When a small business owner unleashes their business concept on the world, a.k.a., starting their own business, out of necessity, the owner wears many hats, such as accountant, customer service rep., financial advisor, CEO, and janitor. As the business grows, business owners often enjoy the opportunity to hire employees as cashiers, managers, and even maintenance workers. However, small business owners tend to shy away from taking on professional employees, such as accountants and human resources professionals.
The reason for this hesitation may vary from company to company and industry to industry. For the most part, Quality Business Plan’s business plan writers have found that small business owners do not take on professional services in-house because of the perceived costs involved.
In some instances, the owner’s gut feeling is justified. However, gut feelings don’t use quantitative measures in its calculus for a recommendation to the owner. The objective of this discussion is to offer quantitative and qualitative factors that a small business owner should consider before outsourcing or integrating new departments.
Quantitative Factor: Financial Models
An important quantitative factor for a small business owner to consider would be the results of financial models. Professionally designed financial models allows a business owner to change different variables within a company’s profit and loss statement to determine optimal profits. For example, a small business owner may construct a financial model with the variable of outsourcing their human resources activities. Next, the owner can then change the variable to include cost of hiring a new department to care for their human resources needs. From these two models, the business owner just needs to compare the bottom line and make a decision based on the highest profits. Of course, there are qualitative factors that should be considered as well.
Qualitative Factor: Need for Efficiency
A qualitative factor that business owners should consider when faced with the opportunity for integration or outsourcing would be the need for efficiency. To illustrate this concept, an excellent example would be accounting needs. If a small business owner only needs an accountant for monthly invoicing and annual financial statements, since outsourcing the task does not require continuous hard deadlines, so go for it. In contrast, if a business owner requires daily attention to their finances from a professional accountant, then inevitably, efficiency is a necessity. From this, expanding operations to include an accounting department may be warranted.
In summary, small business owners are continually faced with the decision to integrate professional services. Two main factors to consider when making this decision would be results of financial models and the need for efficiency. If one of the other business aspects supports integration, then it might not be a bad idea. However, if both test say aye, then integration becomes a necessity.
Author: Paul Borosky, Doctoral Candidate, MBA., Author