It’s your lucky day! You can go on Groupon or Fiverr and hire an accountant for as little as $20!
I’m just kidding. That’s probably a terrible idea.
But it begs the question: How much does it cost to outsource accounting? And perhaps more importantly, how much should businesses expect to spend on accounting to ensure quality service?
Outsourcing accounting can offer substantial cost savings compared to in-house solutions, even when evaluating similarly-skilled providers. This guide will cover cost expectations for US-based companies looking to outsource (both at home or overseas).
Why Should You Outsource?
The primary reason to consider outsourcing accounting services is to keep costs down.
In the US, the average base salary for a full-time in-house accountant is $61,969. Add on payroll taxes, benefits, and additional office space, and annual costs per accountant can easily exceed $80k — and much higher in high-cost-of-living areas.
In addition to salaries, you can also save big on software costs. Third-party bookkeeping services will typically provide their own software, which means - if you're small enough - you don’t have to invest additional dollars in accounting software or an ERP accounting solution.
It’s not all about cost savings, though. Outsourcing can be more efficient, as there’s no need to train internal accounting teams. Quality third-party accounting firms will also offer specialized expertise that may be difficult to find in an in-house accountant.
And counter-intuitively, outsourcing accounting functions may also improve financial security. While you will need to share financial data with a third party, external accountants typically do not have access to company accounts or funding sources, which greatly reduces the risk of embezzlement and fraud.
At a Glance: What’s the Cost of Outsourcing Accounting Services?
For most businesses, outsourcing can cost around $500 to $5,000+ per month for US-based CPA firms, and potentially less for offshore outsourcing.
For larger enterprises, costs can scale up with the volume of revenue and/or the number of employees. A decent benchmark estimate is to calculate expected annual accounting costs at around 0.5% to 1.5% of annual revenue.
Factors Influencing Cost of Outsourcing
The cost of outsourcing accounting varies depending on the specifics of your business. Generally speaking, the smaller and simpler your operations are, the cheaper outsourcing will be.
These factors influence the total cost of using an external accounting firm:
Accounting service costs will typically scale upwards with the volume of revenue a company generates. More revenue typically equates to more work for bookkeepers and accountants, translating into higher service pricing.
Of course, this isn’t always the case. A pre-revenue startup, for instance, still has substantial accounting work to do. On the other side of the spectrum, high-revenue service-based firms may have relatively simple accounting, particularly if they generate most of their revenue from a handful of client accounts.
Regardless, revenue is often used as a simple metric in judging the size of a firm’s operations, which may be used as a starting point for pricing accounting services.
The number of employees a firm employs can also influence the cost of outsourcing accounting. Headcount can be used as a baseline metric of volume and/or complexity for a firm’s operations.
There are also per-unit costs to consider when it comes to workforce numbers. Accountants must prepare W-2s for each employee, for instance. If payroll is also being outsourced, additional per-person costs for withholding, processing paychecks, and preparing tax forms can also add up.
“Accounting” is a broad term. The specifics of a firm’s accounting and bookkeeping needs will greatly influence the cost of outsourcing services.
Accounting firms can offer the following services:
- Bookkeeping and financial statement preparation
- Payroll processing
- Accounts receivable/invoicing
- Accounts payable
- Internal auditing
- External audit management
- Budgeting and forecasting
- Financial analysis
- And more
Basic bookkeeping and preparation of financial reports are typically bundled by default; other services are often available as add-ons.
When you see figures on the average cost of outsourcing accounting services, you’ll notice a huge range ($500 to $5,000+ per month, for instance). A lot of this has to do with the variety of services desired by the business and the commonality of a-la-carte pricing.
External accounting providers can either augment your existing staff’s capabilities or completely replace an internal accounting department’s roles. The level of services provided influences costs.
For instance, if you have an in-house bookkeeper already, you may wish to bring on an accounting service to support them and to handle additional tasks like budgeting, forecasting, or financial analysis.
On the other hand, perhaps you’ve been keeping the books yourself, and are looking to fully outsource accounting to free up more of your own time.
As one might expect, the greater the level of service provided, the more expensive outsourcing will be.
Accounting providers can structure their service pricing in a number of ways. The two most common are an hourly rate and a monthly retainer.
Hourly rates for US-based accountants are often in the $100 to $500+ per hour range. For offshore accounting services, costs are typically lower and can be in the $20-$100+ per hour range.
Some firms may offer multiple tiers of hourly rates. For instance, basic bookkeeping may be $100 per hour (and handled by junior associates at the firm), while tax and financial report preparation may be $400 per hour (and processed by a licensed CPA).
Pros of hourly pricing:
- Can be more cost-effective, particularly for smaller businesses
- Costs scale with transaction volume, meaning costs may be lower in slower months
- Well suited to seasonal businesses, rapidly growing firms, and pre-revenue startups
Cons of hourly pricing:
- Total costs are less predictable
- Hourly billing may encourage inefficiency from providers
- May require minimum billable hours per month
Monthly retainer pricing for accounting services can range from $500 to $5,000+ per month for small businesses with up to $10m revenue and/or fewer than 100 employees, then continues to scale up from there. For offshore accounting firms, costs can be lower, at $250 to $3,000+.
Monthly retainer pricing typically requires a longer commitment, usually of 1 year or more. It can be structured as a standard flat-rate monthly fee (regardless of the volume of work in a given month), or it can be structured as a certain number of hour credits per month, which may roll over if unused.
For instance, a firm may charge $3,000 per month as a flat fee. Another may charge $3,000 per month for 15 credit hours per month. In the latter case, credit hours that are unused in a given month may be rolled over to future months without additional charges.
Pros of monthly retainer pricing:
- Consistent and predictable costs are easier to budget for
- May represent a discount compared to a firm’s hourly rate
- May motivate accounting providers to be more efficient
Cons of monthly retainer pricing:
- Can require a longer commitment
- Less suitable to businesses with variable needs throughout the year (i.e. seasonal businesses, rapidly growing firms)
- Could be less cost-effective for smaller firms and simpler accounting needs
How to Estimate Total Cost
The costs of outsourcing accounting services vary based on the complexities of your particular business. As a result, the only way to get a true estimate of costs is to contact several accounting firms for a custom quote.
With that said, you can estimate costs by considering your firm’s revenue figures, service needs, and location.
Estimated Annual Costs as a Percentage of Revenue
You can calculate the expected annual costs of outsourcing accounting based on a percentage of your annual revenues.
1% to 1.5% of annual revenue is a decent starting benchmark for firms with revenues of between $300k and $3m or so.
For instance, a firm with revenues around $1m might expect annual (not monthly) accounting costs to fall in the ~$10k-$15k range.
For small firms, expenses can often exceed this 1%-1.5% benchmark. A mom-and-pop service provider earning $100k in revenue per year would struggle to find an accounting provider willing to work for just $1-$1.5k/year.
On the flip side, high-revenue firms may have lower costs, as a percentage of revenue. A firm running $10m in annual revenues could perhaps find a quality accounting provider for more like 0.5%-1% of revenues.
Keep in mind that these figures are very rough estimates, and also tend to be based on US-based pricing. For firms outsourcing overseas, costs are typically lower.
Outsourcing Locally vs. Offshore
A major cost variable is the location of the accounting service you outsource to.
Generally speaking, accountants in the US will charge more than accountants abroad — particularly when considering services in lower-cost-of-living countries like India or the Philippines.
When evaluating offshore accounting services, make sure to do your due diligence. Hidden costs and/or inefficiencies can easily erode the cost advantages of offshoring. And make sure to be crystal clear that the service employs accountants who are well-versed in US accounting standards and tax laws.
Outsourcing Can Be Cost-Effective, But Choose Wisely
For many businesses, the cost of outsourcing accounting services can be significantly lower than hiring an in-house accountant (or a whole team).
With that said, it’s vital to partner with a reputable accounting service provider. Cheap services do you no good if they are inaccurate or inefficient, and no business owner wants to have to worry about double-checking the accuracy of their accounting providers.
For more guides into accounting best practices, software tools, and more, head to the accounting section of The CFO Club. For actionable insights on all things corporate finance, subscribe to The CFO Club Newsletter today.