Small Business Financial & Accounting (f&a) Offshore Outsourcing Cost

Fortune 500 companies have been off shoring the financial and accounting business processes (BPO) to countries like India, Philippians, China, etc. These companies have big budgets and a big team of consultants who analyzes the total cost and ROI of sending their financial and accounting work to the service providers in offshore locations. Though smaller companies have started off shoring their financial and accounting work to offshore locations but like big corporations small businesses do not have huge budget to hire consultants to identify the total cost of off shoring their financial and accounting work to offshore locations. But small businesses can still perform their due diligence in calculating total cost of their offshore engagement and gain critical knowledge in finding ROI of sending their financial and accounting work to offshore locations. In this report we will go through all of the hidden costs of offshoring financial and accounting business processes.

1. Different Costs of Offshoring Financial & Accounting Work

Small businesses mainly consider offshoring their work, they will consider only the hourly rate they need to pay to the offshore vendor for various accounting works like bookkeeping, accounts payable, accounts receivable, etc. There are several other additional hidden costs small business have to face in their offshore outsourcing engagement. Typically a small business goes through following offshore accounting work cycle in their offshore engagement:

• Selecting an offshore accounting vendor

• Sending the work to the offshore vendor

• Answering questions for the offshore vendor

• Receiving the finished work from the offshore vendor

• Verifying the finished work from the offshore vendor

• Monitoring the quality of the finished work from the offshore vendor

2. Cost of Selecting offshore accounting vendor

The cost associated with selecting an offshore accounting vendor will be small compared to other costs. Most of the time small businesses can find a qualified offshore accounting vendor simply by searching in Google or by contacting other small businesses those who are already using an offshore vendor, for detailed discussion on this topic read Offshore Accounting Success. This cost is the one time cost and it will be similar to selecting an onshore vendor.

3. Cost of sending the work to an offshore vendor

Small businesses must consider various types of cost like Scanner, High speed Internet, Backup Server, etc, to send their financial and account documents to an offshore vendor, but the good news is that it will be a one time investment and most of the small businesses will have these in place already. There are three different offshore accounting models you can use to send your accounting and financial work to the offshore vendors and for these you will incur following one time cost.

3.1. Scanner & Scanning software

Most of the accounting and financial data will be in your accounting software like QuickBooks, Peachtree etc, but there will be other documents like Bills, Checks, Invoices, Goods received notes, etc will be on paper and these should be digitized using a scanner and a scanning software to convert it into PDF documents which will be stored in your computer. Once the documents are in your computer then you can give access to the offshore vendor to view the PDF documents or they can retrieve it from your computer to perform their work in the offshore location.

Most of small businesses already have a scanner, if not a scanner (scanning software comes with the scanner) can be purchased for less than 00.00. The cost of the scanner will go up based on the volume of accounting and financial documents to be scanned in a given day. It will be a one time cost for the small business and also by scanning all their paper based accounting documents; you can improve the efficiency of overall accounting process.

3.2. High speed Internet Connection Cost

You need to have high-speed Internet connection to send and receive the work to and from offshore location. Again all most all small businesses already have DSL/T1 Internet connection if not they can get a DSL Internet connection for -100/month.

3.3. Secure FTP software

If small businesses are using Application Service Provider (ASP) like Quickbooks online,, etc, then it is possible for offshore vendors to directly access your accounting data directly from the ASP vendor. In this case there is no need to use secure FTP software.

3.4. Backup Server

Once small businesses start digitizing their accounting documents for their offshore vendors, they need to start planning for the backup server to backup all their accounting documents. Most of the small businesses will have this feature already, if not it is a good investment to have a backup server to backup all their accounting and financial data from their main computer to the backup server. For any business “Business continuity” is a vital task and the backup server will help the small businesses to recover all the accounting data in case of main computer failure.

3.5. Additional Accounting software License cost

Small businesses use various accounting software packages like QuickBooks, MYOB, Microsoft Office Accounting etc, for doing all their accounting and financial work. When they offshore the work the offshore vendor will use the same accounting software to do the work. It is very difficult for the small businesses to find an offshore vendor who already owns the licenses for all the accounting software. As described in the offshore accounting models if small businesses decides to use Remote Server or ASP then there is no additional cost for small businesses. On the other hand if the small businesses decided to use Secure File Transfer then small businesses needs to buy additional accounting software license for the offshore vendor to use. Small businesses will incur this cost even if they outsource the work to onshore vendors. This cost is truly soley based on the accounting software package used by the small businesses. Accounting software packages comes with various flavors types of software licenses like concurrent users, fixed number of users, CPU based, Network based etc., Some times small businesses can completely avoid this cost altogether.

4. Managing Financial & Accounting offshore vendor

Once you send your accounting and financial work to the offshore vendor, you need to constantly mange and monitor the quality of finished work that comes back from the vendor. Initially you may need a full-time person educating the offshore accountants and bookkeepers about your accounting process and preparing proper instructions for them to follow in their work. Once you and the offshore team are comfortable in the working relationship then all you need is to verify the work periodically. Basically you need to consider the offshore team as your virtual team and educate them in your accounting processes and procedures, once you are comfortable with their work your own employee(s) will spend less time with the offshore vendors.

5. Offshore vendor wage

For the accounting and financial work performed by the offshore vendor, small businesses will pay either an hourly rate or a monthly rate to the offshore vendor. This will be the actual direct cost small businesses will pay to the offshore vendor and all other costs are indirect cost of sending the work to offshore vendor. Typically the wage cost will be 50-70% less than the cost paid to the onshore accounting and financial vendor. For small businesses this cost savings is one of the major reasons to use the offshore vendor for their financial and accounting work.

Small businesses need to consider several costs in their financial and accounting offshore engagement. As shown in the table Small business F&A offshore outsourcing – Fixed Cost Vs Monthly Cost some of the costs are fixed and some of them are monthly expanses incurred by the small businesses. Among the monthly cost only the offshore vendor wage is the direct cost paid to the offshore vendor. While performing ROI analysis small businesses must consider all these costs to find the Total Cost of doing business with offshore vendors. As shown in the table, for certain items finding out the exact cost may not be possible and it is highly based on the individual small businesses and the type of accounting and financial work that has been sent to offshore locations. The total cost may not be a fixed amount and it can change from month to month. For example in some months there will be more questions from the offshore vendor in clarifications and in other months there will be less questions, this cost will vary from month to month.

Financial Accounting and Reporting and Accounting and Bookkeeping Services

Maintaining a comprehensive, accurate, detailed, transparent yet cost effective accounting setup for any business can be quite a challenge. That is where we step in.
We at KNR understand your need for understanding the running of your business transactions and also understand that you need to stay “in the loop”. Our consultants are at your disposal, to guide you and educate you at every step about what needs to be done to keep your business running smoothly. Whether you want assistance in setting up accounting systems for your enterprise or require year end accounting services, we are there to provide the best services for your business.
Accounting Consulting Services
KNR ‘s accounting consulting services are the result of years of experience put to practical use, which have provided impetus to many business ventures. Our team of consultants works dedicatedly to provide you with the best accounting consulting services , inclusive of financial accounting and reporting. We carry out the entire accounting and bookkeeping services that your business requires, depending on your business needs.
Capital being one of the main ingredients of a company’s structure, a company’s success depends highly on its management. Financial accounting and reporting can be a confusing and highly time consuming process. Outsourcing accounting and bookkeeping services will help you in cutting down costs and diverting resources to other objectives.
Financial Accounting and Reporting
Financial accounting and reporting is an important process in the successful running of any business. It mirrors the success or failure of an organization. It is through this tool, that the public, investors, creditors, government agencies, tax agencies and employees come to know of the worth of the business.
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On April 2, 2009, the IRS announced they will reduce the penalty for not filing a Report of Foreign Bank and Financial Account, known as a FBAR Form.

The current penalty is up to fifty percent (50%) of the highest annual balance of each account for each of the last 3 years.  The 50% penalty is imposed annually.  After 2 years of the 50% penalty, the account can be “wiped out” and the investor may still owe taxes (and interest).

The IRS announced they will not generally prosecute Taxpayers who come forward voluntarily, provided they are not drug dealers, arms merchants or others with “ill-gotten gains”.

The IRS will not asses a 35% penalty (due under Form 3520) on money secretly transferred to foreign trusts (i.e., tax evasion).

The IRS will reduce the penalty to 5 to 20%, depending in part on whether the wealth was inherited.  The IRS will levy the penalty just once, on the highest balance in the accounts over the last 6 years.

Under the IRS plan, Taxpayers will be required to pay any taxes and interest owed over the last 6 years.  The IRS will assess either the standard, accuracy-related penalty of 20%, or a 25% penalty for filing tax returns later.  Taxpayers in the program must also file amended tax returns for up to the last 6 years.

U.S. Taxpayers:

Have 6 months to accept the IRS plan (i.e., by 10/2/09) Under criminal investigation for tax evasion are not eligible Are not required to provide information about the bankers, lawyers and accounts who assisted them

The IRS plan was developed amid widening investigation into American clients of UBS but will apply to clients of other banks.  According to Douglas Shulman, the IRS Commissioner, the goal “is to get Taxpayers who have been hiding assets offshore back into the system.”

The following is a summary of tax returns due for Foreign Bank Accounts:

I.   Returns Relating to Foreign Bank Accounts

A. In General

1.  Each U.S. person having a financial interest in, or signature or other authority over, any foreign financial accounts with an aggregate value exceeding ,000 at any time during the calendar year must report such relationship by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”),

2.  In addition, they have to disclose the foreign account filing requirement on Schedule B of Form 1040 and including the income from these accounts on the United States person’s U.S. federal income tax return.

B. Who Must File

Form TD F 90.22-1 is required to be filed by every U.S. person for each calendar year in which such person has a financial interest in, or signature or other authority over, any foreign financial accounts with an aggregate value exceeding ,000 at any time during the calendar year. The test is based in the alternative – financial interest in or signature authority over the account.

1. Definitions

For purposes of FBAR, the term “United States person” means (1) a citizen or a resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

The term “financial account” generally includes any bank, securities, securities derivatives or other financial instrument accounts, (including any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund), savings, demand, checking, deposit, time deposit, or any other account maintained with a financial institution (or other person engaged in the business of a financial institution).

Any of the financial accounts described above is considered to be a foreign financial account for purposes of FBAR, if it is located outside the United States, Guam, Puerto Rico, and the Virgin Islands.  The situs of a financial account is determined by the location where the branch is, not the location of the institution’s home office.

2. Ownership of Accounts

Under the instructions to Form TD F 90-22.1, a U.S. person has a financial interest in a bank, securities, or other financial account in a foreign country under either of the following circumstances:

A U.S. person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others including non-U.S. persons. If an account is maintained in the name of two persons jointly, or if several persons own a partial interest in an account, each of those U.S. persons has a financial interest in that account. A U.S. person has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is:

a) A person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person;
b) A corporation in which the U.S. person owns directly or indirectly more than 50 percent of the total value of shares of stock;
c) A partnership in which the U.S. person owns an interest in more than 50 percent of the profits (distributive share of income); or
d) A trust in which the U.S. person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.

3. Signature Authority

For purposes of Form TD F 90.22-1, a U.S. person is considered to have signature authority over a foreign financial account if such person can control the disposition of money or other property in the account by delivering his or her signature (or his or her signature and that of one or more other persons) to the bank or other person maintaining the account.

In addition, a U.S. person has “other authority” subject to FBAR reporting if such person can exercise comparable power over an account by direct communication to the bank or other person maintaining the account, either orally or by some other means.

4. Exceptions

Notwithstanding the general rules, Form TD F 90.22-1 is not required to be filed under the following circumstances:

An officer or employee of a bank which is subject to the supervision of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation need not report that he has signature or other authority over a foreign bank, securities or other financial account maintained by the bank, if the officer of employee has NO personal financial interest in the account. An officer or employee of a domestic corporation whose equity securities are listed upon national securities exchanges or which has assets exceeding million and 500 or more shareholders of record need not file such a report concerning the other signature authority over a foreign financial account of the corporation, if he has NO personal financial interest in the account and he has been advised in writing by the chief financial officer of the corporation that the corporation has filed a current report, which includes that account. As noted above, a U.S. person is not required to report any account maintained with a branch, agency, of other office of a foreign bank or other institution that is located in the United States, Guam, Puerto Rico, and the Virgin Islands.

C.   Mechanics of Filing

Reporting on Form TD F 90-22.1 is required for each calendar year that a U.S. person maintains such interest or authority over foreign financial accounts. Persons having a financial interest in 25 or more foreign financial accounts are required only to note that fact on the form (i.e., a general statement indicating that information on all such accounts will be available upon request). (31 CFR § 103.24. Such persons will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate.)

The Form TD F 90-22.1 is filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, MI 48232-0621, or it may be hand carried to any local office of the Internal Revenue Service for forwarding to the Department of the Treasury in Detroit, MI.  The Form TD F 90­-22.1 must be filed on or before June 30 each calendar year. An extension for filing one’s U.S. income tax return does not extend the deadline for making a TD F 90-22.1 filing.

D. Additional Issues

Each U.S. person subject to this reporting requirement must also maintain records showing, (1) the name in which each such account is maintained, (2) the number or other designation of such account, (3) the name and address of the foreign bank or other person with whom such account is maintained, and (4) the type of such account, and the maximum value of each such account during the reporting period (31 CFR §103.32).  These records must be retained for a period of 5 years and must be kept at all times available for inspection as authorized by law.

E. U.S. Trustee Foreign Non-Grantor Trust

Report of Foreign Bank and Financial Accounts – Form TD F 90-22.1

A U.S. trustee of a foreign nongrantor trust must file Form TD F 90-22.1 if the Trustee has a financial interest in or signature authority or other authority over any financial accounts, including bank, securities, or other types of financial accounts in a foreign country if the value of such accounts exceeds ,000. A person has a financial interest in any such account if she has legal title to it.

Trustees generally have legal title to accounts in which trust funds are invested. In addition, if legal title to an account is held by a corporation or partnership and the trustee owns more than 50% of the corporation or partnership, the trustee will be treated as having a financial interest in such account.

A person has signature authority over an account if she can control the disposition of account property by the delivery of a document signed by her and one or more other persons. A person has other authority over an account if she can control such disposition by direct communication to the person with whom the account is maintained.

Form TD F 90-22.1 must be filed by June 30th of the year following the year in which the U.S. person had such financial interest or signature or other authority.

F. Form TD F 90.22-1

A willful violation of the Form TD F 90.22-1 requirements (i.e., failure to file Form TD F 90.22-­1, failure to supply information on the report, or filing a false or fraudulent report) could result in the imposition of civil and/or criminal penalties.  (The instructions for Form TD F 90.22-1 specifically provide that criminal penalties for failing to comply with FBAR are provided in 31 U.S.C. § 5322(a) and (b), and 18 U.S.C. § 1001. In addition, civil penalties for failure to comply are generally provided in 31 U.S.C. § 5321.)

Civil Penalties

If any U.S. person willfully violates the Form TD F 90.22-1 filing requirement, such person may be liable to the U.S. government for a civil penalty of not more than ,000 (31 U.S.C. § 5321. Section 5321 generally provides that if a U.S. person willfully violates a regulation, such person may be liable for a civil penalty of not more than the greater of the amount (not to exceed $ 100,000) involved in the transaction (if any) or ,000.

With respect to reporting on Form TD F 90.22-1, a U.S. person is not reporting a transaction but, rather, reporting his interest or signature authority over a foreign financial account. Thus, the maximum amount of potential civil penalty is ,000.):

Criminal Penalties

If a U.S. person willfully violates the reporting requirement, such person may be subject to a fine of not more than 0,000, or imprisoned for not more than 5 years, or both (31 U.S.C. § 5322(a)); and If a U.S. person willfully violates the reporting requirement while violating another law of the United States, or as part of a pattern of any illegal activity involving more than 0,000 in a 12-month period, such U.S. person may be subject to a monetary fine of not more than 0,000, or imprisoned for not more than 10 years, or both (31 U.S.C. § 5322(b)).

If a U.S. person, with respect to Form TD F 90.22-1, (1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact, (2) makes any materially false, fictitious, or fraudulent statement or representation, or (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry, such person may be fined, or imprisoned for not more than 5 years, or both (18 U.S.C. § 1001).

Investor?s Guide to Financial Accounting

When people decide to invest in anything the first question they ask is, “how much money will I make from this investment opportunity?”  The multitude of investment options has made it more difficult for the average investor to calculate risk and determine the best investment for their money.  Bank deposits with conservative returns have evolved into certificate of deposits, mutual funds, hedge funds, futures and options to name a few.    Fortunately there are many resources available to help navigate these difficult waters.  Instead of using costly professional advice or independent analysis from resources like Morningstar, we will begin to invest with confidence using financial accounting to drive our decisions.

Accounting is the process of identifying, measuring and communicating economic information so users of accounting can make informed decisions about a company’s performance.  There are many types of users of accounting from management focused on day to day operations to investors focused on future cash returns.  Investors should focus on a company’s past performance because there is a strong correlation to future success.  Financial accounting provides investors with historical results of a company through financial statements.  These financial statements include the balance sheet, income statement, statement of cash flows and statement of owner’s equity.

The balance sheet provides details about a company’s assets, liabilities and owner’s equity.  Unlike the other three financial statements, the balance sheet is for a point in time.  Most balance sheets are done at the end of a company’s fiscal year to show the company’s financial position at that point in time.  The most important thing to look for when investing in a company is its assets are greater than liabilities.  According to the accounting equation, assets = liabilities + owner’s equity, if assets are greater than liabilities the owner’s have positive equity in the company.  If the company were to liquidate its assets and pay off all of its liabilities there would be money left for the owners to recoup some if not all of their investment.  A positive trend in owner’s equity is a strong indicator of a sound investment.

When investing, it is important to focus on companies that have the assets necessary to remain in operation.  Both positive working capital and a current ratio greater than 1 are strong indicators of this.   Working capital is current assets minus current liabilities.  Positive working capital means a company has the necessary working capital to reinvest in its operations and drive future revenue.  The current ratio, current assets divided by current liabilities, shows that a company has the necessary current assets to pay for current liabilities and remain in business.   A current ratio of 2.0 is a good rule of thumb for adequate liquidity.  This shows that a company has two times the necessary current assets to pay off any current liabilities.

The income statement is another key indicator of a company’s past performance.  At the end of its fiscal year a company will determine its profit or loss by calculating its net sales and subtracting the expenses necessary to achieve those sales.  Net income shows that a company is profitable.   A positive trend in net income over time means a company continually performs well and is a strong indicator of future success.  Net income shows up on the Statement of Changes of Owner’s Equity under retained earnings.  It is this money that is available to investors through cash dividends.

The Statement of Changes of Owner’s Equity as mentioned above details the total owner’s equity for a period of time.   Over time an investor would like to see a positive trend in owner’s equity.  This shows an investor that throughout the fiscal year there is an increase in owner’s equity through retained earnings.  These earning are available to reinvest in the company and make it stronger in the future.

The Statement of Cash Flows identifies the use of cash by a company during the fiscal year.  This details the cash flows from operating activities, investing activities and financing activities.  It is impossible for a company to survive over time with negative cash flow therefore it is crucial to review the trends in this statement to make sure the company has positive cash flow over time.  The ending cash balance detailed in the Statement of Cash Flows becomes part of the Assets in the Balance sheet.  Consistent reduction in cash will reduce the owner’s equity and in turn reduce a return on investment.

The statements detailed above are critical pieces in making sound investment decisions.  Understanding these documents combined with your existing resources for investment decisions will make you more proactive in your investment decisions and help mitigate risks in your portfolio.

Inventory Techniques in Financial Accounting

Financial accounting provides an essential skill set that is applicable in virtually any situation that involves the sale and purchase of goods and services. Whether you own your own business or simply would like to know how to manage your own personal finances, a modest understanding of Generally Accepted Accounting Principles (GAAP) will permit you the ability to accurately identify, record, and communicate your selling and spending activity, and will, by default, allow you to make wiser financial decisions.

I will explain one concept that is fundamental, yet very essential, to businesses that operate on a perpetual inventory system. When a merchandising company orders new products for their inventory, it purchases them at a market-clearing price that changes over time. As the company begins to accumulate a volume of inventory after purchasing the same product at different times for different prices, the company must decide how to place a value on the goods that the sell and the goods that they have in inventory at a particular moment in time. Now, as you may have learned from even the most menial everyday undertakings, there are often a variety of correct ways to complete a task. Some approaches yield benefits that others do not. Similarly, there are different ways for a business to value its inventory. For the purposes of financial accounting, I will outline three of the most common techniques that accountants use to determine the value of goods in a business’s inventory—namely, FIFO, LIFO, and weighted average.

Suppose you own a business that buys skateboards from a distributor and sells them out of a shop in town. You buy ten skateboards for 0 each on the first day of your business’s operation. On the second day, you buy ten more skateboards for 0 each, which gives you a total of 20 skateboards valued at ,100 in total. Finally, on the third day, you sell twelve of the skateboards that you have in inventory, leaving eight skateboards in your inventory. According to GAAP, the amount reported on your business’s Cost of Goods Sold and Merchandise Inventory accounts depends on the way that you decide to value the goods that were sold.

First, consider the inventory technique of First In First Out (FIFO). This method ensures that the first items that arrived in inventory will also be the first to leave the store. Thus, in our example, when the twelve skateboards are sold on the third day, the seller will value the inventory sold giving priority to the cost of the first ten skateboards that arrived in inventory. Ten of the skateboards sold on the third day will be valued at 0 apiece and the last two will be valued at 0. Therefore, when computing the Cost of Goods Sold, there will be ten skateboards valued at ,000 total and two skateboards valued at 0 total, which will credit the Cost of Goods Sold account for a total of ,220. The ending inventory will then be calculated using the schedule of Cost of Goods Sold. The total inventory before any sales is ,100, and after the sale, the ending inventory is 0.

If, however, your business were operating according to the Last In First Out (LIFO) inventory technique, your Cost of Goods Sold and Ending Inventory accounts would not have the same amounts as they would if you were using FIFO. Instead of giving priority to the first items that arrived in inventory, the items that you most recently purchased will be the first ones to leave the store. Using the same example where twelve skateboards are purchased, you will cost the ten skateboards valued at 0 each and two of the skateboards valued at 0 each. Thus, the total Cost of Goods sold will be ,300 and the Ending Inventory will be 0, which is notably different than the values computed using the FIFO technique.

Another technique that is commonly used to calculate the value of inventory is Weighted Average (WAVG). When employing this technique, you compute the average cost of a single good by dividing the total value of goods in inventory by the total quantity of goods in inventory on the date of the sale. So, in our skateboard shop example, you would find the total value of the skateboards you have in inventory, ,100, and divide it by the total number of skateboards in inventory, 20, to find an average cost of 5 per skateboard. Thus, to compute the Cost of Goods Sold for the twelve skateboards sold on the third day, you would simply find the total price of the twelve skateboards valued at 5 each, which is ,260, leaving an Ending Inventory of 0.

To summarize, FIFO yielded an Ending Inventory of 0, where WAVG computed 0, and LIFO computed only 0. Clearly these values are quite significantly different and will affect the balance sheet accordingly. The question becomes which of these techniques is the best to use for the skateboard shop.

The assumption that the prices of goods generally rises over time has influenced many companies to enlist in the method that provides the greatest benefit for their particular firm. For example, many merchandising companies have subscribed to using LIFO because it provides an implicit tax benefit– the comparatively low Ending Inventory at the end of the period implies a lower amount of taxable assets. Thus, the company pays less in taxes.

The preceding example of inventory techniques illustrates the concept that an understanding of financial accounting principles can provide an individual with a framework to make better financial decisions. A holistic understanding of these concepts can only help you to manage your finances more effectively and make your business more competitive.