There are many tasks required to run a business beyond the provision of day-to-day services to residents. “Back office” tasks do not bring in income and can significantly increase or decrease the costs to run the business. The challenge is to find the most cost- and time-efficient means to accomplish these tasks so that the business runs smoothly and profits are maximized.
Back office tasks are behind-the-scenes tasks that are closely tied to the operations of any office. These tasks include bill processing, vendor payments, payroll processing, preparation of financial statements, human resource tasks such as hiring and performance appraisals, information technology tasks such as software selection and server maintenance, and much more.
In smaller businesses, it is common for one employee to perform multiple functions even though that employee typically is most qualified for only one of their assigned tasks. In some cases, the employee does not have any qualifications for any of the functions. This is often where hidden costs come in. For example:
- If a business is utilizing an employee who is not qualified to complete their assigned tasks, there is a higher likelihood that they will perform the task incorrectly, which may result in penalties, fines, equipment repair costs, and etc.
- There is also a cost of inefficiency since it will typically take an unqualified employee much more time to accomplish the task than an employee who is qualified.
- There is also a risk that an employee who is sharing time across multiple functional areas will not be able to provide adequate focus and attention to any of the areas,
- If the owner or employee fits this work in during the evenings or on weekends, there is also hidden cost of the loss of personal time and time with family and friends which can impact effectiveness and increase the likelihood of turnover.
- Finally, if key employees are involved in back office tasks, there is also the lack of time to focus on the overall direction and strategy of the business, and if no one else is assisting with the strategic work, growth opportunities will be missed.
One key functional office area where there are often significant hidden costs is in the accounting area. Often, small businesses have an office manager or employee doing the bookkeeping and sometimes the payroll processing as well. This work is fit in around their other responsibilities, and they often have little or no experience in doing this work. As a result, the financial statements are often inaccurate and unreliable and often the business will pay their outside accountant significant money to correct the work on at least an annual basis. Inaccurate financial statements also negatively impact management’s ability to make the necessary management decisions, knowingly plan and generate additional growth, and obtain financing. If management is unable to have accurate financial information on a regular and timely basis, they may have to use old and inaccurate data to make their decisions and that is risky.
Finally, there are also usually limited or no internal controls in situations like this. The one person often is typically not closely supervised by others, so the risk of fraud is very high.
Often the focus is to accomplish the various back office tasks as cheaply as possible, and all too often the result is that the direct costs appear low; but the indirect and hidden costs are extremely high, and the business does not grow and have the success that the owners would like to see. When these tasks are analyzed and the optimal options with regard to how these tasks should be accomplished are confirmed, plans can be made to map out how to move from inefficient to efficient as quickly as possible. Significant savings can often be recognized in the short-term as well as continued savings and revenue and profits growth in the long-term. What business could not benefit from these results?
Tapping into the expertise of outside parties to perform back office functions is one way to achieve high quality results by utilizing the skills of highly qualified resources. This is traditionally referred to as outsourcing, and today most or all back office tasks can easily be outsourced as can some of the front office tasks. In particular, it is becoming more and more common to outsource back office functions such as accounting, information technology, and human resources since each of these areas require additional expertise in order to complete the functions accurately and efficiently. While many organizations think this is too expensive, they may be surprised to find it is actually cheaper than having in-house employees perform these tasks.
In summary, it is important for each business to understand the true cost of their back office functions and look for ways to increase effectiveness in an economical manner.
Author: Inga Arendt, CPA