Bringing an Outsourced Finance Team In-house: A Case Study

Bringing an Outsourced Finance Team In-house: A Case Study

LendEDU, a Y Combinator-backed startup, spent more than $50,000 on its outsourced finance department to create professional monthly financial statements. There was just one problem—they couldn’t trust the numbers.

After breaking through to low six-figure annual revenue, LendEDU, a Y Combinator-backed startup, made the big decision to bring its finance and accounting functions in-house. LendEDU, a website that helps consumers learn about and compare financial products, including student loans, personal loans, and insurance products, was looking to support business growth while becoming more efficient.

During this time, my role at our company shifted and I became the director of finance & operations, a new role for our growing company. Candidly, this was a new role for me as well, and together, we decided that we needed to bring on an independent consultant to get us up and running.

This is the story of how our company moved its finance and accounting functions in-house with the support of Toptal Finance Expert Andrew Fales.

Early Struggles in Forming Our Accounting Processes

In the summer of 2017, LendEDU was a small startup company experiencing tremendous growth in various areas. With consistent increases in revenue, cash, customers, and employees, it was apparent that official accounting processes and bookkeeping were soon to be necessary.

LendEDU

Up until this point, LendEDU was laser-focused on growth and the aspects of the business that directly drive it. Understandably, the limited resources the company had at its disposal were not being deployed to build out official payables and receivables teams. Instead, employees with relevant skills and relatable responsibilities added these to their lists of duties.

Toward the end of that summer, our company began to consider the benefits that an official accounting process could provide. Faster receivable turnover could increase our cash flow, accrual accounting methods could help us more accurately analyze performance, and formal bookkeeping could enable us to efficiently manage our finances.

We now had sufficient resources to invest in this aspect of our business. However, at this point in time, it did not seem logical to hire a full-time accountant, so we began to do research on outsourced finance teams who could handle this for us. We came across a reputable firm that focused on carrying out accounting operations for startups. The hourly fees were exorbitant, but we figured, “you get what you pay for,” so we moved forward.

This turned out to be a noteworthy mistake. By August 2018, we had spent more than $50,000 on our outsourced finance department, but we did have official monthly financial statements to show for it. Our revenue was broken out by product line, our expenses were itemized, and the formatting was professional.

LendEDU’s Increased Spending on an Outsourced Finance Department

LendEDU’s Increased Spending on an Outsourced Finance Department
Source: LendEDU, QuickBooks.

There was just one problem—we could not trust the numbers. The close-out process each month was a nightmare. The reps at the firm we had hired did not seem to understand how we earned revenue, and they were not interested in learning. Lengthy emails citing balance discrepancies, invoicing errors, and lists of questions were exchanged, but reconciliations were consistently pushed off to the following months. The process was flawed, communication was terrible, and the customer service was abysmal. Most frustrating of all, confidence in our financial data was low.

Starting the Transition to In-house

After eight months of funneling money to this external accounting firm and struggling to produce valuable results, we’d had enough.

We decided to consider bringing our accounting functions in-house. The benefits of this move were exciting. By moving accounting operations in-house, we could produce monthly financial statements more quickly, more transparently, and less expensively. The persisting problem was that we still were not in a position to hire a full-time accountant and we didn’t have any CPAs conveniently on staff.

By this point, I had learned the basics of the accounting process that we needed to set up and I could handle the majority of the legwork. However, I needed someone with expertise to consult with about our process and, most importantly, to check my work. In short, I needed someone who knew what I didn’t know and someone who could not only identify mistakes but help me fix them. We found this person at Toptal. We had used the site before to subcontract a software developer for our website, and it was a great experience. This time, we needed someone with an accounting background, preferably a CPA, who understood the industry in which our company operates.

Hiring & Onboarding Process

After posting the position on Toptal, we received numerous responses from interested freelancers with impressive resumés. Within days, we had set up five phone interviews for the following week.

We explained what our needs were and asked how each applicant could help us avoid the accounting issues we’d experienced in the past. We found a match with Andrew Fales.

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Andrew is a CPA who founded a highly regarded tax accounting firm which specializes in various aspects of accounting and compliance for startups. Andrew has also consulted for numerous firms in a variety of industries throughout his career. Over a 30-minute phone interview, Andrew laid out a plan for us to set up an internal accounting process. He mentioned that he was proficient in QuickBooks and suggested that he could personally train me on how to navigate the software.

Furthermore, Andrew seemed to fully understand how our business operates and what we were trying to accomplish. Andrew said that his intention was to “work his way out of the job.” His implication was that he wanted to educate us to be self-reliant, which was precisely our goal. His motivation for this approach was the idea that we would consult him in other situations that we encountered as our company matured, which is exactly what we have done.

Month One

After discussing our budget with Andrew, we got right to work. In the first month, Andrew and I talked over Zoom for 2-4 hours per day, three days per week. I used screen share as he walked me through the QuickBooks software, taught me shortcuts, and emphasized accrual accounting principles that were essential to accurate bookkeeping. There was a lot to learn. Anytime I had a question, Andrew had an answer. Anytime there was a mistake that needed to be fixed, Andrew would offer multiple solutions. In one month, we had established a formal accounting process designed to avoid future discrepancies and to function efficiently.

Establishing a formal accounting process
Source: LendEDU, QuickBooks.

Month Two

By the end of month two, I was able to navigate QuickBooks independently and carry out close-out tasks such as bank and credit card account reconciliations, accruing payroll, amortizing prepaid expenses, creating adjusting journal entries, and producing official financial statements.

Month Three

At the end of month three, we had successfully produced accurate accrual financial statements for the 2018 fiscal year.

Month Four

By month four, we were using these statements as historical inputs for revenue projection models, expense budgeting, and ratio analysis. Not only did Andrew personally train me to use QuickBooks software and guide me thereafter, but he also took the time to learn the intricacies of our particular company. He created detailed spreadsheets to calculate payroll accruals, track amortizations, and compute deferred/current tax liabilities. These customized resources enable me to create complex accrual journal entries without assistance.

Accrual financial statements
Source: LendEDU, QuickBooks.

Year 1

It has been a little more than a year since we hired Andrew, and the confidence in our financial data has never been higher. At this point, I speak with Andrew over Zoom for about 5-10 hours per month, primarily for an end-of-month review and to ask questions about one-off accounting situations that occurred during the period. Andrew has successfully helped us set up an in-house accounting process that is more efficient, more accurate, and less expensive than our external collaboration ever could have been. Perhaps most valuable is that we have formed a relationship with a CPA and business professional who has made himself available to us 24/7 via Slack, phone, email, and Zoom for any advice we may need.

Projects Ahead for Year 2

Moving into 2020, we will begin with our 2019 year-end close. This process is usually more strenuous than the average monthly close-out. At this stage, it is essential to make all of the necessary adjustments and to achieve a high level of accuracy in our financial statements in preparation for submitting our tax returns.

Also on our to-do list in the first part of 2020 is to begin utilizing the QuickBooks budgeting tool. This will enable us to perform a detailed comparative analysis between our estimated budgets and actual budgets, ultimately helping us to manage our expenses. Andrew has already Slacked me a list of instructions on how to prepare for this project so that we can hit the ground running in the new year.

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