Book-keeping, especially SME bookkeeping often tends to have the wrong ideas attached to it. 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 bookkeeping function. That’s a part of a full-suite finance function, not all of it.
At Evalua8 we like our bookkeeping to be great. Recently we had a prospect ask us this question and the details we provided made for great learning. We highly recommend that all SMEs ask their respective bookkeepers about what is their process flow when it comes to finance.
We acknowledge that methods across firms differ. Here’s how we approach bookkeeping for our clients
SME bookkeeping should have a process that flows into accessible 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 line item to start with. This then flows (generally) seamlessly into one or more financial reports the company needs to produce periodically. The main financial reports we are referring to here is a balance sheet, profit and loss account and cash flow statements.
It’s not just about recording transactions in a robust way, it also helps when a company starts using third-party add ons or software for specific reporting or to support functions such as inventory management. As an example, when using FathomHQ for monthly reporting, any change in the reporting layout required has to be made via the base feed which is normally Xero or Quickbooks. When the basic layout and structure is correct, your reporting looks better and is easier to understand.
SME bookkeeping that is audit or due diligence ready
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 and transactions should be able to be understood. If you are considering investment or already have investors, you would be familiar with a due diligence process. When your bookkeeping process is correct, transactions recorded are easier to explain and a lot of the documentation required by management, tax authorities and investors are easier to find as they are attached to each transaction.
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 app for expenses management, 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 or majority shareholder 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 maintained and can be easily accessed when needed.
Passing journal entries
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 good SME bookkeeping function, consider getting you accountant to do a quick internal audit of the transactions before a tax filing is made.
True and fair view
A great SME bookkeeping function focuses on providing a “true and fair view” of the company financials. True and fair doesn’t always have to mean 100% accurate. True and fair is financial information presented with enough detail and enough accuracy so a reader can easily understand it and base decisions of them. The numbers presented shouldn’t lead to a misunderstanding and consequently a bad commercial decision.
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 $15,000 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 $15k better off than it actually is.
Balance Sheet reconciliation
A SME’s balance sheet houses some of the most important accounts across the company – cash balances, assets, receivables and payables among others. A proper balance sheet reconciliation process allows easier detection of accounts that are “off” such as VAT and PAYE payables as an example. One of the key things we tell business owners is to ensure they make friends with their balance sheet. Some of the larger mistakes that happen in most SMEs are in and around this specific financial record. A lot of decision making centres around the accounts that are balance sheet focussed, such as bank balances and working capital. A good bookkeeping function will focus on the balance sheet as a key report to get right.
Variance analysis
Variance analysis for financial statements involves comparing actual financial performance to budgeted or forecasted figures to identify differences (variances). For SMEs, this analysis is crucial as it helps management understand why deviations occur, enabling them to pinpoint areas of inefficiency, overspending, or revenue shortfalls. It provides insights into operational performance, aids in cost control, and supports more accurate future budgeting. Another way of thinking about this is to compare financial information across periods to identify one-off items, anomalies and unusual occurrences. A monthly variance check-up is absolutely critical for any company.
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 7 year period and have necessary checks to ensure errors are caught and dealt with early.
Have queries regarding book-keeping? Book a clarity call and we can explain our process and approach in greater detail.
References
- Pictures are courtesy of Pexels.com and are allowed under creative commons license
- https://www.frc.org.uk/library/standards-codes-policy/accounting-and-reporting/true-and-fair-concept/
