Outsourcing is contracting out manufacturing or service operations conducted by the business to reduce costs or to generate efficiency. Companies more appropriate for outsourcing are those involved in restricting and downsizing, decentralized and out of date. Prior to outsourcing consideration should be given to whether it is feasible in light of business objectives and requirements, business plans, expectations and risk and uncertainty. Outsourcing enables a company to be more effective and efficient, reduce costs, lower risks and simplify and streamline functions. In choosing an outsourcing vendor take into account reliability, reputation, cost, references experience and the quality of service. Outsourcing finance and accounting processes have recently become a strategic issue for many organizations as businesses are under increasing pressure to improve performance and reduce costs. Although emphasis has been on reducing costs, there is a trend towards outsourcing to enable strategic change.
New business adapting or factoring in outsourcing is beneficial in several dimensions. It improves the customer supplier relationships by outsourcing the payment procedure to a different company resulting in retaining clients, and even attracting new clients who will have heard of the simplified money collection procedure. During their very first stages many entrepreneurial businesses are very strict with their cash flow and need to manage their expenses very carefully: factoring like any other outsourcing service reduces administrative costs and thus redirects critical resources to marketing and production. Third, since entrepreneurial businesses are not experts in money collection, outsourcing to experts can collect the money more efficiently and therefore potentially improve receivable turn around and improve the entrepreneurial business accounting. Accounts receivable result from a company extending trade credit to its customers by selling its products or services. A company recieves cash in payment for accounts receivable from a few sources, directly from customers for on spot payments, bank in exchange for a credit card authorization from a customer and mailed in payments from a customer which come straight to the company. Under the scenario of a collection agency the accounts receivable clerk must enter the cash receipt against the delinquent account receivable then issue a credit for the portion that the collection agency took from the payment.
Accounts payable do not contribute to the mission of any company nor does it impact customer service. By outsourcing this function to a supplier who specializes in accounts payable processing a controller can reduce the management time devoted to this functional area and allocate more time to other profitable company functions. Outsourcing payable and receivable have many benefits to business and maybe a disadvantage in one way or the other. The functions in accounts receivable and payable help in improving the workings of a company with much control and attention can be used in other functions including marketing and production.
Outsourcing payable and receivable has both advantages and disadvantages as discussed. One advantage of outsourcing transaction processing is that the supplier may have a better knowledge of world class processes that allows it to complete transactions faster than the company’s in house staff. The downside of outsourcing transactions processing includes the cost of doing so, unless they can use greater knowledge of processes or locations in low wage countries to cut costs, suppliers will be more expensive than the in house function because they include a profit as well as their sales and marketing costs in their pricing structures.
References
Bragg, S. M. (2006). Outsourcing: A Guide to Selecting the Correct Business Unit Negotiating the Contract Maintaining Control of the Process. John Wiley and sons.
Jae K Shim, P. P. (2008). Financial Management, 3rd Ed. Barrons Education series.
John R Graham, S. B. (2011). Introduction to Corporate Finance: What Companies Do, Abridged Edition . Cengage Learning.
Kariv, D. (2011). Enterpreneurship: An International introduction. Taylor & francis.
Vagadia, B. (2011). Strategic Outsourcing: The Alchemy to Business Transformation in a Globally Converged World. Springer .
