Did you know that the number of private equity firms that outsource accounting and finance tasks has grown from 27% to 40% in one year alone? These firms are not only outsourcing data-intensive tasks, like fund administration, but are also seeking expert guidance when it comes to financial modeling and reaching growth goals. If your private equity firm is falling behind on financial reporting, struggling with stagnant growth, or looking to attract more investors, the benefits of PE accounting outsourcing might be the solution you’ve been searching for.
Outsourcing is the secret weapon that private equity firms can use to streamline fund administration, reporting, and compliance without expanding in-house teams. In this article, we’ll cover how private equity finance and accounting outsourcing benefit your organization and which tasks can be passed off to the experts.
The Basics of Accounting Outsourcing in PE
Outsourcing is the process of delegating tasks and duties to an independent contractor or outside organization. These team members work as an extension of your business, infusing independence, expertise, and flexibility into your private equity firm. Two of the most common roles outsourced in the private equity sector are accounting and finance.
Accounting outsourcing focuses on managing the numbers in your company, such as the general ledger. In addition, outsourced private equity accountants prepare financial statements, monitor compliance with regulators, and submit tax filings. On the other hand, finance professionals analyze growth patterns, prepare financial forecasts, and evaluate the data to help you make informed decisions.
In many cases, the roles of accountants and financial analysts overlap. As a result, you might enlist the help of an outsourced finance professional to maintain your general ledger or an outsourced accountant to prepare forecasts. However, you may need to niche down if you are looking for specialized services. For example, Certified Public Accountants (CPAs) can conduct reviews and audits, while a financial analyst without this designation can’t.
Get the private equity playbook: How to Use Outsourcing to Win Big
What Private Equity Finance Tasks Can Be Outsourced?
Most private equity firms benefit from outsourcing a variety of backend finance and accounting tasks. In addition, accounting and finance outsourcing for private equity businesses is also beneficial for high-level decision-making. Let’s cover a few more of the tasks that can be outsourced in your organization.
Fund Administration
The first task that your private equity company can outsource to a financial analyst or accountant is fund administration. Non-investment-related tasks, such as data entry, bank reconciliations, and cash flow management, can be passed off to a qualified professional. For one, having an outsourced professional handle these roles improves your independence and reduces your risks of errors and fraud.
Additionally, outsourced fund administration ensures your data is available in real time. For example, if you have an extra $50,000 of funds you need to deploy, having reports that display current profit margins is crucial. Your outsourced accountant or finance professional provides these reports while prioritizing accuracy and compliance.
Financial Reporting
Taking internally generated reports at face value without review is risky. Transactions could be misclassified, adjusting entries could be needed, and data could be missing altogether. When you outsource financial reporting to an accountant or finance professional, you don’t have to worry about inaccuracies in your reporting. These professionals evaluate the legitimacy of transactions and ensure each piece of data is where it needs to be. This gives you confidence to make decisions surrounding new investments and growth initiatives.
Furthermore, many regulators, lenders, and investors require that financial reporting be completed by an independent party. With PE finance and accounting outsourcing benefits, you can meet these requirements with ease. For example, if your lender requires annual reviewed financial statements, you can enlist an outsourced CPA who offers that service.
Report Generation
There are dozens of reports outside of your financial statements that give you insight into your private equity company’s performance. Financial analysts and accountants can put together cash flow management schedules, return on investment data, and detailed projections to help your team make more informed decisions. For example, a private equity finance professional can put together financial forecasts that show upcoming revenue and capital needs. This helps you plan resources to meet your business objectives.
Another task within report generation that outsourced finance professionals can assist with is investor statements. Investors want to see how their capital is being deployed and their expected returns on investment. Your finance professional can piece together reports that contain the necessary information and display the data in a user-friendly and appealing manner. By appeasing investors’ needs, you are more likely to retain key investors and raise more capital.
Fundraising Documentation
Private equity firms rely on capital contributions. In many cases, a single deal could contain dozens of investors. Finance outsourcing for private equity businesses commonly includes the handling of capital documentation. This could include updating spreadsheets and systems for new capital, recording convertible rights, and properly differentiating between equity and debt investments.
Part of creating streamlined financial processes relies on designating an individual or team. If your internal staff members are already bogged down with other tasks, proper fundraising documentation can slip through the cracks. By passing this task off to your outsourced finance professional, you don’t have to worry about misplacing an important signature or recording a capital raise correctly.
Read more: Streamlining Finance & Accounting Processes in Your High-growth Portfolio Companies
The Advantages of Having Streamlined Financial Processes
We’ve covered the different tasks that finance outsourcing for private equity can cover. Now, let’s go through the advantages of having streamlined financial processes in your private equity firm.
Boosting Efficiency with PE Accounting Outsourcing
The first byproduct of streamlining your financial processes is increased efficiency. Financial professionals understand the intricacies of reporting. Unlike an internal staff member who might be handling a dozen different tasks or untrained in financial management, accountants and finance professionals have extensive knowledge in these areas.
Moreover, outsourcing your finance function also leads to defined procedures and protocols. When a new capital contribution comes in, your team knows exactly what to do and who to go to with any questions. These factors combined result in increased productivity and efficiency.
Cost Savings
Streamlined financial processes also unlock cost savings. You are no longer paying employees to spend hours trying to figure out what adjusting entries are needed or how to build a financial forecast. When you bring in a finance expert, they get straight to work, which reduces your backend costs.
Cost savings from streamlined financial processes also come in the form of strong cash controls. Your outsourced accountant or finance professional monitors your cash flow to find ways to save your business money. With accurate ledgers, they might find that paying an invoice one week early leads to a 3% discount or that making an extra call to an investor increases the odds of securing more capital. Streamlining your financial processes is the first step in succeeding in cost-saving initiatives.
More Informed Decisions
Private equity firms make high-level decisions on a daily basis. Which projects are worth undertaking? How much capital is needed for each investment project? Is the fund properly diversified? With streamlined financial processes, you can make decisions backed by accurate data.
This could be updated financial forecasts, balance sheets, income statements, or tax plans. With an outsourced accountant or finance professional working behind the scenes to keep your data accurate, you can feel more confident in your decisions, leveraging the benefits of accounting outsourcing for your PE business.
Access to New Capital
Investor contributions are necessary to keep your private equity fund afloat. After all, without investors, how would you invest in new deals? Many investors are number-driven. They want to see how much return their investment can generate and the past successes of your private equity firm. By streamlining your backend finance and accounting, you can easily compile this data to attract new investors.
Maybe your financial analyst puts together historical graphs on investment returns or shows you the potential return for a $100,000 investment in a new deal. Whatever the case, backing your claims with data is important to gain access to new capital and meet investor expectations.
Regulatory Compliance and Outsourcing Benefits for Your PE
Private equity firms are subject to a slue of legislation to protect investors, like the Sarbanes-Oxley Act, Investment Advisors Act, and the Bank Secrecy Act. Even outside of these industry specifics, your business must follow general tax and accounting legislation. Streamlining your finance and accounting functions ensures that all transactions are properly reported on your financial statements.
For example, depending on your investment amount, you might need to account for an investment in a business using consolidation, the equity method, or the fair value method. Your professional knows when each method is required, helping you maintain compliance with regulators.
Getting Started
Fund administration, financial reporting, report generation, and fundraising documentation are four tasks that you can outsource to a private equity finance or accounting professional. Strong controls over these tasks give you the ability to generate streamlined financial processes, which results in increased efficiency, cost savings, more informed decisions, access to new capital, and compliance with regulators.
If you’re ready to leverage these benefits and more, contact one of our team members today to learn more about our PE accounting outsourcing services.
