Outsourcing with Xero Practice Manager

With outsourced accounting and bookkeeping services becoming a staple of a digital practice we frequently come across the question of how to treat outsourced services inside Xero Practice Manager (XPM). The objective of this article is to give you the skills to recognise the cost of outsourced services correctly in your practice based on the type of relationship you have with your service provider.
There are three options for recognising outsourced services in your XPM correctly:
1) Outsourced Services as Staff only
2) Outsourced Services as Supplier only
3) Outsourced Services as Staff and Supplier
1) Outsourced Services as Staff
Using this method your outsourced service provider receives a login to your XPM and completes a timesheet for the jobs they work on just like one of your team. You can either set up a unique login for each of the external people who work for your practice or a generic login per full-time equivalent resource you use or type of resource you use.
When setting up your outsourced services as staff it is important that we add a base rate that reflects their hourly cost to us against each of the users we add. As our outsourced services complete timesheets they apply this cost to each of the jobs they work on for us. Set the default billable rate to what you’d normally charge for these services on a time and materials basis.
This method works best if you know your outsourced staff by name, have a low turnover of outsourced staff, manage them yourself and have a simple hourly agreement with a set rate by service. The benefits of this option are:
  • Low-admin as your outsourced services are entering time directly to jobs.
  • We also can view actual time against jobs throughout the month not just when we receive an invoice from our outsourced service provider.
  • Allocating jobs and specific tasks is easier as they are treated just like a staff member in XPM
The downside of this method is that the total actual cost of outsourced services for a month may not match the sum of the total time cost in your XPM. This will occur where we might have a fixed-fee our output related invoicing arrangement with our service provider.
2) Outsourced Services as Supplier only
This scenario is more traditional and treats your outsourced services as a supplier and pays them based on their invoice (with accompanying documentation as required). Under this method your outsourced service provider does not receive a login and is not added to the staff section of XPM. You will be issuing them Purchase Orders for the value of the work you want them to do for you. They will need to invoice you either an itemised invoice with a subtotal by job or an invoice for each job. You will need to enter these as Purchase Orders and receipt them to automatically create an accounts payable in your (blue) Xero.
This method works best where the arrangement with your service provider is still on an hourly rate by service and they are able to send you an itemised invoice. It is also good where you might have a variable mix of services they perform for you and you are not responsible for managing the staff themselves.
The benefits of this option are:
  • The outsourced staff require no training other than letting them know that they can expect to receive a Purchase Order number/document for future work you request from them that they need to reference on their invoice.
  • The actual cost to you of the outsourced services are applied to the appropriate job
The downside of this method is that it is admin intensive as we need to enter our outsourced service providers itemised invoice each month. These job costs are only recognised monthly when we receive an invoice instead of on the completion of a timesheet. Where we on-charge these services directly at an hourly rate we need to wait to receive the supplier invoice first. We will also need another method of managing/allocating/prioritising our outsourced resources to jobs as the staff cannot view this inside your XPM.
3) Outsourced Services as Staff and Supplier
This is the most complex but most accurate of the three methods as you get both the benefit of a single point of entry, your outsourced service provider benefits from a free and convenient timesheeting system, and you receive timely financial reporting via completed Timesheets. If you have ever found yourself delaying sending customer invoices waiting on contractor invoices this is the method for you.
To set this up correctly:
  • Add the outsourced resources as staff using an email address on your domain or their domain. Importantly set the base rate here as $0.00 and enter the rate you charge them out as in the billable rate box. If you don’t ever on-charge their time enter this as the cost rate to you. This will let you see the value of their time incurred against a job before they send you an invoice. Leave all the permissions boxes unticked to allow them to complete Timesheets for their jobs only
  • Set them up as a supplier complete with their billing details.
  • Have them complete their Timesheets on the same frequency all other staff do. Issue them a purchase order for any work you ask them to do and receipt that purchase order as they invoice you.
What if my outsourcing service provider does not/will not itemise my invoice by job?
Some service providers charge a fixed fee for a specified output or a set resource with no guarantee of the volume of output. This makes them unable to itemise their invoices by job. For as long as this is the case you are unable to view the true cost of a job and therefore measure client and job profitability. This lack of visibility can be dangerous especially if you charge your clients on a fixed monthly basis. You will be forever unable to review or negotiate your agreements with your customers as you don’t know how profitable they are to you. You will be left stuck viewing your monthly cost of outsourcing as a direct cost in your P&L only instead of on the per-job level.
The method you choose will impact the speed and reliability of your customer invoicing and financial reporting. To make sure you get it right for your business talk to us.
If you’d like to discuss which option to apply to a staff member in your team you can email us the nature of the arrangement or book a chat.

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