Overlooked Benefits of Outsourcing Nonprofit Accounting
By Jim Simpson, CPA and director, Financial Technologies & Management
In the nonprofit community, outsourcing typically means long-term delegation of key operation to outside experts. The accompanying expectation is improvement of the quality, strengthening effectiveness, and lowering or controlling costs.
A key difference in the nonprofit sector is not only controlling costs, but becoming a more effective organization. Finance and accounting departments are two essential back-office areas in nonprofit organizations. Nonprofits typically outsource accounting already for payroll processing and audit services so it is not surprising that nonprofits are looking at other aspects of the finance and accounting department to outsource.
With limited resources, a nonprofit can outsource some or all its financial functions, which can help a nonprofit efficiently staff and conduct its financial operations. It also respects the board and executives limited time or expertise to manage the finance functions, and allow more allocation of resources toward mission and program outcomes.
It is often difficult to staff the accounting department properly as you need to consider quite a bit to determine the appropriate staffing levels. These considerations include number of employees, budget, grants management, revenue complexity, business model, and lifecycle stage.
Here are eight overlooked, and sometimes unknown, benefits of outsourcing nonprofit accounting.
- Improved efficiencies. The less time internal staff members spend on duties that can be outsourced, the more time they can focus on mission and program outcomes. Typically, outsourcing also results in more timely and accurate financial information, which leads to a better operating organization. One way to assess this is to review how much time is currently spent weekly on accounting and finance to determine where this time could be better utilized with a better functioning finance department. Bookkeeping and Accounting is time-consuming especially when dealing with multiple responsibilities like human resources, information technology, facilities, and other back office responsibilities. An outsourced accountant allows your organization to focus on getting all of the back office function completed and work with program staff.
- Reduce costs. The organization can save money by outsourcing the finance functions that are not core to its mission. It is not uncommon for an organization to save 20 to 40 percent in total personnel costs and control these costs. On-staff accountants often have to perform administrative tasks that could be performed by lower level paid staff. By purchasing services and expertise for time needed by your organization, you can better afford the multiple staff levels an organization needs that includes bookkeeping, accounting, controller, and CFO service levels. An additional cost saving is that services can be provided off-site, which can save facility costs and overhead-related expenses. Outsourcing can be used for major finance projects including the annual audit, budget preparation, software implementation, and other projects that drain internal staff’s time and energy. There are many intangible benefits to include timely and accurate financial reports, eliminated frustrations related to staff management and turnover, and saving management’s valuable time. If your accounting staff leaves for another job, the knowledge and expertise leaves the organization, as well, and is typically costly and difficult to replace.
- Reduce fraud threat. Segregating accounting duties between internal and external staff inherently reduces fraud risks. Outsourced accounting provides the organization with checks and balances along the proper oversight to prevent fraud. Many nonprofits rely exclusively on external auditors to detect fraud but these are not intended to detect fraud and only detect fraud it 3 percent of the time. The increased segregation of duties strengthens your internal controls and procedures, while providing increased transparency and accountability in the overall financial operations. The Executive Director doesn’t typically have the time, desire, and expertise to manage the accounting function so using an outside expert maybe the best way to properly manage the accounting and finance function. Most nonprofits only have one internal accounting staff that does all the accounting including all cash receipts, cash disbursements, and reconciling the bank accounts which increases your risks of fraud. Outsourced accounting provides you with the checks and balances, as well as the oversight that you need to prevent fraud.
- Higher level of expertise. Many nonprofits can’t afford to employ a staff member who has controller and CFO skill sets and can perform the day-to-day bookkeeping and accounting needs for an organization. By outsourcing, you can take advantage of an expert team’s significant financial expertise, while staying current on the latest regulations and laws. Best practices and improved efficiency can result from the implementation and improve your accounting and reporting functions. The higher-level expertise provides a strategic and fresh perspective to identify deficiencies and add capacity to enable bookkeeping and accounting staff to complete day-to-day activities. Outsourced accountant likely has a number of individuals they can consult to provide them with the knowledge and expertise they need to benefit the nonprofit they are serving.
- Ability to scale. A nonprofit organization needs the flexibility to increase or decrease the size of its finance department, a difficult task when you have allocated internal staff to the finance function. The Accounting Function involved a lot of different areas and skill sets in the organization and includes Payroll, Budgeting, Billing, Reporting, Financial Analysis, Purchasing, and Grants Management. With outsourcing, you can scale your service level up or down to meet your current situation and needs. You can outsource certain finance functions or the entire accounting function. Outsourcing can be performed on-site or off-site, which also provides flexibility to the organization.
- Accounting software expertise. It is unlikely that the internal staff will be able to stay current and fully utilize the updated accounting software. Normally, an organization is faced with staff turnover and no training budget. It is likely that the internal staff has never experienced a new software implementation and is relying on how previous internal staff utilized the accounting software. Furthermore, internal processes and systems don’t change to accommodate new software features and enhancements so software utilization doesn’t improve. An outsourced accountant with technology expertise will likely be current with technology from having multiple clients experiences and the necessity to be as efficient as possible. There are several areas of accounting that should look for automation to include bill paying, expense management, and cash receipts to free up time spent simply to process transactions.
- Better manage your finance and accounting function. What type of information are your currently receiving from your accounting department? Is it real time financial information and is it timely and accurate? Does it help you with financial planning and decision making including managing cash flow and planning for budgeting and financial projections? An outsourced accountant can help you better manage your finance and accounting function and help your organization get to the more important financial areas. It will also provide better financial accountability and transparency for the organization. You need to insure all levels of financial management are taken care of which includes the transactional which is just the day to day, but you need to insure the strategic and managerial levels are performed as well to include financial planning and performance management.
- Stay current with regulations and laws. Most organizations don’t have time to stay up with the constantly changing regulations, new accounting standards, Internal Revenue Service, and other oversight organizations. An outsourced accountant will likely be current with these changes and will adjust service levels to meet the latest requirements. You need to insure you are performing grant and contract monitoring and maintaining financial polices and procedures.
Outsourcing accounting provides nonprofit organizations with a team of experts who have multiple client experiences which benefits its clients and the nonprofit organization’s it serves.
When considering outsourcing any accounting function, make sure you work with several staff including a manager or partner who’ll become familiar with your organization. This will help with the continuation of services and provide additional resources and expertise to the board, finance committee, investment committee, treasurer, and Executive Director.
Having the right team in place allow you to focus more resources on your mission and related program outcomes while having a better functioning finance function. It is important that you have the right expertise with an outsourcing firm that you trust and enjoy working together so that a long-term relationship can develop. Keep in mind the organization will still be making the financial decisions, but should be able to make better decisions with the financial advisor performing the role and making recommendations to assist with the organization’s decision-making with insight, influence, and impact. Look for a firm that will tailor to clients’ needs and become an extension of the organization’s team regardless of the service levels.
Please contact us and we can start you with a needs assessment to help you identify outsourcing levels. You might need some temporary or transitional help while you assess your needs and allow you time to recruit for permanent positions. We can help train and upskill existing staff to help with staff retention and development.