Blog / Nonprofits

Outsourced Accounting: Mitigating Risk and Creating Efficiencies

by Christina Hardy and Rachel Sweeney
Outsourced Accounting: Mitigating Risk and Creating Efficiencies

As a community-oriented organization, an important part of your mission is to provide employment locally. Outsourcing key organizational functions can thus be frowned upon because it can create a perception of searching outside the local community for services.

But there are times when outsourcing is the best alternative — particularly when it can help protect your organization and staff from risk and create financial efficiencies that lead to better stewardship of scarce resources.

Outsourcing can apply to a diverse set of accounting tasks, for instance. Some examples that are particularly relevant to nonprofit organizations are:

  • Payment processing. Outsourcing payment processing through third-party providers can help develop segregation of duties (an important internal control measure we discussed in a previous blog) and efficient operational reviews of expenditures, as well as help nonprofits scale operations without adding to your personnel headcount.
  • Cloud-based purchase order systems. A robust purchase order system utilizing pre-authorizations can protect against cybercrime and fraud and allow dynamic adjustments of future spending.
  • Payroll processing. Outsourced payroll processing reduces risk for nonprofits and frees up staffing resources for other duties.

New Technology Makes Outsourcing a Better Option

Often, when an executive committee recommends looking into outsourced solutions, the response is, “We’ve done it this way for years, why would we change now?” or “We looked at that five years ago, and it was a waste of our time. Why look at it again?”

The reason to revisit outsourcing now is the increased availability of affordable technology that previously didn’t exist. Due to the complexity of most nonprofit general ledger coding structures (grants, departments, restrictions, etc.), the most affordable software wasn’t always optimal for the needs of nonprofit organizations. However, the technology has matured even in the more modest software packages used by many midsize nonprofits.

“[T]here are times when outsourcing is the best alternative — particularly when it can help protect your organization and staff from risk and create financial efficiencies that lead to better stewardship of scarce resources.”

A useful example is the area of procurement and purchase orders. Historically, a lot of nonprofits have been hesitant to use purchase orders, viewing them as unnecessary administrative overhead, cumbersome to their staff, and an expense that would typically require going to a top-tier software provider. The cost was prohibitive for many nonprofits, the systems were complicated, and implementation was often painful.

But purchase orders are one of the best ways to predict and manage your organization’s spending at a given time or period. As people proactively request dollars, management and finance departments can look at what’s already committed in open purchase orders, what’s already been spent, and what’s available in the pipeline to spend. The amount of committed spending is one of the biggest unknowns for nonprofits without a purchase order system.

What about the expense and complexity of the technology? The good news today is more middle-market providers are offering purchase order modules, usually integrated with outsourced payment processing — and at a price point that’s affordable for most midsize nonprofits.

These accounts payable modules employ artificial intelligence to automate low-level manual processes. For example, they can take a purchase order, vendor, and an amount — all with the same coding — and compare the data with an incoming invoice to automate matching incoming invoices with approved purchase orders.

This is potentially a huge timesaver; for example, if adding an accounts payable processor role to your system can enable your accounting team to do the same amount of work in two-thirds of the time, you’d be able to grow one-third in size without taking on additional headcount for accounts payable processing.

In addition to the value brought by scalability, most outsourced accounts payable packages also have payment processing solutions that perform a sweep of the bank’s checking account into a holding account and processes the checks from the holding account.

Outsourcing payment processing can help provide controls against two different risks. It can remove custody of check stock from the accounting department, which helps develop better segregation of duties, and it helps reduce the risk that an unauthorized disbursement will be processed (an event that could indicate check fraud).

Instead of a nonprofit’s routing and checking account number available (exposed) on a check, potential fraudsters see the number of the holding account — the account the funds get swept into. So, if somebody submits a check that was never cut, the accounts payable processing company will notice it and say money was never moved for that. The check can’t be cashed because it doesn’t exist. So again, it provides another level of security by separating out what’s deposited into the account where cash actually lives to protect that cash.

There’s a strong case to be made for these investments. Today’s software is less expensive and, in many cases, more affordable and scalable than additional personnel headcount. The benefits outsourcing brings to your organization ultimately flow to your ability to be a good steward, which in turn flows to your ability to better serve your community.

Chris Hardy, CPA
Christina advises nonprofits on the financial aspects of their organization so they can move the needle on their missions. She specializes in human services organizations, foundations, economic development organizations, and grant-funded organizations.
Rachel Sweeney, CPA
Rachel specializes in risk and efficiency assessments in accounting processes and assisting clients in the implementation of the assessment recommendations. Her experience spans a variety of industries, company sizes, and and entity structures.