As businesses grow, their financial requirements increase — and with that come challenges that are often too great for the likes of a basic financial ledger. When this occurs in your business, there are two choices to help you stay on track with your incomings and outgoings: accounting software or outsourced accounting services.
It's worth noting that the two options offer different levels of accuracy and protection for your business, and the choice may be slightly more obvious depending on your business type or even personal abilities. But in any case, a few important questions arise that may leave you wondering whether accounting services or software is right for your business, right now, to help you ensure that all of your numbers add up when the time comes to file.
As any successful business owner can tell you, steering clear of the Internal Revenue Service's (IRS) iron fist is highly advisable in order to achieve peaceful profits as well as to secure the financial foundation (and future) of your business.
How Should You Decide Whether to DIY with Software or Outsource Accounting Services to an Expert?
Well, now hang on a second here because the answer isn't that simple. This is an ongoing battle in the world of small business, and there is no unified agreement between all small business owners.
To determine which path to take — accounting software vs. outsourced accounting services — it's important to discuss a few things first that will help you understand why some businesses might choose one over the other. First of all, what do each of these options really entail?
Accounting Tools/Software vs. Outsourcing Accounting Services for Small Businesses
To navigate the whole bookkeeping software vs. outsourced accounting services argument, we first need to understand the difference between bookkeeping and accounting. In a nutshell, bookkeeping is what you need during the first stages of your business, when paperwork, payroll, invoices, receipts and write-offs can easily be tracked without issue.
Once your business begins to grow and you get into more employees, more expenses, and higher-level ventures, accounting services will provide a far more comprehensive and coherent view of your business finances both for your own operating activities as well as to satisfy the IRS.
Let's take a look at both options:
When you think of accounting software, a few providers might come to mind. QuickBooks, FreshBooks, Sage, Xero and many more offer small businesses the ability to keep their own books at an in-house level. Some business owners may choose to learn these tools on their own, while others will hire an in-house bookkeeper with more extensive knowledge of a particular tool to come in and keep everything neat and tidy for the IRS. There are upsides and downsides, as we shall learn, and reasons why this option may or may not be right for your small business.
Outsourced Accounting Services
Outsourced accounting services are those which are provided by an external, third-party provider who specializes in, well, accounting services. These are specifically educated tax professionals who are licensed and accredited, and you can be sure that they aren't using QuickBooks Essentials to keep track of your company's financial records.
These are the people who stay up to date with changes to tax laws and have a firm grasp on the nuances of small business accounting, including how to save your business from paying unnecessary taxes and how to take advantage of legal tax avoidance strategies to maximize profits for your business.
So, what should you be thinking about when vetting either option?
Factors to Consider When Choosing Accounting or Bookkeeping Services
Naturally, cost always plays a role in these types of decisions. Simply put, using accounting software in house is cheaper than hiring outsourced accounting services...at least, it might seem that way at first glance. The upfront cost of the software itself may be cheaper, and you may find a bookkeeper with good rates or hire one of your own, but too often the old adage, "you get what you pay for" comes into play.
As a business owner, you must decide whether you'd prefer to keep your costs low in favor of shortsighted cashflow retention or opt to have a seasoned professional squeeze and analyze every penny to ensure you're profiting the most from each revenue dollar earned.
Outsourced accounting services provide access to a broad spectrum of advanced professional knowledge and accomplishment — arguably, it's one of the most significant reasons for outsourcing in the first place. Hire the people who do this for a living, right?
That isn't to say that you won't find a bookkeeper worth their salt or that you can't manage your company's finances on your own with small business accounting software. But a) you have a business to run, and b) one payrolled bookkeeper is often no match for an entire team of the industry's best if the goal is to minimize tax obligations and maximize take-home profit.
Choosing outsourced accounting services goes beyond maximizing profit, however. Legally speaking, you don't want to be on the wrong side of the IRS, and honest mistakes that are overlooked by one are far less likely to be overlooked by a seasoned team. You may find that outsourced accounting services offer more protection, accuracy and security in terms of meeting your legal tax obligations.
This is less fun to talk about, but loyalty is a big one. According to 2020 data from the Association of Certified Fraud Examiners (ACFE), 14 percent of all occupational frauds came from accounting departments, and fraud risks such as billing fraud and payroll were twice as likely in the case of small businesses than in larger organizations. Check and payment tampering was four times higher in small businesses. There's no question that corruption within your company can be highly detrimental, and sadly, employees aren't always honest. Your employee situation may be different, but it's a least something to keep in mind.
When you outsource accounting services, loyalty isn't a question, it's a rule. The goal of the provider you hire is to keep you as a client for as long a tenure as possible, and it's in their best interest to double and triple-check all statements and records to generate a paper trail and determine where each and every penny goes.
Why Small Businesses Should Use Accounting Software
If your business operates locally and remains on the smaller end of small business, accounting software may be the right choice for you. Software will help you plan, forecast, manage and identify potential problems or issues while strengthening the viability of your business.
You'll want to ensure that you choose the right accounting software for your business activities, and it's worth noting that the cheapest options will rarely provide you with the tools you need to maintain a high level of accuracy and visibility.
Why Small Businesses Should Use Outsourced Accounting Services
The more complex your business becomes, the more reason to opt for outsourced accounting services to ensure that your business financials are in the hands of licensed professional accountants. These providers make it their business (literally) to manage your financial statements with the utmost accuracy in order to prevent IRS audits, penalties and potentially even worse scenarios.
The harder they work, the more peaceful your business becomes because you know that they are always on top of everything — from billing and invoices to employee fraud and profit protection.
What to Look for When Making Your Decision (and How Most Business Owners Decide)
It's essential for business owners to recognize the difference between bookkeeping and accounting before making their choice. Bookkeeping refers mainly to a company's management of daily financial transactions such as receipts, sales, and any purchases the company makes to facilitate its operational activities. Accounting, on the other hand, is a deep dive into the day-to-day financial data to pull subjective insights that can enable the company to make key decisions based on informed projections.
Most small business owners who have defined goals and aspirations for their businesses (those who wish to scale) understand the importance of gaining insight beyond day-to-day record keeping and are always looking for ways to enhance their operations to achieve those goals. Though this isn't always the case, it does provides a fair bit of context for the average owner.
To make things easier, start by identifying your short-term and long-term goals and think about how your business operates.
Do you want to scale or stay local?
Do you need a lot of employees or only a few?
Will your business have more expenses over time?
Do you or your employees travel for work and incur travel-related expenses?
Does your business need to position for future moves, risks or opportunities?
Would it be easy for small amounts of money to go missing or be accidentally miscalculated?
If you do have a smaller local business that provides a quiet, comfortable living without a ton of paperwork, using bookkeeping software or hiring a bookkeeper as an employee might work well for your setup. Most businesses in their beginning stages will be in the same boat, at least for a period of time.
That said, if you are planning to grow, expand into other markets and increase your staff to compete with other big industry leaders, you'll want to search for the right small business accountant who can help you achieve those goals from a financial perspective. Outsourced accounting services can offer a significant benefit in this case, as your provider will be dedicated to assisting in the growth of your business and work to identify a financial path toward your desired outcome.
5 Best Accounting Services for all Business Types
If you've determined that outsourced accounting services are the right way forward for your business, congratulations because ensuring that your books are in order and that financial insights and forecasts can be calculated will provide you the opportunity for increased success as you grow your enterprise.
To help you with the next step, we've compiled the five best accounting services that can help you achieve your goals regardless of the type of business you operate.
On top of helping you form your legal business entity, Incfile's Accounting & Bookkeeping service offers comprehensive tax accounting coverage for your business so that you can focus on running and managing the tasks that you enjoy.
Transactions, reconciliation, tax preparation and filing are all taken care of, and you'll receive unlimited tax consultation to have your questions answered promptly and keep things running smoothly.
You'll always know how your business is performing thanks to easy-to-use software and monthly reporting, and you won't miss out on tax savings due to categorization errors or other mistakes that are commonly made with in-house bookkeeping.
inDinero provides an easy-to-use platform, great customer support and access to experts alongside a wide array of accounting services. For an additional fee, you can also get tax support for filing state and federal taxes as well as catch-up bookkeeping. Using a real-time dashboard, small business owners can check in to access self-support features and connect for expert advice using live chat, phone, or email.
1-800Accountant offers a low-cost option for small businesses that have basic needs with no limit on the number of transactions. Customers are provided a dedicated local accountant who is able to provide professional guidance for financial management and tax preparation. You have the option to add on additional services for increased fees, such as preparing and filing your personal and business taxes, as well as state and federal returns.
Paro enables you to match up with an accountant that checks the boxes as far as your financial and accounting needs go. Besides the flexibility to choose the right fit for your business, you can also determine and set project scope to ensure that your accounting needs are being met. Rates are paid hourly as Paro is essentially a freelance network of professional accountants and bookkeepers, and they maintain a strong vetting process to ensure you are in good hands.
Pilot is a startup-friendly accounting firm that, while relatively new, understands the needs of new startup businesses. They provide a dedicated account manager and offer fast setup with QuickBooks integration and accrual basis accounting (cash-basis accounting is not offered).
Monthly reports, balance sheet statements, and profit/loss reports are all part of the service as well, as are monthly account reconciliations and cash forecasting. If you choose, you can pay additional fees to add on services such as tax preparation and filing, inventory tracking, and accounts payable and receivable reporting.
Choose Incfile for Expert Outsourced Accounting Services
Incfile's Accounting & Bookkeeping service was designed to help new businesses thrive from day one. If you're planning to form your new LLC or other legal entity (or even if you already have), Incfile will help to ensure that your books are kept in pristine condition and that reporting, preparing, filing, tracking, reconciliation and personal tax filing are all taken care of. We know how businesses work, and we understand that keeping your obligations as low as possible will help position your business for continued success.
If you want to protect your business from costly mistakes, avoid IRS troubles and desire to see your dream manifest into a peaceful and profitable business, check out our Business Accounting and Bookkeeping service and sign up for your free tax consultation today.
Chad is a freelance writer and former project manager focused on presenting information on SaaS, technology and business formation.