finance and accounting outsourcing

finance and accounting outsourcing

What is outsourcing?

In general, outsourcing involves the contracting out of a business process or processes to another party. It allows the sharing of specialised skill and infrastructure across many organisations at affordable prices. In the context of accounting services, it entails the contracting out of all or certain processes relating to the collection and administration of financial data, capturing of transactions and the preparation and review of financial results.

Outsourcing of finance and accounting functions is a well-established and growing practice. It is one area where outsourcing makes sense as despite the unique nature of businesses, the underlying accounting and financial processes remain largely generic across most organisations. During tough economic times, outsourcing can provide instant cost savings and also improve the quality and timeliness of information to enable better cost monitoring and management.

Why outsource?

Finding the right balance in your finance function in terms of employee numbers, skill and experience is an ongoing struggle for many organisations. This is not surprising given the fluctuating workload within the function, the spectrum of skills required and continual operational changes that constantly demand a new mix of capacity, skill and expertise. The effect of these variables are often exorbitant costs, capacity miss matches, poor quality, unreliability and ultimately adverse business decisions and results.

The sustainability and reliability of an in-house function is also never guaranteed. The untimely departure of a key resource can throw the function into turmoil and also mean the loss of valuable information and experience which have vested in that person over time. Very few organisations have workable contingency plans in place and normally throw cash at the problem in the form of costly temps and contractors. Finding a replacement is disrupting and costly and no guarantee that the cycle won’t repeat itself. Each time this happens, there is a dip in the quality and reliability of information and an increased risk of fraud.

The challenges and complications associated with the management and administration of employees are major distractions from focusing on core business objectives. Labour laws and employee contracts make it almost impossible and extremely expensive to implement any swift changes that could affect employees. This puts significant strain on managing costs in challenging times. The overall well-being, development and retention of employees require significant investment and support systems. This effort is often overlooked when considering the overall cost of employment.

Outsource partners specialise in providing you with the right level of financial and accounting support within flexible and affordable terms. When considering that these risks and challenges can be passed on to someone else through an affordable outsourcing arrangement, the business case for outsourcing becomes almost indisputable.

Benefits of outsourcing

By sharing specialised infrastructure, processes and resources with other businesses through a mutual provider, the following benefits are realised:

Improved quality and reliability
It is inevitable that when financial and accounting affairs are managed by dedicated specialists, the quality and reliability of financial information will improve. In an outsource arrangement it is possible to continually assess and provide the right level of skill and experience required for changes in complexity and size of your business.

Cost reduction
The direct cost of personnel is already a significant expense for most companies but usually does not take into account the associated overheads of housing these employees. For example, add in recruitment costs, training, insurance, office space, support personnel (e.g. HR), a computer, software licenses, a mobile phone, etc. and soon the direct cost doubles. These costs are now absorbed by the outsource provider and spread over many organisations in an affordable manner. Large portions of IT related costs, e.g. accounting software licenses, servers, upgrades, etc. can also be eliminated within an outsource arrangement.

Efficiencies
Outsourcing allows you to focus all your energy on value creation for your clients as opposed to dealing with the daily distractions and challenges of running a finance and accounting function. Any good outsource provider will quickly identify and eliminate any inefficiencies and duplications as it is not only in your interest, but also in their own. An effectively run finance function will compliment all other areas of your business and generally serves as the link between all business units.

Flexibility and scalability
Outsourcing allows you to add or remove skill and capacity as and when needed, on a temporary or permanent basis. The headache of when and how many staff to recruit is removed. During busy or slow times resources are added or removed without any complexities, e.g. over year-ends, budgeting, etc.

Sustainability and reliability
The sustainability of your accounting and finance function is guaranteed under an outsource arrangement. It is the responsibility of the provider to ensure the right levels of staff are available at the right times. Conformance to this is stipulated in SLAs and used to measure the performance of the outsource provider. The outsource provider will also have processes and measures in place to ensure data is backed up, contingency plans are in place and knowledge of the business is documented and retained.

Administration and control
The administration of individual employees are costly and requires care and attention to avoid unnecessary legal issues or unhappiness in an organisation. Unfavourable labour laws in South Africa also deters from recruiting employees which often causes huge capacity restraints and adds to the burden of existing employees. Outsourcing significantly reduces the risks associated with the recruitment, retention and termination of employees.

Contrary to belief, outsourcing results in better control as opposed to the general concern over the loss control. This is because it is easier to manage an outsource provider more stringently than in-house resources. The metrics for measurement of an outsource provider are also likely to be clear, e.g. savings, service-level achievement etc.

What can be outsourced?

Each business’ needs and circumstances are unique and will determine the right level and combination of outsourced services. The size, complexity, geographical locations and number of employees are all factors that will be considered in determining the optimum arrangement. Processes typically outsourced include:

  • Payroll
  • Bookkeeping/accounting
    • Accounts payable
    • Accounts receivable
    • Fixed asset management
    • Bank processing
    • Month-end
  • Management accounts
  • Financial statements
  • Year-end preparation
  • Budgeting and business models
  • Company secretarial services
  • Taxation (VAT, PAYE, Income tax, etc.)
Outsourcing models

There are various outsource models that can be considered, these include:
Full outsource – the entire finance function is outsourced.
Partial outsource – the outsource partner works in collaboration with internal staff.
Limited outsource – the outsourcing of specific areas e.g. only the cost accounting function or payroll.

Temporary outsourcing – filling in during a temporary vacancy, e.g. maternity leave.
Project outsourcing – outsourcing of specific projects or tasks e.g. a business model, a budget model, year-end preparation.
Managerial outsourcing – secure managerial oversight and guidance from outsource partner at agreed intervals, e.g. two days a month.

Why choose Moonwater as an outsource partner?

Moonwater provides the full spectrum of financial and accounting outsource services. What differentiates us from the pack is our unique blend of skill and experience which is ideal for the services we are offering. We are commercially experienced and our advice and solutions are based on hands on experience gained from working in, managing and improving finance and accounting functions and processes.

You will benefit from our wide range of exposure gained from other businesses, but our solution to you will be uniquely tailored to your needs and means. We work with you to ensure the selected model is cost effective and agree SLAs which support the drivers of your business. We are confident that our skill and experience will improve the success of your business by saving you costs, improve quality and allow you to focus on the core activities of your business.

Tools or not tools

Tools or not tools

Despite decades of automation, business information and management information, many businesses still find themselves in a position where information does not enable decision-making or add value to the way the business is managed.

The misconception that an analysis-reporting tool will do it all is one of the reasons why businesses find themselves stuck. Tools which are implemented do not run on autopilot. There are data dependencies and ongoing maintenance either through consultants or in-house. Automation also doesn’t automatically improve what is measured and reported on.

Considerations before investing in a business analysis/reporting tool
When considering investment in a business analysis/reporting tool, bear the following in mind:

Upfront cost of the tool
This cost includes the software cost, hardware and implementation cost. Sometimes other software is required in the environment for the tool to function and these will have to be procured if not available already.

Ongoing cost of the tool
The ongoing costs consist of the cost to maintain and support the functioning of the tool. Typical ongoing costs are license fees, consulting costs, in-house resources and changes due to business requirements or enhancements. Very often reconciliations between various sources or data are required to ensure the integrity of information.

A certain level of skill might be required to maintain/operate the tool. If the skill is not available in-house, resources might have to be recruited or training provided.

Benefits
What are the benefits that will be derived from the tool implementation? Will more data be translated into information? Is it automation of what is already available? Will it save time? Will it improve decision-making? Is the additional information required on an ongoing basis or only occasionally?

Other
Is the person currently analysing data and reporting on it the right person? What are the alternatives to a tool? Does companies in a similar position invest in tools? What is the expected life of the tool?

Watch out
Excel is rich in capability and accountants are very familiar with it. A number of tools has a similar look and feel or uses Excel as back-end. Evaluate carefully that you don’t buy Excel with a different name and some limitations.

Change and commitment
Key role-players must support the tool-investment and be committed to use it. Even if implemented successfully and cost-effectively, the ultimate return on investment will depend on how the use of the information settles with the users and decision-makers.

Is your practice’s financial management adapting to the new legal landscape?

Is your practice’s financial management adapting to the new legal landscape?

I wrote this article for the legal magazine Without Prejudice and it was published in their September 2015 issue.

In recent years we’ve seen many articles with themes about ‘Why is the demand for legal services shifting?’ (legalexecutiveinstitute.com), ‘Law firm clients today are in the driver’s seat – asking law firms to provide more value at a reduced cost’ (businessoflawblog.com), and ‘Solving the Profitability Problem’ (legalexecutiveinstitute.com) and the key messages are that there is a ‘buyer’s market in legal industry’ and ‘law firms are shrinking’.

Law practices have experienced this in declining profits, a decline in billing realisation and a drop in collections, despite increases in standard rates. This trend is confirmed with Peer Monitor data reporting collection realisation at the end of 2015 at a low 83.8%.

The Legal executive institute attributes the reason to the change in the legal landscape to a change in clients’ buying habits. Clients are shifting to in-house council, alternative service providers, lower-cost firms and specialised firms. Alternative service providers entering the market are for example major accounting firms (PricewaterhouseCoopers, Ernst & Young, Deloitte, KPMG), LPOs (Legal process outsourcing), Dispute resolution systems and Document creation systems.

Continuously reducing fees to retain clients is not a solution to retaining clients as it is not sustainable. There are however strategies to survive in the evolving legal market such as partnering with alternative service providers, focussing on value-adding client metrics and the implementation of project management.

Each and every strategy requires financial practice management to move up a few notches. More sophisticated financial management enables the implementation of new strategies, the managing of more demanding clients (more value for less) through project management and improve monitoring and managing of the day to day operations in a more volatile era.

The two main areas of focus in financial management are margins and cash flow – margins to manage profitability and cash flow to run operations.

Margins

The ultimate aim of a law practice is profitability – the value generated for the stakeholders (partners). Profitability is the net result of fees, less costs to provide the service and overheads. Managing your margins entails more than deducting your overall costs from your fees and see what’s left over. Understanding your margins at a granular level to enable informed decisions is what matters. What returns do you make, on which clients, in what practice areas, who are the fee earners, which industries? Measuring and comparing margins between clients prompt investigation that can lead to strategic decisions regarding the future of certain clients or services. The same applies for knowing and understanding the margins of offices, practice areas and fee earners. Lower margins do not necessarily equate to bad business, however being able to understand and interpret it allows you to make informed decisions and not be taken by surprise. Equally, unusually high margins could be an indicator of risk that later impacts on your cash flow position.

Project management is required for the management of alternative fee arrangements to ensure that the projects are profitable. In a fixed fee arrangement, the price is fixed and costs have to be managed within the agreed price to result in a profitable matter. Tracking of cost against progress has to be done from the start of the project and maintained throughout. As soon as cost is higher than expected the project should be reviewed and alternative strategies considered to make it profitable. There is little to be done with major cost overruns at the end of a fixed fee arrangement.

Due to fixed salary scales or historical increases of both salaries and charge-out rates, the fees generated by fee earners over time could become misaligned with their earnings. Regular review and analysis can identify these and allow for refinement to protect the practice’s profit. Sometimes there is intentional misalignment of fees and earnings. An example of this might be a fee earner working on an internal project.

The billable hour is still the main driver of direct cost and to date also the main driver of billing in many law practices. There are schools of thought that time recording will phase out with conversion to alternative fee arrangements and off-shoring. Though time might no longer be the basis for billing, the measure of effort (cost) to deliver a service will still require the tracking of time as time is the main cost driver.

Time is the trading stock of a law practice and every hour counts and therefore disciplines to ensure regular time recording improves the bottom line. The sooner time is recorded the higher the level of accuracy and completeness. Time recording is also a useful tool in identifying potential issues and opportunities. For example, the amount of time taken to perform certain assignments compared to the fees invoiced can accurately point out areas for improvement (losses) or investment (profitable services).

The more time recorded from the hours worked, the higher the pool from which billing is generated. Only time that is billed and collected ends up in the bottom line. If a person worked for 100 hours, but only recorded 80% (80 hours) and then later bill only 90% (72 hours), there is a loss of 28 hours. If 90 hours are recorded and 90 % (81 hours) are billed, the unbilled hours reduce to 19. Improved time recording directly impacts the bottom line.

Most costs in law practices are fixed (salaries, rent) and not easily reduced. If the expected margins on fees are not achieved, the fixed cost might become a financial burden. Decisions on premises can have a huge impact on the ability to manage profitability and cash flows. During volatile times some flexibility in lease arrangements should be considered.

Cash flow

Cash flow management is the process of planning and predicting cash flow requirements to meet obligations on time and enable expansion. Cash flow constraints tap energy from a business as it not only creates a negative mood, but also distracts from winning business and servicing clients. Red flags go up when there are concerns over the ability to pay salaries or vendors or having a high accounts receivable book, but no money in the bank.

The cash flow position of a firm is a symptom of how well other areas in the firm are managed. Regular cash flow constraints can indicate poor discipline within billing, low quality customers, ineffective collections or unnecessary costs. To resolve the problem long-term the source of the problem has to be identified and not only solutions for the short term.

Cash flow volatility could also be attributable to the type and combination of types of fee arrangements. Billing done monthly for work to date provides some consistency in incoming funds. Alternative fee arrangements might be paid only at the end of the project, if no provision was made for interim payments. Funding for the resources on an alternative fee arrangement to the end of the project therefore has to be funded from other sources or projects. In an environment where a high percentage of fees are billed and paid monthly, historical trends and forecasts could be used as basis for cash management. Where the percentage of billings based on alternative fee arrangements which does now allow for an even inflow of funds is high, a more detailed cash forecasting model is required to management cash effectively. Such a model will cater for detail per substantial project.

Cash flow should become part of the fee discussions with clients with interim billing (at phase of the project) and retainers part of the negotiations. In turn clients might be looking for value in the form of for example progress reports before interim payments are made. There are no rules and the success of this is up to the fee earner to negotiate with a client.

Using vendor payments to manage cash flow has limited value in an environment where payments such as advocate fees are regulated and the majority of are payments are fixed e.g. salaries and building rental. That further emphasise the importance of project management in a law practice and a detailed business/budgeting model.

Conclusion

Project management to enable alternative fee arrangements, planning and cash flow management requires a different level of detail to differentiate law practices and to support practices through volatility. Each practice requires processes, systems and tools to manage through this new era and embrace the changes prepared.

The tangible value from enriched financial information materialises on taking action to make clients, practice areas or fee earners more profitable. Do zero-based budgeting annually and review the value of planned spending. Per Robert Kiyosaki’s rich dad: “The rich are rich because they have expenses that make them rich. The poor are poor because they have expenses that make them poor.”

Considerations when choosing an accountant

Considerations when choosing an accountant

There are many players in the market providing the routine accounting functions and choosing the wrong one could do more harm than good to your business. The risk in choosing accountants can be reduced by looking for:

Chartered accountants – registered with SAICA or IRBA
Chartered accountants are professionally qualified and registered with SAICA or both SAICA and IRBA. Membership of these professional bodies can be verified by logging on the accounting or auditing body’s website or by contacting them directly. Professional bodies are standard setting and monitoring.

A practice registered with an accounting body for chartered accountants
A practice registered with a professional body has a practice number and the registration of the practice can be verified with the applicable body.

Commercial experienced
Accountants with commercial experience (as opposed to traditional accounting firms) within a variety of industries, in other words someone that’s been round the block, are more likely to understand your business.

They will have a different level of awareness of processes, operations and the impact of not getting things right and on time.

Communicate in everyday language
The accountant must talk everyday language and don’t throw you with financial jargon – that smoke and mirrors. Do they tell you about IFRS and statements when you worry about the quantum of stock in the warehouse or in transit?

Independence
Auditors are not allowed to audit their own work. Therefore your auditors can’t be your accountants as well.

Value to expect from accountants
Even if you outsource your taxes and accounting, you are ultimately still responsible for the integrity and accuracy of your accounts and taxes. It is therefore imperative that your accountant discuss and explain financial results with you on a regular basis and provide you with full access to all your information at any time. Financial information is the monitor of the business and can’t be logged behind passwords allowing you only sneak views. Some of the value to expect from an accounting service:

  • Regular updates on submission deadlines for SARS, CIPC, AFS, PAYE, etc.
  • Update of all accounting records as at agreed intervals, normally monthly
  • Management accounts
  • Discussions on the performance of the business
  • Suggestions and information sharing on accounting and tax matters impacting your business
  • Assistance with the selection and appointment of auditors, managing of the audit and related fees
  • Assistance with the selection and appointment of consultants as and when required e.g. specialised tax advice, system implementations
  • To tell you when they are not equipped to provide a certain service