Good record-keeping isn’t just about making tax time easier. The quality of your financial records affects how clearly you can see what’s happening in your business, from where your money is going to what you’re actually making.

When records are incomplete, inconsistent, or out of date, it becomes much harder to make informed decisions relating to profitability. It can also mean you waste time untangling historical information rather than planning for the future.

A few good record-keeping habits can make your financial information far more useful and potentially save your business money in the process.

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1. Pay Attention to How Transactions Are Classified

It’s not enough to just record expenses. The way transactions are classified affects the financial reports you use to assess the business.

If direct costs are regularly recorded as overheads, capital purchases are treated as ordinary expenses, or transactions are inconsistently classified from one month to the next, your reports can become difficult to interpret.

This becomes particularly important when you’re assessing margins. If the costs associated with delivering a product, project, or service aren’t captured consistently, you may think a particular area of the business is more profitable than it really is.

Good record-keeping should allow you to compare like with like and understand what is actually driving your results.

2. Build Enough Detail to Understand Where You Make Money

Following on from the above; knowing that the business made a profit is useful, but knowing where that profit came from is crucial to future business decisions.

Depending on your business, that could mean tracking financial performance by project, service, location, division, product category or another meaningful segment.

Consider a business with three different service lines. Revenue may be growing overall, but one service could be generating strong margins while another is barely covering the cost of delivery. If all of those transactions are grouped together, that distinction can disappear.

Your record-keeping should be structured around the questions you need your financial reports to answer. That’s why your accountant should also have a deep understanding of your business goals and growth strategy.

Read More: Is Your Accountant A Key Contributor to Your Business?

3. Keep Your Debtors and Creditors Accurate

Your bank balance doesn’t give you the full picture of your cash position. You also need to be across outstanding payments; both who you owe and who owes you.

If invoices aren’t being followed up, overdue payments can quietly start affecting cash flow. On the other side, if supplier bills aren’t entered as they come in, you can easily overestimate how much cash you actually have available.

Keeping your accounts receivable and payable up to date means you can see upcoming cash movements more clearly, stay on top of overdue invoices and make spending decisions based on a more accurate picture of your finances.

4. Establish a Proper Month-End Process

One of the best habits a growing business can establish is a consistent month-end close. That means reaching a point each month where the financial records and reports are considered reliable enough to review.

Exactly what this involves will depend on the business, but it may include reviewing accounts receivable and payable, reconciling balance sheet accounts, checking payroll liabilities, identifying unusual transactions and reviewing the profit and loss statement and balance sheet.

Without this process, reporting can remain perpetually unfinished. And if you’re reviewing performance using numbers that end up changing, it becomes much harder to identify and respond to issues.

5. Review the Quality of Your Financial Data as the Business Grows

The record-keeping system that worked when you were turning over $500,000 may not be appropriate when you’re turning over $2 million.

As a business grows, there are generally more transactions, employees, suppliers, customers and financial obligations to manage. Management may also need much greater visibility over individual areas of performance.

That can require changes to your chart of accounts, reporting categories, approval processes, accounting software or the way financial responsibilities are divided between people.

The question should be: Are our financial records giving us the information we need to manage the business we have today? How should we evolve our financial team?

The Warning Signs Your Records Need Attention

You don’t necessarily need to find a major accounting error to know your record-keeping needs work. One of the clearest warning signs is that you don’t fully trust your own reports.

Other red flags include:

• Your profit and loss regularly contains figures that need explaining
• Your balance sheet has accounts nobody is quite sure about
• The numbers change significantly after your accountant reviews them
• You can’t easily answer seemingly straightforward questions about margins, outstanding liabilities or cash flow
• Accounts are consistently weeks or months behind

Better Records Aren’t Really About Record-Keeping

Ultimately, the goal is to have financial information you can rely on.

Accurate, timely and appropriately detailed records make it easier to understand profitability, manage cash flow, plan for tax obligations, compare performance and identify problems while there is still time to do something about them.

They also change the conversations you can have with your accountant.

Instead of spending the meeting trying to establish what happened six months ago, you can spend more time discussing what the numbers mean and what the business should be preparing for next. It’s this kind of future-focused thinking that defines good business advisory.