As the year winds down, your accounting needs ramp up. There are tasks, major and minor, that will ensure your business is ready for a fresh start in the new year. The problem for many small business owners is that year-end tends to be the busiest time of the year, leaving those tasks on the back burner. It can seem overwhelming, with so much to get completed in so little time. Where do you start? What needs to be accomplished? How do you prepare for the new year?
Below you will find a year-end checklist for small business owners, and tips for starting the new year on the right track. The checklist can ensure you are aware of what needs to be done, and our best tips for getting started.
Top four year-end checklist tasks for small businesses
1. Ensure you have a complete picture of your taxable income
Many business owners who’ve closely watched their P&L reports throughout the year are surprised by their taxable income. Remember, personal expenses paid out of the business account and shareholder distributions don’t show up on your P&L, but they do move money out of your bank account—and they count toward your taxable income. Loan principal payments can also be misleading. If you’re making payments on an asset that you’ve already depreciated, those payments aren’t deductible expenses (although the interest is a valid deduction).
Remember, there’s more to understanding your taxable income than what shows on your P&L statement. We recommend our clients utilize their cloud accounting apps to regularly pull financial reports, including P&L statements, in order to have an accurate picture of the business’ financial health all throughout the year.
2. Clean up and reconcile your business books
The year has come and gone. If you haven’t locked down your books throughout the year, take the time to do so now. Don’t forget to:
- Never post-adjust entries from prior years. If you’ve uncovered a past mistake that needs to be corrected in your books, take care of it now in this year’s books. Never change a past year, unless you’re amending that year’s tax return.
- Reconcile bank and credit card accounts. Hopefully, you’re used to reconciling bank statements. Are you doing the same for your business credit cards? Although you pay credit card balances in a monthly lump sum, the individual expenses should be booked to the proper accounts.
- Reconcile loan balances against statements. Again, keeping up with these reconciliations throughout the year will save you time at year-end.
By cleaning up your books, you’ll be better prepared for tax season, and you won’t be left paying a hefty fee for data clean-up work. Review uncleared checks, any discrepancies, and ensure all liabilities have been taken care of. If you’re self-employed, make sure all estimated taxes have been paid; if you have employees, double-check that all payroll taxes have been remitted.
By the way, Xero has a great feature that allows the business owner to set a new password for each month’s books, reducing the risk of internal control issues and theft. If you’re struggling to find the time for bookkeeping every month, send us a message. We offer business bookkeeping services and can help you migrate to the cloud to allow for virtual, secure collaboration.
3. Start organizing documents you’ll need at tax time.
If you’ve made significant purchases in the past year, collect and organize the documents your accountant will need to create a depreciation schedule. Don’t forget to include documentation of related loans. It’s also a good idea to create a folder for the tax mail that you’ll receive in January. Did you pay any contractors over $600? Collect the information you’ll need to file 1099s in January.
Don’t forget that many business expenses are tax-deductible. No matter how small they may seem, expenses can add up over the year and help to reduce your tax burden. Ensure you have receipts and invoices saved or uploaded to your cloud-accounting tool for easy access. If you haven’t yet entered them into your system, do so now.
4. If your business is an S-Corp, notify your payroll company of your owner benefits.
S-corp shareholders who hold 2% or more of the company need to report their benefits (health insurance, auto insurance, etc.) on their W-2s. If your payroll company handles these, make sure they’re aware of the appropriate numbers.
Five tasks to prepare your small business for the new year
1. Set a business budget
Preparing for the new year wouldn’t be complete without setting a business budget. In order to accurately develop a budget for the year, you will want to take a look at your financial statements to examine your revenue, expenses, and current assets. Reports can be pulled quickly from your cloud-based accounting system. From the dashboard, you can pull monthly and yearly reports.
Tips for setting a business budget
In order to make money, you will need to spend money, and the expenses will vary depending on the nature of the business. For instance, if you keep inventory on hand, your budget will need to account for that.
When setting a budget, take inventory of what the business already has, additional staff that may need to be brought on, and any large purchases that need to be made (such as new technology, furniture, or even real estate). Keep in mind, budgets can and should be evaluated throughout the year, especially if there is sudden growth or unexpected expenses. In most cases, business expenses will qualify as tax deductions.
2. Set sales goals
When pulling reports for budgeting, be sure to keep them on hand in order to set sales goals. Based on previous sales figures, goals, and growth, the company should have a foundation in order to set realistic, achievable sales goals. Setting sales goals can sometimes be a guessing game if you’re unsure how to use your financial reports to create a projection.
Not sure how to set a small business sales goal? Working with an outsourced CFO can provide the financial expertise needed to create projections, as well as set sales goals and budgets. Outsourced CFOs are a great option for smaller businesses, those just launching, or those in need of temporary assistance as they don’t come along with the financial burden of a full-time hire. Outsourced CFOs can provide services on a part-time or interim basis, and they can accommodate a range of budgets.
3. Update technology to manage your business finances
There’s no better time than the present to find areas of opportunity. As a business owner, consider how you can tap tech to increase productivity. Are there any processes that could be automated? Investing in technology can be one of the best ways to improve the business and give you back valuable time. Cloud-based accounting apps can automate repetitive tasks, such as expense reporting, payroll taxes, and data entry. Adopting cloud-based accounting apps gives business owners a real-time picture of their business from anywhere at any time. Make it your new year’s resolution to save time and money going into 2023 by integrating cloud-based accounting solutions into your back office.
4. Year-end tax planning
If you haven’t already done so, schedule a time to speak with your CPA about a proactive tax strategy. A year-end tax planning meeting will include a tax projection so you know what’s coming in the spring. From there, you can estimate future taxes owed and make a plan that includes tax-savings opportunities. If you’re projecting a substantially successful year, you may want to consider large purchases for the company, such as equipment upgrades or other deductible expenses that will not only benefit the business and its employees but also the tax picture. A word of caution: if you’re making large purchases with the goal of reducing your tax bill, be sure to consult with your CPA and understand the allowable deduction.
5. Don’t forget to send 1099s
If your business uses the services of contract employees or freelancers, don’t let 1099s slip through the cracks. Make sure you have collected all the necessary information needed to send out 1099s in January. For businesses with many 1099s, we offer 1099 preparation services to fit your business needs and budget. If you’re unable to send out a 1099 to the contractor and IRS, you will be at risk of fines and penalties for non-compliance.
A successful new year starts now. Preparation is key in order to be able to take advantage of valuable tax deductions, and have a clear picture of your business finances. Take time to review the year-end checklist for small business owners. If you need assistance with year-end small business accounting, or preparing for the new year, send us a message. Your business’ financial health is our mission.