Why you should care about payroll
Traditionally there hasn't been much incentive for accounting firms to offer payroll services. But that's changing, thanks to new software and business practices.
This places firms in an interesting position, one of both risk and opportunity. There's a risk that if you don't start offering payroll services you could lose clients. On the other hand there's an opportunity to increase revenue from your existing clients – and win new ones.
In this guide we'll look at what's driving the changes in the payroll services market. Then we'll explain how you can use these changes to your advantage by marketing these services to your clients.
Payroll isn't what it was
Traditionally, accounting firms avoided taking on payroll work. That's because it was seen as a burden, a lot of work for relatively little reward. Problems with payroll included it being:
- Time consuming: Far too much data entry was required, including employee hours being input by hand. Tax forms had to be completed and payments manually submitted. All of this had to be done at different times for different clients.
- Confusing: Every client had different pay periods and tax deadlines. Accountants had to make sure they met each and every deadline. If they failed to do so, they might have had to pay any penalties incurred by the client.
- Prone to errors: Entering data manually increases the chance of mistakes being made. As well as the potential liability for tax issues, mistakes could have meant under- or over-paying an employee. That could lead to expensive compensation claims.
In short, payroll was seen as costly. The profits rarely outweighed the risks.
In a word, software. Modern accounting software is cloud-based. That means your financial data is stored securely on remote servers. You access the software online – just log in to your account at any time using a smartphone, laptop or tablet.
The big advantage with this type of software is the connection it brings. Instead of manually reconciling accounts, for example, that can be done in moments – automatically. It just requires a feed from an online banking service.
And it's not just accounts reconciliation that's vastly improved. Payroll is being affected too:
- Employee hours can be imported straight into payroll software
- Staff can be paid automatically, online, with scheduled payments
- Personnel data such as address changes can be updated quickly
- Tax calculations can be carried out automatically
- Notifications can be set for any number of events and times
- Different deadlines for different clients are all handled automatically, without fuss
- Errors are reduced because so much of the work is automated
The integration of payroll with accounting data is helping to bring about this revolution. Data that's already in the accounting system can be used to simplify payroll.
Clients have choices
Every client has a choice – now more than ever. Your existing clients and your potential new customers have options when it comes to handling payroll:
1. They can choose to manage it in-house
2. They can outsource payroll to one firm and accounting work to another
3. They can outsource payroll and accounting work to the same firm
Here's where the big change is happening. Choices one and three are still viable. Choice number two is rapidly disappearing, for reasons we'll discuss next.
An open market
Business owners know what's happening. New cloud-based services are being offered to them every day, in their professional and private lives. New connections are being made and new competitors are appearing all the time. Old business models are being swept away.
So business owners no longer want the hassle of doing payroll in-house. Nor do they want to outsource payroll to one company, while their accounting work is done elsewhere. To a small business owner, payroll is part of accounting. They just want it taken care of – with everything done by one supplier.
That's a good thing for firms that can adapt and move quickly. It brings us back to risk and opportunity. If you don't offer payroll services, you're not growing your practice to the fullest extent:
- You're putting off potential clients who want an all-in-one solution and this is costing you revenue
- You're not getting the most revenue possible from each of your existing clients
Five reasons to pitch payroll services
The great thing about this changing market is that payroll services shouldn't be a tough sell. Customers are likely to understand how they could benefit from outsourcing their payroll to you. Still, it pays to pitch your services carefully. Here are some tips:
Having all the work done by one firm means there's a single go-to for any questions or issues. Your client won't have to worry about getting their payroll service provider and their accountant to talk to each other. They'll be one and the same person.
You're already trusted with your client's financial information. It makes sense for them to trust you with payroll too. This reduces risk by having just one firm with access to their financial data, instead of two.
3. Less work
Let's say you're already doing a client's accounting work. That means they have to send you their payroll data regularly, to be entered into their ledger. If you take over payroll too, that step can go. So it'll mean less work for the client.
Online payroll software can connect with other cloud applications. That can let your clients dig into their business data in new and useful ways. You can show them how.
Combining the services you offer will save you money – and you can pass on some of that saving to your clients. You might even want to offer payroll as a loss-leader in the short term. It may be worth doing so you can build up long-term recurring monthly revenue.
Choosing the right clients
There's no point in making life difficult for yourself. Marketing to every client at once is a recipe for trouble. Cloud-based payroll systems can save you time and money, but you have to take the transition process into account.
There will inevitably be some trial and error involved. So start with a pilot program. Choose the pilot clients carefully. Ideally:
- They should have more salaried employees than hourly-rate employees. Salaried employees are paid a consistent amount, so there are fewer changes from one payroll run to the next.
- They should have low staff turnover. New hires and departing employees mean extra payroll work. You must add them to the payroll system when they join, and sort out benefits and other payments when they leave. Stable companies are a better option.
Once you have several clients up and running, you can start marketing payroll services to the rest – and to new clients too.
What you learn from your pilot trial will help you manage the others with the minimum of fuss. It will also help you refine your marketing – so clients are eager to use your payroll services.
Timing it right
When should you try to market payroll services to existing or new clients? The natural transition point is at the end of the financial year:
- That's when clients are likely to be thinking about making changes
- The client would be starting with fresh financial data in a new system
- There's no need to transition year-to-date financial data from their old system to yours
- You'll avoid having to cross-check duplicate data in two systems
This means you should start pitching several months earlier. Start by explaining all the benefits of outsourcing payroll to your firm. Give the client time to understand the benefits. Then lead them into the transition with clearly defined steps.
If changing at the end of the financial year is not possible for a particular client, try to do it at the end of a quarter. Three months' worth of payroll data will be compacted into a single chunk. That makes it easier to transition the data into the new system.
Get the pricing right
Pricing is always a complex issue. It's a topic we've covered in some detail in our guide to value pricing.
You should also check the competition in the market. Find out what dedicated payroll outsourcing companies charge. Also look at other payroll-handling accounting firms in your region. Your pricing should probably be closer to the latter than the former.
Ultimately, your goal will be to offer a package of services that's of value to your clients – and profitable for you. Payroll services can now be part of that package, helping you increase both your revenue and your client base.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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