How Start Ups and SME’s are Exploring Financial Outsourcing as an Option to Inhouse Finance Function

I recently met a young 21 year old guy whose start-up had raised a significant amount of funding from angel investors. Not only was I impressed by the confidence of this young boy, but his passion for his product and belief in managing the best team was really praise worthy.

Being a finance professional, my only question to him was, that how as a team of 4 brilliant IT professionals were they going to take care of finance, which is a core function of any business. It seemed I had touched the part of his business which he was susceptible about. He mentioned that as a technology start-up which was funded, they were asked various questions  by fund houses, namely, What was their burn rate? How long was their money going to survive? How would their annual recurring revenue (ARR) look? How much more money would they need? When would they need the next round of funding?

He mentioned that all the above questions made sense to him and he was prepared with answers. However the questions which bother him were more on the core finance function namely compliances. He was particularly clueless on how would he take care of tax and regulatory compliances on a weekly, monthly, fortnightly basis. This was not something they never took account for in their project reports.

His exassperation was not exaggerated, as on one hand he wanted to concentrate on his technology product and on the other hand the core finance function was keeping him involved in something which could be easily looked at by a specialist. Also being at a very nascent stage, the idea of having a CFO sounded an expensive and unjustifiable decision.

The main points I could gauge out of the conversation were:

  • Boot strapping did not allow them to have expensive CFO’s;
  • With the growing compliances in India, even after having a CFO, the fund may need external consultants for other activities;
  • They would not want to dedicate a space for a separate finance function;
  • They were looking for a flexible, scalable and low cost options;
  • They were looking for a technology driven solution rather than hard copy driven;
  • They were looking for intelligent reporting and dashboards;
  • Access to new talent pools and greater ability to focus on core areas of business.

Recollecting some of my discussions with various people in the past, I realised that the above issues were not only faced by start ups but also by small and medium enterprises who intend to scale up and pass the baton of finance from family to professionals.

With my experience in the last 15 years in this profession, the main reason I could gather for the same was that such enterprises are not able to differentiate between the role of the book keeper and the CFO. It also arises from the old school of thought of having an in-house finance function.

New Rules of the New World

Across the globe, start-ups and successful SME’s have started making New Rules for the New World, by doing away with the inhouse book – keeping function i.e by outsourcing it to a specialised accounting firm and identifying the right time to hire a CFO (if at all) only for a specific function.  They simplified the process by differentiating the CFO’s function from the book keeping function. Once that was done, they realised that the book keeping function could be easily outsourced to a specialised firm.

By carrying out the above exercise, the SME’s were able to identify the right time and activities to be transitioned from the close control of the entrepreneurs to professional control.

Types of Entities Which Explore Finance Outsourcing Extensively in India Currently

Indian subsidiaries of MNC’s and SME’s are the major segment as on date that are looking out for and exploring the outsourcing model. The outsourced book keeping function is not so new for a number of Indian subsidiaries of foreign companies set up in India and they have benefited in the following ways:

  • Concentrate on Core – The operations team can concentrate on the core function
  • Specialised team –The finance and accounting function is maintained separately by a specialized team
  • No risk of missing out any government changes – All the recent notifications and government changes are taken care by the outsourcing full service firm
  • Process driven reports to the management company – All the reporting and related functions are done directly by the specialized team and the parent company
  • Integrity – Being sure that all the reports are not skewed as they are coming from the outsourced firm
  • Effective control over operations – Having a double check on bank/ other operations by adding an independent signatory from the outsourced firm
  • Sometimes the partners of the firms can also work as CFO’s – The outsourcing firms acts as the CFO for the foreign company
  • No risk of labour turnover – No scare of turnover as the burden shifts on the outsourced firm
  • Economical – No requirement of additional infrastructure, lesser hiring costs, liabilities, administrative & HR issues and no bonus clauses
  • Lean organizational structure – With lesser number of employees and functions, the organization becomes leaner and simpler to manage.

Why Start Ups and SME’s should explore the model of Financial Outsourcing?

Though financial outsourcing has its own challenges and have to be managed well to ensure effectiveness. However once the same is planned well and effectively executed, it becomes a win – win situation for both start-up/ SME and the partner firm doing it.

The start-up/ SME spend a lot less for getting quality, reliable and long term service from a full service accounting firm.

The full service accounting firm on the other hand gets an opportunity of working with a growth company and becoming a part of its growth story at the time of its growth.

I would like to end the article by quoting the famous first prime minister of Singapore

Lee Kuan Yew, “ if you deprive yourself from outsourcing and your competitors do not, you are putting yourself out of business.