Why Nonprofits are Moving to Outsourced Accounting
There are many reasons nonprofit organizations are moving to outsourced accounting services (OAS). The one most cited by top managers of fast-growth organizations is being able to focus on the mission, programs, and fundraising while having the assurance that finances are being competently managed.
Additional points to consider when noting why nonprofits are moving toward outsourced nonprofit accounting include employee turnover, audit issues, and inadequate accounting technology.
But what about the cost of purchasing outsourced nonprofit accounting services in relation to maintaining an in-house staff? Are the benefits worth the cost? There’s a perception that outsourcing accounting services are more expensive than maintaining an in-house staff. Let’s examine that by looking more closely at the cost components.
Based on PayScale’s recent survey on nonprofit accounting annual salaries for accounting and finance personnel, the median by position are:
Financial Controller $81,000
Accounting Manager $77,000
Senior Accountant $ 68,000
Staff Accountant $48,000
For illustrative purposes, let’s assume a composite of these skill levels is required in two full-time equivalent positions for a small- to mid-size nonprofit. The average salary is $68,500 and with two people, that total is $137,000. You must also add 25% for employer-paid taxes and benefits making the annual cash outlay $171,000. Let’s set this as the ceiling for which a nonprofit will not exceed when purchasing outsourced accounting services.
Outsourced Accounting Service Pricing
So, how does an outsourced accounting services’ provider price its equivalent services and return a profit? Likely, its personnel costs are at least 15% higher for full-time equivalents. Therefore, in order to make a profit, its personnel must work smarter and faster, eliminating much of the time spent by internal personnel that doesn’t deliver a direct benefit. Modestly, this could range from 40 to 50 percent including vacation and sick leave, training, attending meetings, and non-productive (water cooler) time. Assuming an accounting services provider can do the work in significantly less time than in-house staff, the price charged on an annual basis would range as follows:
OSA Efficiency (% time required) Annual Price of OSA Service Cost Saving
40% $115,000 $56,000
45% $142,000 $29,000
50% $156,000 $15,000
Additional Cost Savings
The above presentation is incomplete without mentioning other potential cost savings from outsourcing some or all the nonprofit’s accounting functions. Here are a few:
- Reduced office overhead expenses
- Staff recruitment and personnel training costs
- Audit fees
- Additional costs attributable to personnel turnover and discontinuity
- Losses due to employee theft or fraud
- Maintaining accounting technology – software and IT support
Our conclusion is this: outsourced nonprofit accounting services can deliver significant benefits with stronger financial management at a cost less than maintaining an internal staff for most organizations from startup to maturity