Year-End Activities for Small Businesses
Year-end is an extremely busy time for business owners and accountants. Year-end activities can be extensive. Business owners are reflecting on the year’s performance and strategizing for the next year, while also tying up loose ends. Accountants and CPAs are closing the books for many of their clients and rendering last minute advice. All in the midst of the holiday season! It is still so critical that you work together with your accountant to close the year out right and get ready for the next.
There are a few routine year-end activities that you or your accountant should be doing every year to ensure a smooth and efficient transition into the next year.
One of the first year-end activities you should do is gather all of your financial information and organize them. If you were financially organized throughout the year, this step will be easy. If not, year-end is the time to catch up! Gather all of your financials and related data (ie receipts, bank statements), and make sure it is all accounted for in your accounting system.
One way to make sure all transactions have been accounted for is by reconciling all of your bank accounts. Most accounting software has reconciling tools.
The process of reconciling starts with your bank and credit card statements. You want to make sure each debit and credit amount is included in your books by going down the list of transactions and checking them off on the statement. If you notice a transaction is not included, add it or if its duplicated, delete the duplicate. By going through this exercise, you can feel confident that your books are accurate.
Make sure each transaction is classified correctly. This could be done as a part of your reconciliation. Most businesses have some sort of temporary account for transactions they are unclear about. For example, a ‘miscellaneous income/expense’ account. Year-end is the time to close those accounts out.
If you have receipts for cash transactions or expenses you paid out of your personal funds, you should include them. Compile those and reconcile them with your books.
If you run payroll, make sure you reconcile payroll expenses with actual taxes paid. This will ensure your annual Form 940 is correct.
If there are any adjusting journal entries that need to be made, do them at year end. Sometimes adjusting journal entries need to be made to accurately depict the financial nature of a transaction.
Once all transactions for the year have been properly recorded, prepare a trial balance and other financial statements and take time to review it for reasonableness and completeness.
Goal setting is imperative for business growth. However, not every business owner knows how to set the right goals. In general, year-end activities should include setting SMART (Specific, Measurable, Attainable, Relevant, Timely) goals for your company.
Specific goals are definite and well defined. General goals do not add any value because of the lack of direction. For example, simply stating you want your business to be more profitable is not specific enough. Instead consider, “I want my business to be 10 percent more profitable compared this year.” Specific goals should be directly tied to your business.
Goals should be measurable. Measurable is defined with dates, specific amounts and/or percentages. Simply put, measurability is quantitative. If your goals include a quantitative value, they are measurable.
Goals should be attainable for your business. There is no sense in setting unrealistic goals. Doing so can actually be demotivating and counterproductive. Set goals that are reachable yet challenging. If your goals are too easy, you may be shortcutting yourself.
Goals should be relevant to your business’ direction. Setting relevant goals means focusing your energy on what is important. What are your business’ weaknesses or strengths? Are there opportunities for growth? Answering these questions helps create relevancy to your goals.
Lastly, goals should be timely. As a part of your year-end activities, you might develop goals for the entire upcoming year, but it would be wise to divide the year into periods. This way, you can evaluate your business’ progress and adjust if necessary before the end of the year. By setting goal deadlines, there is a sense of urgency to accomplish your goals.
Create a Budget
The saying holds true, failing to plan is planning to fail. Without a clear financial plan, your company is opening the door for financial issues or even failure. Creating a budget should definitely be one of your year-end activities. Budgeting is a planning tool that can help you develop a clear direction. A budget should consist of capital limitations, an estimate of future expenses and revenues.
Now that your financial information is organized, you can begin budgeting for next year. Use your budget to develop goals. Knowing how much you can spend or expect to earn creates a starting point for goal setting.
Share your budget with your team. You may have team members who work more closely on certain areas of the business, therefore, having greater insight on budgeting in that area. Sharing your budget keeps everyone on the same page. Also by sharing your budget, you’re making your company goals transparent. If your sales team does not know what you expect to achieve in sales, how can they achieve it? Or if your admin does not know how much they should spend on supplies, how can they not overspend? Getting your team involved can help ensure you stay on target.
Divide your budget into smaller periods, like monthly or quarterly. Smaller budgets are easier to conceptualize. Only using an annual budget makes it harder to stay on track since you don’t readily know how much you should be spending or making in a particular month or week. Monthly or quarterly budgets over time help you recognize trends or cycles in your business. Let’s say you spent 90% of your annual budget by October. Instinctively, you may believe you’ve under-budgeted and accordingly adjust your next annual budget. However, turns out, the last quarter of the year is your slowest and you don’t spend as much on supplies as you originally thought. Smaller budgets over time shed light on situations like this and enable you to plan for the ups and downs of your business cycle.
Archive your monthly and quarterly budgets. This is where you can quantitatively recognize trends in your business. Trends can open your eyes to the wants and needs of your customers. And satisfying those wants and needs will drive your business.
Assess your budget versus actual outcomes. Studying the deviations and why they occurred will be key to planning your next budget. Reflect on your budget with an open mind. Adjust your budget mid-year if you need to. Budgeting is about creating goals based on financial data and using the results to make more informed business decisions.
Develop a Financial Forecast
Forecasting should be one of your year-end activities. It is the process of looking at past financial data to project the financial performance of a company including how much it will earn and spend. Forecasting is different from budgeting because budgeting is what you hope to earn and spend whereas forecasting is what you believe you’ll actually earn and spend. Forecasting is a planning tool that compares the results to your budget as a measure of whether your company met or exceeded expectations. A good forecast should consist of proforma financial statements for the income statement and balance sheet.
You begin by assessing your current year’s performance. Ask yourself, how did the company do? What worked well? What didn’t work? How much was spent on different areas of the business? With this information, hopefully, you are able to draw cause and effect relationships. Maybe you increased your digital marketing budget and as a result, your revenue increased compared to the year before. These are the sort of connections you want to make when beginning to develop your forecast.
It’s important to anticipate challenges or “worst case scenarios” in your forecast. For example, if you project your company will make $1,000,000 in sales next year, you should consider different situations that would counter that. Many coastal businesses were negatively impacted by the BP oil spill back in 2012. If you owned a beach shop near the Florida panhandle at that time, you were hit hard by the sharp decrease in tourists in that area. There was no way you could have anticipated such a devastating event, but it’s because of situations like that why you should always have a buffer in your financial forecast.
Plan for discounts and bad debt write-offs. Whether your business is new or well established, there is a decently high likelihood you’ll offer discounted pricing to your customers at some point during the year. Be intentional and build that into your sales forecast. Maybe you have a business that is slow during the summer months and to boost sales you offer discounts. Keep this in mind when planning your sales forecast.
For one reason or another, you will not collect on all of your outstanding invoices. Even if currently do, its good to plan that some of your customers will not pay you. These are termed as bad debt write-offs and sales is directly impacted. When considering bad debt write-offs, it’s beneficial to have a hope for the best but project for the worse approach.
Know your customers. Know their purchasing and payment habits and the timeline for both. Apart from this, is knowing your company’s trends and patterns. Having a clear picture of your company’s trends and patterns helps predict the environment it will operate in and thus make forecasting easier. The market has many ups and downs. Whether it’s because of technology, price fluctuations or change in consumer preference, the market is constantly changing. As a business owner, you have to continue to satisfy customer needs and wants in order to stay afloat. So spend time analyzing the market and your customers, past, and present, to approximate your company’s forecast. It can mean the difference between growth or stagnation.
Tax planning is the method of looking at your financial situation from a tax perspective in efforts to achieve tax efficiency. With year-end tax planning, you could legally save you or your business thousands in taxes. Who doesn’t want that? In order to achieve tax efficiency, your business would need to accelerate expenses and/or defer income.
For cash basis companies, one way to accelerate expenses is by prepaying expenses. If you are planning on buying new software soon or going on a business trip early in the upcoming year, pay for it before the end of the current year. Those expenses will reduce your taxable income in the current year and reduce taxes. You could also pay your bills earlier. If you have outstanding vendor invoices that are not due until January, pay them before 12/31.
Defer income if you can. Delay billing your customers or delivering goods and services until after the New Year. Both ways would reduce your sales in the current year and reduce your tax liability.
Year-end is a good time to make a charitable donation. Not only for the moral value of fulfilling your corporate social responsibility but for the tax advantages. Your business could donate cash or property. Charitable donations are 100 percent deductible on your business tax return for the fair market value of the donation.
If you are thinking about purchasing new equipment for your business, do so as a part of your year-end activities. Businesses are now entitled to a tax deduction up to $510,000 for equipment placed in service before 12/31. Equipment could include office furniture, computers, or even software.
Performing year-end activities is a vital part of running your business and tax planning. Doing so keeps you one step ahead and on top of all your responsibilities. Most business owners enlist the help of a CPA to assist in this process. Consider the accounting services of LYFE Accounting!