A Streamlined End-of-Year Financial Checklist for Proactive Small Business Owners
By: Shay James
Financially-organized business owners. You know them, or at least you’ve heard of them. Business owners who manage to get ahead of year-end financial tasks like tax preparation and preparing up-to-date books. Business owners who make itemized lists. They check their lists twice. And at the end of the fiscal year, they probably even check them thrice.
Is that even a thing? Yes, yes it is. And we’ll help you realize why.
Whether you outsource your CFO services (if that’s the case, then we’ve got you covered), or you prefer to tackle year-end tasks yourself, it’s wise to come to terms with the financial health of your business as you enter a new year.
Our streamlined end-of-year financial checklist will give you a snapshot of how to do just that. Are you ready? Let’s get organized, organized [insert your best Olivia Newton-John moves here].
Conduct a Physical Inventory
If you are an inventory-based business, track the quantity and value of all inventory items you have in storage. Taking inventory will help you ensure your financial data is accurate before you begin analyzing everything in detail.
Inventory items consist of the parts and final products you manufacture or purchase to sell to your customers. Remember, your inventory is an asset, so once you’ve accounted for every item, make the adjusting journal entries associated with the inventory. You’ll also want to update your income statement and balance sheet accordingly.
Review Financial Documents
Consult your CFO services team or use accounting software to generate a financial report for your business that includes all relevant documents, such as your profit and loss report, your balance sheet, and your cash flow statement. Take time to print your documents and read them carefully with a pencil in hand.
Through analysis of your financial data, you’ll be able to assess your company’s health and position and see where to make adjustments for a more profitable year to come. Keep in mind that your CFO services team can help you prepare these reports following generally accepted accounting principles (GAAP).
Profit and Loss Report
Also known as an income statement or operating statement, your profit and loss report provides a distinct look at your income accounts and their balances (revenue), your expense accounts and their balances, and your net profit (business revenue minus business expenses).
You’ll want to pay close attention to your profits and losses to determine how to adjust your budget for the future. See our previous blog post, How to Create a Budget for Your Business in 5 Simple Steps, for tips on calculating your profit and loss statement and improving your profit margin.
Balance Sheet
Your balance sheet helps you, along with loan officers and current and potential investors, to assess the strength of your business. It’s also referred to as a statement of financial position. This statement shows what your business owns (assets), what your business owes (liabilities), and its equity.
Cash Flow Statement
Cash flow signifies the amount of money your business started with and ended with over a certain period. A cash flow statement helps you identify the cash flow from everyday business operations like revenue and expenses, from investments like assets bought and sold, and from financial decisions you’ve made like taking out a business loan.
Identify and Address Outstanding Accounts
Accounts Receivable
Your accounts receivable (A/R) report shows how much money each customer owes and the accounts aging report, which reveals how long invoices have gone unpaid. If there are too many outstanding receivables and your A/R balance is high, your ability to financially operate your business may be in jeopardy.
With this in mind, while you may not be able to collect all outstanding debts before the year’s end, make it your mission to resend invoices or notices to collect any money owed to the business. You can offer incentives like discounts for prompt payments or penalties for late payments as a way to reconcile your A/R.
Accounts Payable
An accounts payable (A/P) report will detail vendor bills you’ve entered that you have yet to pay. You’ll see the balance and the length of time you’ve owed that balance. If you don’t have the cash to pay vendors right away, you should carefully consider and prioritize who to pay and when to pay them, as late repayments can impact your business credit.
Reconcile Bank Statements
Your bank statements are one of the best sources of information about the financial standing of your business. While most business owners reconcile their bank account monthly, you’ll want to be especially certain that all of your balances are accurate at the year’s end, as this will have an impact on your tax projections and tax planning.
On your bank statement, you’ll see itemized deposits, withdrawals, and other transactions like account fees that impact your business account. Compare your year-end bank statement with your balances in your general ledger. Be sure that balances from your statement and ledger match, and if they don’t, determine the reasons for the discrepancy and reconcile any differences.
When reconciling your bank statement, look out for fraudulent activity, double or missed payments, unexpected banking fees, or other miscalculations. This is also a good time to double-check your payables and receivables.
Manage Tax Documents
Set up a consultation with your CFO services team to review your financial reports and income taxes to prepare for tax season before they get too busy. In fact, setting up a meeting with your account at the end of the year can help you prepare for the final year’s tax bill that will be due in April. An earlier meeting also gives you more of a chance to engage in tax planning that may lower your tax liability.
If you do payroll and tax preparation in-house, you will prepare your tax forms and tax returns either on paper or electronically. You will file all tax forms with the Social Security Administration, your state’s Department of Revenue, and any other relevant local tax authorities. You will also need to keep a copy of all forms for your business records.
Forms W-2, W-3, 1099-NEC, and 1099-MISC
If you have employees, you’ll need to report their wages earned for the year. Employees will each complete Form W-2 (Wage and Tax Statement). Form W-3 (Transmittal of Wage and Tax Statements) is filed in conjunction with Form W-2. For Form W-3, review all of your employees’ W-2 forms and report the wage and tax information totals.
If you’ve hired independent contractors, they will complete Form 1099-NEC (nonemployee compensation). Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) is similar to Form W-3 in that it’s a summary that accompanies your contractors’ Form 1099; it only needs to be completed if you are submitting your Form 1099s by mail.
Additionally, 1099-MISC’s must be completed if you paid an attorney or rents in the amount of $600 or more during the tax year. Failing to submit any 1099 correctly can result in penalties in the amounts of $50 to $110 per Form. Willfully failing to submit a correct 1099 can result in a fine minimum of $550 – and there is no maximum.
Tax Returns
You will report the profits and losses of your business on your tax return forms. Different business entities use different methods of filing, so consult your trusted tax advisor or carefully review filing guidelines to determine the correct forms to complete and submit.
Develop a Financial Action Plan
Now that you’ve taken a good look at your business finances, you can develop a plan for new and continued growth. Keep in mind, small changes can make a big difference when it comes to the financial well-being of your company.
Reflect on and weigh your options for change, and consider entering the new fiscal year with several SMART goals connected to your business’ financials.
For example, you may want to reevaluate your pricing strategy, which means you’ll have to decide whether to raise your rates with existing clients. Along with that, you may want to pay yourself more next year, so you’ll have to determine the right avenue to make that goal a reality.
Or, you may see that the rewards you earned on your business credit card didn’t make up for the annual fees associated with the card. In this case, you should shop for a better credit card or build your credit to apply for one that charges no annual rate.
Lamplight Advisors knows designing a plan for the future is key, but we also know that in business, there’s no time like the present. Let us help you check off your year-end tasks so that you can put more time and creative energy into your business. To see if we can help your small business reach new heights in 2022, click here to schedule a conversation today.