What Is an Outsourced Finance Department and Does Your Business Need One?

25 Aug

For many growing businesses, there comes a point where bookkeeping and annual accounts are no longer enough.

Your business may be turning over £1 million or more, you may have employees, multiple revenue streams and increasingly complicated finances, but hiring a full-time finance team can feel like a significant and unnecessary expense.

This is where an outsourced finance department can provide an alternative.

Instead of employing several people to manage your bookkeeping, management accounts, payroll, cash flow, tax and financial reporting, you can outsource your finance function to a specialist team.

But what exactly is an outsourced finance department, and how do you know whether your business actually needs one?

What is an outsourced finance department?

An outsourced finance department is an external team that manages some or all of your company's finance function on your behalf.

Rather than employing an in-house bookkeeper, finance manager, financial controller and potentially a Finance Director, you work with an external finance team that provides the expertise your business needs.

Depending on your requirements, an outsourced finance department can take responsibility for:

Bookkeeping
Management accounts
Financial reporting
Cash flow forecasting
Credit control
Accounts payable
Accounts receivable
Payroll
Corporation tax
VAT
Budgeting and forecasting
Financial planning
KPI reporting
Finance strategy
Finance Director support

The key difference between an outsourced finance department and a traditional accountant is that an outsourced finance team is generally much more involved in the ongoing financial management of your business.

Your accountant may tell you what happened last year.

An outsourced finance team helps you understand what is happening now and what you should do next.

Why are businesses choosing outsourced finance departments?

As a business grows, its financial requirements become more complicated.

A small business might be able to manage its finances with accounting software and an external accountant.

But as turnover increases, so does the volume of transactions, employees, suppliers, customers and financial decisions.

Eventually, business owners often find themselves asking questions such as:

How profitable are we actually?
Which areas of the business make the most money?
Can we afford to hire another employee?
Why is cash flow tighter despite increasing sales?
Which customers owe us money?
How much cash will we have in three months?
Are our margins improving or declining?
Can we afford to invest in new equipment?
What will happen if sales fall by 10%?
When can I afford to take money out of the business?

These aren't questions that annual accounts alone can answer.

They require accurate, timely and meaningful financial information.

That's where an outsourced finance department can add significant value.

What does an outsourced finance department actually do?

The exact service will depend on the business, but a good outsourced finance department should be able to provide much more than basic bookkeeping.

1. Bookkeeping

Accurate bookkeeping provides the foundation for your entire finance function.

Your finance team can manage transactions, reconciliations, supplier invoices, customer invoices and other day-to-day financial information.

But bookkeeping shouldn't simply be viewed as data entry.

When it is properly managed, it gives business owners reliable information on which to base decisions.

2. Management accounts

Management accounts provide a regular snapshot of how your business is performing.

Rather than waiting until your year-end accounts are prepared, you can receive monthly or quarterly information covering areas such as:

Revenue
Gross profit
Operating costs
Net profit
Cash position
Debtors
Creditors
Key performance indicators

This allows you to identify problems much earlier.

3. Cash flow forecasting

Profit doesn't necessarily mean you have cash in the bank.

An outsourced finance team can create cash flow forecasts that help you understand your future financial position.

For example, you may be able to identify months where cash flow is likely to become tight before the problem occurs.

That gives you time to take action.

4. Credit control

Late-paying customers can put unnecessary pressure on a growing business.

An outsourced finance department can manage your credit control process, including:

Monitoring outstanding invoices
Sending payment reminders
Contacting customers
Reporting overdue debts
Escalating persistent late payments

Getting paid faster can have a significant impact on your cash flow.

5. Budgeting and forecasting

Your finance team shouldn't just tell you what happened.

They should help you understand what is likely to happen next.

Budgets and forecasts allow you to plan for recruitment, investment, expansion and other major business decisions.

6. Financial strategy

At the higher end of the market, an outsourced finance department can provide access to senior financial expertise without requiring you to employ a full-time Finance Director.

This might include:

Business planning
Financial modelling
Investment planning
Acquisition support
Profit improvement
Scenario planning
Business valuation
Exit planning

This is where an outsourced finance function can become a genuine strategic partner to the business owner.

When does a business need an outsourced finance department?

There isn't a specific turnover figure at which every business suddenly needs an outsourced finance department.

However, there are some common warning signs.

1. Your turnover is growing quickly

Growth creates complexity.

A business turning over £500,000 may have very different financial requirements from one turning over £2 million.

As your business grows, you need better systems, reporting and financial controls.

An outsourced finance team can grow alongside you without requiring you to constantly recruit new finance employees.

2. You're making decisions based on your bank balance

If the primary financial information you use is the balance shown in your business bank account, you probably need better financial reporting.

Your bank balance doesn't tell you:

Your true profitability
Your gross margin
Your future cash position
Your debtor position
Your underlying performance

Good financial reporting gives you a much clearer picture.

3. You don't know your numbers until weeks after month-end

If you're finding out how your business performed several weeks or months after the period has ended, you're effectively driving while looking in the rear-view mirror.

Timely management accounts can give you the information you need while you can still do something about it.

4. You're spending too much time dealing with finance

Business owners should be focused on growing and running their businesses.

If you're spending hours every week:

Chasing invoices
Checking payments
Reviewing spreadsheets
Dealing with payroll
Answering finance queries
Trying to understand your accounts

it may be time to consider outsourcing your finance function.

5. You need senior financial expertise but can't justify a full-time Finance Director

A full-time senior finance hire can be expensive, particularly if you only need their expertise for part of the week.

Outsourcing can give you access to experienced finance professionals on a flexible basis.

You get the expertise without necessarily carrying the cost of a full-time team.

How much does an outsourced finance department cost?

There is no one-size-fits-all price.

The cost will depend on factors such as:

Your turnover
Number of transactions
Number of employees
Complexity of your business
Number of companies
Reporting requirements
Level of financial support required
Whether you need Finance Director-level support

For some businesses, outsourcing may replace a single finance employee.

For others, it can effectively provide an entire finance function.

The important thing is to compare the total cost and value, rather than simply comparing the monthly fee with the salary of an employee.

An in-house finance function can involve:

Salary
Employer National Insurance
Pension contributions
Recruitment costs
Training
Software
Holiday and sick pay
Management time
Additional employees as the business grows

Outsourcing can provide access to a broader range of expertise without having to build the entire team internally.

What are the benefits of an outsourced finance department?

For growing businesses, the biggest benefits can include:

Lower overheads

You can access a team of professionals without necessarily employing an entire finance department.

Access to expertise

Instead of relying on one employee, you can potentially access bookkeepers, management accountants, financial controllers and Finance Directors.

Better financial visibility

Regular management reporting can give you a much clearer understanding of your business.

Improved cash flow

Better forecasting and credit control can help you manage cash more effectively.

Scalability

Your finance function can grow as your business grows.

More time for the business owner

Perhaps most importantly, outsourcing can remove much of the financial administration from your workload.

Does your business need an outsourced finance department?

Ask yourself these five questions:

1. Do I know exactly how profitable my business was last month?

2. Do I know what my cash position will look like three months from now?

3. Do I have accurate monthly management accounts?

4. Do I have someone proactively reviewing the financial performance of my business?

5. Could I make a major financial decision tomorrow and have the numbers to support it?

If the answer to several of these questions is no, your business may benefit from an outsourced finance function.

You don't necessarily need to wait until your business reaches a particular turnover.

The right time is when the complexity of your finances has grown beyond what your current finance arrangements can comfortably handle.

Outsourcing your finance function doesn't mean losing control

Some business owners worry that outsourcing their finance function means giving up control.

The opposite can be true.

A well-run outsourced finance department should give you more control, because you have better information.

You should know:

Where your money is going
Which parts of your business are profitable
What your cash position looks like
Where your biggest financial risks are
Whether you're hitting your targets
What you can afford to invest
What you need to change

The purpose of outsourcing isn't simply to take finance away from you.

It's to give you the information, expertise and support to make better decisions.

Welf: Your outsourced finance department

At Welf Accountants, we work with growing businesses that need more than traditional year-end accounting.

We provide a complete outsourced finance solution, combining bookkeeping, management reporting, accounts, tax, payroll, credit control and financial support.

Our aim is simple:

To give growing businesses the financial expertise they need without the cost and complexity of building an entire finance department themselves.

Whether you need help with your day-to-day bookkeeping or you're looking for a finance partner to help you understand profitability, cash flow and future growth, we can build a finance function around your business.

If your business is growing but your finance function hasn't grown with it, it may be time to consider outsourcing.

Ready to take control of your business finances?

Talk to Welf Accountants about building your outsourced finance department today.

Paul Knappett