It’s the end of the calendar year, and, for most companies, that means the end of the fiscal year as well. With that comes a flurry of accounting tasks that need to get done. Either working “in” your business or working “on” your business, some of these year-end tasks are obvious, but others are less known – especially for the first-time entrepreneur.
Of course, every business is different, so for specific accounting advice, you can contact us. But absent that, here are a few end-of-year accounting to-dos we’ve seen slip by even the most diligent of entrepreneurs:
WORK "IN" YOUR BUSINESS - GETTING YOUR FINANCIAL BOOKS IN ORDER
Whether you’re one of those solo entrepreneurs with a glovebox full of receipts that haven’t even been entered yet or a small business person who has a bookkeeper on your payroll, you have to get this step done before you can do anything else. Don’t shirk the bean-counting as mistakes in this step can escalate quickly in terms of money, time, and overall efficiency of your business. This is the foundational key for how your business will operate in the year(s) to come.
- Reconcile Your Accounts
Of all the year-end accounting tasks, reconciliation is perhaps the most important. Reconciling your bank accounts, credit cards, and money accounts, ensuring that the balances are equal to those on your balance sheet, is necessary to ensure that all transactions have recorded correctly.
- Sales and Revenue
Have you invoiced all of your customers for work you’ve done and products you’ve delivered/shipped for the year? If not, get caught up on those now. You can’t collect on outstanding invoices you haven’t sent.
- Collect Your Accounts Receivable
Outstanding invoices that carry over into a new fiscal year are a hassle. For clients or customers that are behind, now is the time to turn up the heat.
If your collection efforts turn out to be futile, first, do no more work for this client. Second, you may be able to write off the bad debt and get a tax deduction. Ultimately, you’ll want to do everything in your power to get paid before the close of the year.
- Establish Reserves
If you sell products that have a warranty, you should have a “Reserve” account to cover potential future claims based on historical rates of expenses. Year-end is a good time to assess this. Similarly, if you have accounts receivable that may not be collectible, you might consider setting up a “Reserve for Doubtful” accounts to recognize the potential liability of the asset on your books.
- Inventory
Verify your inventory balance is correctly reported on your balance sheet. The best way to do this is to have an accurate count as of December 31st. You’ll also want to verify that your inventory is valued correctly – determine if any inventory items cost more than they’re worth and need to be written down.
Remember, your CPA is going to need the following in order to prepare your tax return:
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- Inventory balance at the beginning of the year (January 1st);
- The cost of inventory purchased throughout the year;
- The amount of inventory that was sold during the year;
- The ending inventory balance at the end of the year (December 31st).
- Fixed Assets
These are the larger purchases you made throughout the year (i.e. equipment, automobiles, furniture, computers, etc.). Do you still have all of the fixed assets that are reported on your balance sheet? If not, record the sale or disposal of these fixed assets.
Don’t forget to verify the depreciation on your fixed assets as well. Make any necessary adjustments.
- Expenses and Accounts Payable
Verify all of your accounts payable have been recorded in your accounting software. Now’s a great time to make your 401(k), SEP IRA, and Simple IRA contributions, if you haven’t done so already.
If you are a self-employed or a small business, did you know that your personal mobile phone and internet usage for your business is deductible on your tax return? Collect your mobile phone bills and internet bills for the year and determine what percentage of your bills were for business purposes.
If you are a small business, did you pay for any business expenses from your personal accounts (i.e. bank, credit cards, lines of credit, etc.) or have any of your personal expenses paid by business? Don’t forget to include these on your balance sheet as owner contributions and distributions.
- Notes Payable
Verify your notes payable (i.e. loans) amounts on your balance sheet match the statements from your banks. Are you missing any notes payable? Do you have any notes payable that you paid off during the year or debts that were forgiven? Make any necessary adjustments.
- Mind the GAAP (Generally Accepted Accounting Principles)
Clean books are essential to satisfying both investors and acquiring companies. If your company’s financials are not already in line with accounting principles, they need to get there as soon as possible.
Not sure whether you are running GAAP-compliant books? Speak with a professional as early as possible. This is another area that, if monitored, can save valuable time and money.
- Collect Those W-9’s
Lots of small businesses start out as one- or two-person organizations, with the support of contractors. Business owners who hire independent contractors and pay them more than $600 during the year are required by law to send them (and the government) a Form 1099-MISC by January 31st and to the IRS on or before February 28th of the following year. Failure to send these documents out results in a $250 fine, so don’t delay.
Get started collecting the required information from your contractors now and collect the W-9’s from your vendors and/or contractors. And while you’re at it, make sure you can easily determine how much was paid to them for the services they performed.
Speaking of Form 1099-Misc, you must issue one to each vendor or contractor that you have paid for the following:
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- Rendered services greater than $600 and is NOT incorporated
- Rents
- Royalties
- Broker Payments
- Fishing boat proceeds
- Legal fees
- Payroll Taxes
Verify your payroll tax liabilities match your quarterly payroll returns.
- Double Check Your Income Statement
After making all of the adjustments listed above, double check your Income Statement (a.k.a. Profit and Loss Statement). Does your income and expense numbers make sense? Compare your Income Statement against priors years and against your budget (if you have one). Think long and hard to make sure there is no additional income you are missing and no additional expense items you are missing. Remember, no receipt equals no deduction.
WORK "ON" YOUR BUSINESS - IT'S TIME TO STOP AND SMELL THE ROSES
The sense or urgency that fuels your end-of-the-year push shouldn’t preclude you from looking back at the work you’ve done. Early-stage businesses, especially, have much to do – including filing their taxes – and little time to do it.
Year-end is the best time to stop working “in” your business and take a moment to work “on” your business. Here are three areas to review:
Finances – Examine Your Financial Documents and Analyze Ratios
First, you need to prepare (or have prepared for you) the standard three business financial documents that will be the basis of your decisions.
The Balance Sheet is a summary of how your business is doing financially at a particular point in time. It shows all of your business’s assets, liability, and equity.
The Income Statement lets you see at a glance whether or not your business is profitable at a particular point in time by itemizing your revenue and expenses, resulting in a profit or loss.
The Cash Flow Statement reconciles your opening cash with your closing cash for a particular period, showing you where the money has gone. The statement will summarize your business’s cash flow inflows and outflows for each of these three areas: Operating Activities, Investing Activities, and Financial Activities.
Once you’ve examined your balance sheet, income statement, and cash flow statement, dig a little deeper by checking your business’s current ratio, total debt ratio, and profit margin.
Goals – Evaluate Your Goals From Last Year
Now that you know where your business is, it’s time to take a look at how it got there. Pull out your business plan and any other planning documents, such as last year’s action plan, and review last year’s goals.
Did your business accomplish what you set out to do? Why or why not? Make some notes on your thoughts about your successful accomplishment of your goals (or lack of it). These will be handy when you do your business planning for the current year.
Did you have a budget last year? If so, or not, create one for the upcoming year. Doing so will force you to evaluate your current income and expenses and help you identify the areas you want to keep an eye on for the upcoming year. Were your office expenses unusually high this year and cutting in to your bottom-line profit? If so, maybe you want to put a cap on office expenses each month to stay on target.
Taxes – Evaluate Your Current Tax Strategies
What tax strategy are you currently using and is it working for you? Investigate different tax strategies that you haven’t used, such as changing your business structure or your “taxed-as” status with the IRS.
Not sure what’s best for your business? Talk to a professional about which tax strategy would be best for your personal and business circumstances. Don’t put this important task aside for later, as you don’t want to be among the estimated 40 percent of small businesses that rack up $845 per year in penalties.
PREPARING YOUR TAX DOCUMENTS
You can turn over the required documents to a professional or prepare your tax return yourself. Getting Your Tax Records Together For Your CPA lists the key records your tax accountant will need to prepare your income tax. If you happen to be using one of the excellent cloud-based accounting software programs for record keeping, one of the many advantages is that your accountant will be able to directly access your business records online.
CONGRATULATIONS, THAT'S IT! YOU'RE DONE!
You know the cliché; businesses that fail to plan plan to fail. We all know how important business planning is, but it’s easy to put off in the press of daily events. Hopefully this end-of-the-year checklist has inspired you to get to it and made your business planning easier.
Need help with your end-of-the-year checklist? We assist small businesses across Central Florida close their books every year.
