Why More Sri Lankan Small Businesses Are Outsourcing Their Payroll to Payroll Service Providers

Why More Sri Lankan Small Businesses Are Outsourcing Their Payroll

Payroll is often considered the lifeblood of an organization since it ensures employees are compensated fairly and on time for the work they’ve done. But with the transformation of the employment landscape and associated statutory requirements both in Sri Lanka and the global context, many small businesses are finding it worrisome to handle their payroll in-house.  

How are you processing staff payroll currently? Are you handling it in-house or have you outsourced it to a payroll service company?  

Read on to find out why many Sri Lankan businesses are outsourcing their payroll to either specialist payroll service providers or a payroll service company like a Chartered Accountancy firm, the numerous advantages outsourcing payroll carries, and other valuable considerations.   

It’ll offer valuable insight in helping you decide whether you should outsource payroll like many other Sri Lankan small businesses are currently doing or handle it in-house.

Growth of the Payroll Services Industry Indicative of Increased Payroll Outsourcing by Small Businesses

The growing pattern of payroll outsourcing by companies small and large can be gathered from the massive growth in the payroll services market internationally. In a payroll services report for US payroll giant UKG, titled NEAT EVALUATION FOR UKG: Payroll Services 2021 Report by Nelson Hall – a leader in research and analysis in the business process services (BPS) and IT services industries (ITS) – it was found that the global market for standalone payroll services was USD 21.4 Billion in 2020. It is expected to grow at 4.3% CAGR and amount to USD 26.3 Billion by 2025.

More Sri Lankan Small Businesses Outsourcing Payroll Due to Payroll and Income Tax Compliance Challenges

Parallel to the increased supply of payroll services globally and in Sri Lanka, there is a growing trend of Sri Lankan small businesses outsourcing payroll due to the challenges involved in processing payroll in-house manually. From late salary payments, payroll errors, and low employee morale, to costly fines, handling payroll internally can be a stressful and time-consuming affair for small businesses.

Two major reasons many Sri Lankan small businesses have opted to outsource payroll to Chartered Accountancy and Management Consultancy firms:

  • New tax exemptions and tax regulation changes that have come into effect due to the Inland Revenue (Amendment) Act, No 10. of 2021 which amended the Inland Revenue Act No. 24 of 2017.
  • The introduction of APIT in place of the former PAYE tax system and related changes.

These changes in the local payroll and statutory compliance landscape require professionals with tax expertise to handle effectively, which most small businesses lack in-house. The increased pattern of small businesses outsourcing payroll is therefore clearly justified.

Now that we’ve looked at several reasons why more small businesses in Sri Lanka are outsourcing payroll, let’s consider a list of advantages and disadvantages associated with payroll outsourcing to specialist payroll companies.

The Pros and Cons of Outsourcing Payroll

Regardless of the industry your small business operates in, it should be understood that outsourcing payroll to an external party like a payroll service company can help reduce the time your staff spends on payroll while reducing errors and risks of running payroll in-house.

But there can be negatives as well, such as the additional cost involved in outsourcing payroll or the coordination and back and forth communication required between both parties.

Below we explore a few of the pros and cons of outsourcing payroll, so you can make a more informed decision.

Advantages of Outsourcing Payroll

  • More time and effort to focus on core business and a competitive edge
  • Faster and effective payroll calculations to save time and cost
  • Generates payslips accurately
  • Bonuses and expenses are calculated with less difficulty
  • Reduces the burden of statutory and regulatory compliance
  • Payslips and annual report data are stored in a secure and accessible manner

Disadvantages of Outsourcing Payroll

  • No immediate help when needed
  • Clients may have to wait in line to get their problems resolved since most payroll outsource companies have many clients to deal with
  • Some payroll outsource companies provide training on the payroll software only to a limited extent
  • Limited control over the security of data
  • There can be additional or hidden fees involved for tax filing, etc., which may not be clear at first

Although outsourcing payroll can include several disadvantages, they are outweighed by the many positives outsourcing holds for small businesses. This is why more small businesses are outsourcing their payroll to payroll companies in Sri Lanka and why you should start considering it as well.

Below, we take a look at a Sri Lankan study which explores how the implementation of accounting practices including payroll can help SMEs and small businesses improve performance.

How Proper Payroll Accounting Practices Are Helping Sri Lankan SMEs Improve Performance

In the study Accounting Practices and Organizational Performance: Evidence from Small and Medium Scale Enterprises in Sri Lanka (Sivasubramaniam, Saseela), involving 75 local SMEs, a positive relationship was discovered between payroll accounting and organizational performance.

Although not as strong as the impact that bookkeeping and budgeting have on the performance of SMEs, a definite connection was established between payroll accounting and organizational performance.

This further indicates how local SMEs or small businesses have potential to improve performance and grow through the proper implementation of payroll and other accounting practices, and how outsourcing their payroll to a payroll service company might be a cost-effective way to realise this benefit and gain the ability to focus on their core business.

Now that you’ve understood why more Sri Lankan small businesses are outsourcing their payroll and some of the advantages involved, you’ll be well-placed to decide whether your small business should consider outsourcing your payroll as well.

To ease the process, and help you select the best payroll companies to outsource your payroll to, we’ve compiled a list of the top payroll companies in Sri Lanka, the majority of whom are recognized as Approved Training Partners of CA Sri Lanka.

You can access the list using the link below. It will allow you to select a payroll outsourcing company based on your business’s exact payroll requirement.


Happy Payroll Outsourcing!

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