Book-keeping often tends to be thought of in terms of reconciling bank accounts. In the times we live in, where everyone uses AI and tech, getting your bank reconciled shouldn't be the only goal for a great SME book-keeping function. That's only a part of the function, not all of it.
At Evalua8 we like our book-keeping to be great. This post has been inspired by this very question asked by a prospect. This is a great question and one that all SMEs should ask their respective book-keepers or check internal processes to see that it ticks all the right boxes.
We acknowledge that methods across firms differ. Here's how we approach book-keeping for our clients
Setting up transactions that flow into your monthly or quarterly reporting
What most small business fail to implement is a system where your books are set up in a way that it flows into a reporting structure without friction. Changing the reporting to suit what has been set up transactionally will always be more time consuming and difficult. When financial entries are entered into your software, ensure they sit in the right chart of account item to start with. This gets them to go into the correct line item on your financial reports such as revenue, cost of sales, opex, asset or liability.
We prefer FathomHQ for monthly reporting and any change in reporting layout required has to be made via the base feed which is normally Xero for us. So we spent time on preparing Xero layouts in a good way to ensure that it connects well to Fathom in turn.
Maintaining an audit trail
Most SMEs are not audited, but there should be set up in an "audit ready" manner. This means that a supporting document trail should be consistently maintained. Then there is VAT reporting to consider. In the event of a VAT audit or a GST audit (Singapore), HMRC (or IRAS) will ask to see the supporting documents for input and output VAT. If you use the likes of Dext, it'll be easier to maintain a robust document trail. You also cannot claim VAT on any expenses that are not backed by supporting bills.
Apart from these very good reasons, you are also required to legally maintain company documents as a director to support financials for sales, expenses, assets and other documents like bank statements. Please see link here from HMRC that explains this in more detail. Book-keeping should ensure the trail of documents are kept and can be easily accessed.
Dealing with accounting nitty-gritties
A book-keeping function is never complete without the "journal entries" (JE). When you try to pass a JE on Xero, it rightly cautions you to only make an entry ONLY if you are an Accountant or professionally trained. This is a true sentiment as setting up JEs incorrectly in the books can cause your numbers to be badly skewed.
For SAAS, the likes of deferred income and prepayment JEs are necessary to ensure compliance with accounting standards as you want to capture revenue and expenses in the period they fall into. Sadly without a basic knowledge of accounting standards, it's not recommended that you deal with this area. If you don't have a book-keeper consider getting an internal audit done once every year before making a tax filing.
Numbers that are true and fair
A great book-keeping function focuses on providing a "true and fair view" of the company financials. In my opinion, true and fair doesn't always have to mean 100% accurate. True and fair is financial information presented in such a way that it allows a consumer of that information to take a realistic commercial decision. The numbers presented shouldn't lead to a misunderstanding.
For e.g. a $500 expense gets missed for a company that has an overall expense of $100k per month will not cause a director to take a decision that's fundamentally flawed. In the same instance, if an expense worth $5,000 is missed, it can provide an inaccurate picture of the company's financials. A person taking a decision looking at these numbers would assume the company is $5k better off than it actually is.
The only way to mitigate such an occurrence is to ensure your book-keeper has checks and processes in place to avoid mistakes. But human errors will happen. A monthly check which helps is to ensure a balance sheet reconciliation is carried out as it helps to catch any errors early.
Do it right
As you can see, a great book-keeping function ensures that the numbers that flow into reports used consistently by a business has enough accuracy to ensure you can take better decisions faster. At Evalua8, our professionals have been trained in the art of maintaining books well. We have finessed this over a long period of time and have necessary checks to ensure errors are caught and dealt with early.
Have queries regarding book-keeping? Reach out and ask us direct.
References
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https://www.frc.org.uk/library/standards-codes-policy/accounting-and-reporting/true-and-fair-concept/