When Should a Nonprofit Outsource Its Accounting Function?

A nonprofit may benefit from outsourcing part or all of its accounting function when financial responsibilities have outgrown internal capacity, turnover creates continuity risk, reporting is consistently late, or the organization needs expertise that would be difficult to hire into one internal role.

The right question is often not:

“Should we outsource accounting?”

It is:

“Which responsibilities should we continue to own internally, and which would be stronger with outside support?”

Signs the Organization May Have Outgrown Its Current Finance Structure

Outsourcing often becomes worth considering when one or more of these issues start to appear:

  • financial statements are consistently late;

  • balance-sheet accounts are not reconciled regularly;

  • grant reporting depends heavily on spreadsheets;

  • restricted funds are difficult to track;

  • leadership does not trust the numbers;

  • the board is asking questions the finance team cannot answer;

  • the annual audit requires significant cleanup;

  • one person holds too much financial knowledge;

  • turnover creates recurring disruption;

  • forecasting and cash-flow planning are limited; or

  • the organization needs controller- or CFO-level expertise but cannot justify a full-time hire.

These are usually signs that the problem is no longer basic bookkeeping.

It is a finance-function design problem.

Outsourcing Does Not Have to Mean Outsourcing Everything

A nonprofit can retain some responsibilities internally while outsourcing others.

For example:

Internal Bookkeeping, Outsourced Controller

An internal employee handles day-to-day transactions while an outside controller oversees:

  • monthly close;

  • reconciliations;

  • financial statements;

  • grant accounting;

  • restricted funds;

  • internal controls; and

  • audit readiness.

Internal Accounting Team, Fractional CFO

The internal team maintains the books and financial reporting while an outside CFO provides:

  • forecasting;

  • board reporting;

  • scenario planning;

  • reserve strategy;

  • financial analysis; and

  • executive decision support.

Fully Outsourced Finance Function

An outside team may handle:

  • bookkeeping;

  • accounts payable;

  • reconciliations;

  • monthly close;

  • financial reporting;

  • controllership;

  • forecasting; and

  • CFO-level support.

The right model depends on the organization’s existing staff, complexity, budget, and control environment.

Turnover Can Be a Major Reason to Outsource

Finance turnover can be especially disruptive for nonprofits.

When a key employee leaves, the organization may suddenly lose institutional knowledge about:

  • grants;

  • donor restrictions;

  • account reconciliations;

  • reporting deadlines;

  • accounting policies;

  • payroll;

  • systems; and

  • audit preparation.

A well-designed outsourced model can reduce key-person dependency by spreading knowledge across a broader team.

That can improve continuity during:

  • employee turnover;

  • parental leave;

  • extended absences;

  • leadership transitions; or

  • periods of rapid growth.

Outsourcing Can Add Expertise That Is Hard to Hire Individually

Many nonprofits need several different finance skill sets.

They may need someone who understands:

  • transaction processing;

  • nonprofit GAAP;

  • grant accounting;

  • restricted funds;

  • internal controls;

  • audits;

  • Form 990;

  • cash-flow forecasting;

  • board reporting; and

  • financial strategy.

Finding one employee who is equally strong in all of those areas can be difficult.

An outsourced model may give the organization access to a broader finance bench without hiring every capability as a separate full-time position.

Outsourcing Can Improve Reporting Timeliness

If leadership is waiting weeks or months for reliable financial statements, the organization may have difficulty making timely decisions.

A strong outsourced finance function should create a disciplined reporting cadence.

That may include:

  • monthly close deadlines;

  • reconciled balance sheets;

  • budget-to-actual reporting;

  • grant reporting;

  • cash-flow forecasts;

  • board dashboards; and

  • recurring financial review meetings.

The objective is not simply to close the books faster.

It is to provide leadership with financial information while it is still useful.

Outsourcing Can Strengthen Internal Controls

Smaller nonprofits sometimes struggle with segregation of duties because too few people are involved in financial processes.

Outsourcing can help create additional layers of review.

For example:

  • internal staff enter bills;

  • an outsourced accounting team processes or reviews transactions;

  • leadership approves payments;

  • an outsourced controller reviews reconciliations;

  • the board maintains governance oversight.

This does not automatically create strong internal controls, but it can make thoughtful segregation and independent review easier to design.

Related Resource: What Internal Controls Should a Small Nonprofit Have? →

When Outsourcing May Not Be the Right Answer

Outsourcing is not automatically better.

An organization may be well served by an internal team when:

  • it has strong finance leadership already;

  • transaction volume requires significant daily onsite support;

  • the organization has specialized operational knowledge that is difficult to transfer;

  • the existing team is stable and performing well;

  • leadership has sufficient financial visibility; and

  • outsourcing would add unnecessary complexity.

The objective should be to improve the finance function—not outsource simply because outsourcing is available.

Keep Strategic Ownership Inside the Organization

Even when finance is heavily outsourced, management and the board still retain responsibility for the organization.

Outside providers can support accounting and financial leadership, but nonprofit leadership should continue to own:

  • organizational strategy;

  • budget approval;

  • major spending decisions;

  • grant commitments;

  • financial policies;

  • risk tolerance;

  • reserve decisions; and

  • governance.

Outsourcing changes who performs the work.

It does not transfer management’s or the board’s responsibilities.

Define Responsibilities Clearly

One of the most important steps in an outsourced relationship is defining who owns each responsibility.

The exact model will vary.

What matters is that nothing falls into the gap between the internal team and outside provider.

Compare Outsourcing to the Full Cost of Hiring

The comparison should not be limited to salary.

An internal employee also involves:

  • payroll taxes;

  • benefits;

  • recruiting;

  • onboarding;

  • training;

  • management time;

  • software;

  • continuing education;

  • coverage during leave; and

  • turnover risk.

At the same time, outsourced support has its own cost.

The right analysis should compare:

total cost

capability

capacity

continuity

and

quality of financial information.

Ask What Level of Support You Actually Need

Not every organization needs outsourced CFO support.

Some may need only:

  • better bookkeeping;

  • monthly reconciliations;

  • controller review; or

  • temporary accounting support.

Others may need a broader finance function that includes:

  • forecasting;

  • board reporting;

  • cash-flow planning;

  • scenario modeling;

  • grant oversight; and

  • fractional CFO leadership.

The scope should reflect the actual problem.

Questions to Ask Before Outsourcing

Leadership should consider questions such as:

  • What is working well internally today?

  • Where are the biggest gaps?

  • Which responsibilities are taking too much leadership time?

  • Are the financial statements reliable and timely?

  • Do we have adequate controller-level oversight?

  • Do we need forward-looking financial leadership?

  • How dependent are we on one employee?

  • What happens if that person leaves?

  • Are grants and restricted funds being tracked well?

  • Can we complete our audit efficiently?

  • Does the board receive useful financial information?

  • Which functions should remain internal?

  • Which functions could be stronger with outside expertise?

The answers help define whether outsourcing should be partial, fractional, or comprehensive.

The Bottom Line

A nonprofit should consider outsourcing when the finance function needs more capacity, continuity, expertise, or financial leadership than the current internal structure can reliably provide.

Outsourcing does not need to be all-or-nothing.

The strongest model is often a thoughtful combination of internal ownership and external support.

The right question is:

Which responsibilities are core for our internal team to own—and where would an outside finance partner make the organization stronger?

How Bilotta & Company Can Help

Bilotta & Company, CPAs, LLC works with nonprofit organizations across accounting, controllership, fractional CFO support, financial reporting, audit, tax, and financial stewardship.

Through our Nonprofit Navigator® Financial Stewardship program, we help organizations design a finance model around the responsibilities they actually need covered—from bookkeeping and monthly close through controller oversight, board reporting, forecasting, and fractional CFO support.

The objective is not outsourcing for outsourcing’s sake.

It is to build a finance function that gives leadership reliable information, stronger continuity, clear ownership, and more capacity to focus on the mission.

Related Resource: Bookkeeper vs. Controller vs. Fractional CFO for a Nonprofit →

Related Resource: What Financial Reports Should a Nonprofit Board Review? →

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Visit the Nonprofit Financial Resource Center →

This article is provided for general educational purposes and should not be considered accounting, employment, legal, tax, or financial advice for a specific organization.