Outsourced accounting services, or any kind of outsourcing service, are not an operational monolith. Far from it, these firms can be categorized based on various factors. Location, relationship, and pricing strategy are primary outsourced accounting models.
Rather than overload you with information, we felt it best to keep things simple and dive into the most important factor that sets them apart: Location.
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Location-Based Outsourced Accounting Models
Location-based outsourcing is the most commonly understood outsourcing model category today. These models are defined by their proximity to a client business. Each model under this category offers unique pros and cons, and it is largely up to your discretion which one you choose. Let’s explore what each offers and help you find which one works best for you.
On-site Outsourced Accounting
Onsite outsourcing is easily the most widely trusted and accepted outsourced accounting model. After all, onsite means your accountant will be in the office with you. There are virtually no risks in onsite outsourcing. You are hiring an employee through an agency to come and work for you and can monitor them yourself. However, you miss out on affordability in exchange for heightened surveillance and security.
The most enticing part about outsourcing is the cost control it offers. For many small businesses, outsourcing is the only way to hire an accountant. The major reason outsourcing is so much more affordable is that it is often remote. The remote nature of outsourcing is designed to reduce overhead costs. When you call your outsourced accountant on-site, all those overhead costs come right back.
On-site outsourcing must be leveraged carefully. Businesses that do not require consistent accounting services can use it the best.
Think of yourself as a small CPG retailer. Your daily accounting and bookkeeping are not that big of a deal. You have downtime when the store is not busy to manage the books. However, you also find yourself not having the time to file your taxes properly. Or you find that your numbers are not adding up. This is where you go to contract outsourced accounting help on-site. An accountant will approach your store, address your concerns, and charge according to the decided rates.
This puts the accounting professional in a contractual consultancy position, where they help out with things like taxes and audits. Larger businesses may hire outsourced on-site accounting services for shareholder meetings and quarterly reviews.
One cool tactic start-ups can leverage is getting a recognized industry accounting professional into their investor meetings. They can then address and explain the business’ financial goals and performance far better and will garner investor trust. Think about it: if you were meeting a fashion start-up whose accountant worked prior with Nike, would you not be far more willing to invest?
If utilized correctly, on-site outsourced accounting can be your secret weapon for tackling the hard problems. This model can greatly benefit local businesses like family-owned restaurants and retail stores.
Onshore Outsourced Accounting
The onshore outsourced accounting model does not come up as often in conversation but is thriving. With onshore accounting, you hire a firm in your state or country to manage your accounting.
This is the go-to choice for medium to large businesses. If you have the budget to hire an accountant at your country’s market rates, then go for it. Onshore outsourced accounting is a happy compromise between the on-site and offshore models. Your overhead is reduced as you do not need to make room for an accountant on-site. Meanwhile, your accountant, while remote, is still within your locale.
There will likely be no cultural clash in this scenario, and your accountant will also be familiar with local laws. Taxes are incredibly murky waters to navigate, for example. While an offshore accountant can handle them, there are always advantages to having a local do it. They know the people working in the industry and their tips and tricks.
As mentioned, however, cost is still a limiting factor. Onshore accountants charge based on your local accountant’s market rates, which puts them largely outside the reach of small businesses working on tight budgets.
Nearshore Outsourced Accounting
Nearshore outsourcing is a different form of onshore outsourcing. In this type of outsourcing, you hire an accountant from a neighboring country to manage your finances. The idea is to keep overhead low with remote work while maintaining similar cultural values and time zones.
For example, your business is in Texas, and your accounting partner is in Mexico. In this case, you and your accountant will be very close in time zones and can easily sync up. You could even occasionally drive to meet them in person or vice versa. At the same time, this accountant will charge you less than an onshore accountant in Texas.
The simple fact is that the accountant market rates are much more affordable in Mexico for a US business owner. Imagine a US accountant charging $80000/year, while a Mexican can charge as much as 20% lower. Of course, this is a hypothetical example, and the rates will be in flux. But more times than not, hiring from a neighboring country as a US business owner will be less costly than hiring onshore.
The tradeoff is that your accountant will not be intimately familiar with local regulations and the industry. This can be a dealbreaker for some business owners, but the cost savings far outweigh the knowledge gap for many. It helps that these remote nearshore accountants are aware of this shortcoming and keep themselves educated on American regulations. Nearshore firms also ensure that their professionals have the requisite training needed to bridge the knowledge gap.
Offshore Outsourced Accounting
When we think about outsourcing, the offshore outsourced accounting model is the first that comes to mind. Outsourcing is commonly understood to be offshore unless stated otherwise. The idea with offshore accounting is simple: maximize savings while minimizing quality loss.
As the name suggests, offshore outsourced accounting connects remote professionals from distant countries to your business. Customer service is a great example of emphasizing the point here. We all know the pain of contacting customer support at Amazon only to be linked to a call center somewhere in Asia. The IT sector is notorious for contracting South East Asian outsourcing firms for customer support.
Many US businesses have incredibly strict budgets. 99.9% of all US businesses are considered small businesses, with at most 20 employees on the payroll. A 10% drop in accounting quality is acceptable for these businesses in exchange for 40-50% cost savings. Many of these businesses do not need an industry savant to do their taxes or handle their audits.
They are perfectly content working with a decent accountant that gets the job done. The main point of hiring an accountant is to bolster financial performance. As long as they are competent and the firm behind them is trusted, that’s all that’s needed.
Conclusion
After the pandemic, we have entered a golden age of outsourcing. The world as a whole is now far more digitized after the pandemic. Professionals have invested time and effort to master the digital landscape. Cloud services have progressed at an astronomical rate, with more secure and efficient digital accounting platforms now available.
With all this infrastructure now in place, outsourcing is no longer an alternative solution. At this point, outsourcing has become the preferred method for managing accounting for small businesses. The only question that remains, and that we have hopefully answered here, is which one of the 5 outsourced accounting models will work best for us.