its in-house accounting capabilities are inadequate. The names have been changed to protect our clients’ anonymity.
The cost of not having adequate accounting services
Example #1 – “We wish we had hired our outsourced CFO six months earlier.”
Company A was a $100 million (in revenues) business with an in-house accountant, controller, and even a full-time CFO. The CEO and CFO decided to buy another company, but unfortunately, they did not know how to conduct adequate due diligence.
The CEO hired us after the acquisition closed. Right off the bat, we asked the Controller (we’ll call him George) — who was planning to retire and already had one foot out the door — for the company’s financial statements.
The statements showed they were losing money, and we asked George whether they had violated any loan covenants. George could not answer the question right away (think about that – the Controller did not know whether the company had violated its loan covenants), but after some research, he told us that indeed, they had.
The CEO had a meeting scheduled with the company’s banker later that week, and we urged George to give this information to the bank in advance of that meeting.
He did not heed our advice.
The company had drawn the entire amount available under its line of credit, and within eight months, it filed for Chapter 7 bankruptcy.
If we had been brought in earlier, before the ill-fated acquisition, we would have examined the target company’s financial information and would have advised against the deal. We also would have cleaned up our client’s books and pushed them to be proactive in communicating with their bank. We believe we could have prevented the bankruptcy.
Example #2 – Accounting is not just debits and credits; it’s also discipline and oversight
Company B raised its Series A funding, then blew through the money in less than a year.
The board was concerned that the company did know how to manage its spending and did not even know how much was being spent and on what. The board hired us to address these concerns and impose some much-needed financial discipline.
We cleaned up Company B’s books, analyzed past spending, developed a budget, and implemented a process for comparing actual spending to the budget on a regular basis.
Soon after we straightened things out, the company was operating under budget and had achieved its revenue targets. We should mention that Company B had an in-house controller! However, he did not like his work to be scrutinized. Soon after we were brought in (within days), he left.
Example #3 – When it comes to accounting, ignorance is no defense
Company C had been collecting sales tax but was not remitting it to the state. This may seem surprising—most of us live in states that impose sales taxes and know that the money does not belong to the business that collects it—but it is not an uncommon problem.
The same thing happens with payroll taxes. Not paying these taxes is illegal and can result in criminal charges, and the liability cannot be extinguished in bankruptcy.
Even if the company no longer exists, the responsible officers at the company can be held personally responsible. We came in, figured out what was owed, and created systems to make sure the company would stay on the right side of the law.
Another entry in the “Ignorance is No Defense” category is a company that had not maintained a cap table. That meant it did not know which outside investors owned what percentage of the company and how much was owned by other stockholders, including options that had been awarded.
As you might imagine, the investors were upset and arguing about how much of the company each of them actually owned. We came in and went back through all the relevant transactions to bring the cap table up to date.
Another company had a CEO who was completely focused on revenue growth and paid no attention to profitability or cash flow. The company had ignored its accounts payable for over a year and did not know how much was owed to various vendors.
We were brought in to help the company raise additional capital, but after untangling the books, we decided the situation was untenable because the CEO continued his financially irresponsible habits. We resigned, as did two board members shortly thereafter.
Example #4 – Sometimes, what looks like an accounting mess is actually fraud
Company D’s board of directors was informed by its CEO that there was not enough money to meet the payroll. One of the investors smelled a rat because the financial reports the CEO provided to the board showed the business was growing rapidly and EBITDA positive.
The investor called us in, and we determined that the CEO had fabricated the numbers on the board presentations for years. We went back to basics and generated legitimate financials, which showed the company was only generating one-third of the revenues the CEO had reported and had never been profitable.
We traced the fraud through bogus accounting journal entries that had been created by the CEO. Warning to board members: there is an inherent risk in having the person in charge manage the books. Hiring an outsourced accounting service can mitigate that risk.
In another example, Company E was preparing to raise new capital. One problem: the CEO and CFO (yes, the company had a CFO) hid the fact that a big customer was not a real customer.
No one had noticed that the invoices for that “customer” were being sent to an email address within the company.
At the end of the year, Company E switched to a new accounting system, and either the CEO or CFO wiped out the “bad” (fictitious) receivables “owed” by the non-existent customer.
There was no write-off of the fake receivables because they were not transferred to the new accounting system. The CEO and CFO managed to raise new capital, and shortly thereafter, the new investor brought us in to do an accounting review after experiencing financial difficulties
Unfortunately, we had to tell the investor that they had been lied to during the due diligence process.
Businesses often focus on in-house salaries versus the outsourcing firm’s hourly rates when evaluating the cost of using outsourced accounting services.
But that approach does not capture the costs of not having the right accounting personnel and the internal controls needed to manage and the finances of a business, and the oversight needed to ensure that management, investors, and the board are receiving accurate, timely information from someone who is looking out for the company’s best interests.
We will walk you through our thought process to develop a realistic estimate for you.
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