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What is Financial Outsourcing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 September 2016
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Financial outsourcing is a business strategy that involves contracting with outside providers for various types of financial and accounting functions. Small companies sometimes make use of this form of outsourcing as a means of keeping costs low while still taking care of essential accounting functions. Even large corporations sometimes find that this form of business process outsourcing can be cost-effective under certain conditions.

Of all the different forms of financial outsourcing, one of the most common is contracting with a provider to handle payroll functions. Payroll service providers can establish a structured profile that ensures all salaried and hourly employees are paid on time and in accordance with data supplied by the client. Typically, one central contact at the client’s location can review and approve payroll data before each pay period, and then the service takes care of the remainder of the details. This includes calculating and deducting employee taxes, withholding employer taxes, filing tax documents with the appropriate state and federal agencies, managing direct deposits or cutting checks in order to pay employees, and even managing garnishments or other forms of withholding automatically.

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Along with payroll services, hiring professionals to manage accounts payable and receivable records is very common today. Many small companies find that doing so helps to keep employee costs to a minimum, while still allowing the business to have a complete and up to date set of accounting records. In some cases, the provider will even oversee the process of issuing invoices to the client’s customers, receive the payments, post them to the receivables, and manage the deposits into the client’s operating and payroll bank accounts.

Another form of financial outsourcing has to do with bill collections. In some cases, this type of outsourcing takes place after the company has made reasonable attempts to collect on outstanding invoices that have not aged more than 120 days. At that point, they are rendered to the collection agency, which takes on the task of trying to collect on the delinquent balances. In recent years, downsizing has led to situations where these agencies actually begin following up on invoices that are as little as thirty days in arrears.

With all forms of financial outsourcing, the main benefits include access to professional services without the need to incur expenses like salary, benefits, or training a staff to perform the necessary functions. New companies operating on shoestring budgets often find that outsourcing financial functions allows them to focus on building the business rather than spending time on routine housekeeping matters, such as paying bills or issuing invoices. As more small businesses continue to appear, the chances that financial outsourcing will continue to grow in popularity are very good.

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