9 Things Every Small Business Owner Should Do to Protect Their Finances Before Year's End
For most people, the end of the year means making vacation plans, getting together with family, buying gifts, and attending parties. Small business owners aren’t so lucky. They’re often working right up through the end of the calendar or fiscal year—and then immediately jumping into the next one. It’s hard work, but it’s worth it.
Because this time of year is so busy, even the most diligent SMB owners occasionally let important end-of-year to-dos slip past them. Unfortunately, forgetting to do even the smallest task can have a ripple effect into the following year, resulting in extra work or even undue tax burdens.
With that in mind, we’ve compiled the ultimate checklist for small business owners to consult as the year winds down. Here are 9 things every small business owner should do before the year is up.
1. Run all standard financial reports
To get a clear understanding of how well your business is doing financially, you need more than just a gut feeling. If you have an accountant, you can turn to them to help give you an idea of the health of your business. But, if you haven’t quite reached a place where you can afford an accountant, you should consider using an accounting software to generate a complete financial report. These reports typically include three major financial statements:
- Profit-and-loss (P&L) statement: A P&L statement, or income statement, describes and summarizes all the revenues, costs, and expenses a business accumulated during a given period—in this case, the past year.
- Balance sheet: This is a snapshot of the current state of a business’s assets, liabilities, and how much is owed to investors.
- Cash flow statement: This statement summarizes the cash (and its equivalents) entering and leaving a business. It shows how well a business manages its available funds.
You can use the information generated from these reports to drive some end-of-year decision making. If your profits are larger than expected, it may be time to make some investments; if they are smaller than expected, it’s time to adjust your budget for next year.
2. Prepare your tax documents
For most business owners, the year’s end signals the time to start preparations for filing taxes. This means gathering all important financial documents, business records, receipts, and anything else that can be used to prepare your filings.
If you have an accountant, you’ll likely still need to collect your financial statements, payroll information, business expenses, asset additions or disposals, and other important records for their review. You’ll also need these documents if you’re using accounting software such as QuickBooks to file your taxes on your own.
Most employers will also need to file certain forms by January 31 of the following year, so get ready to send these out promptly if they apply to you:
- Form W-2s for each employee who had income, Medicare tax, or Social Security withheld;
- Form 1099 for anyone you’ve paid at least $600, such as freelancers;
- Form 940 to report Federal Unemployment Tax; and
- Form 941 as a quarterly tax return to report income taxes, Social Security taxes, or Medicare taxes.
3. Reconcile your accounts receivable and payable
Do you owe any vendors for work completed during the year? Are you still owed for a project you completed? Generally accepted accounting principles call for you to reconcile the work you’ve completed or had completed this past year—not leaving payments to be collected and then taxed the next fiscal year.
4. Maximize your deductions and reduce your income
If you do find that you’re a bit more profitable than you expected at the end of the year, you have some decisions to make. Instead of carrying that extra profit over to the next year—and subjecting it to income tax, or pushing yourself into a higher tax bracket—why not use it constructively to purchase needed equipment or product that you can then deduct from your taxes?
Not only will you maximize your deductible expenses, you’ll also minimize your taxable income—all in the name of strengthening your business.
5. Determine if you’ll hand out bonuses, and when
Your decision to hand out end-of-year bonuses or holiday gifts in the form of cash may hinge on the performance of your company as well as how profitable you were in the past year. But if you feel your team has done enough to warrant a bonus, decide when exactly you’ll disperse the funds. Handing them out in late December as opposed to early January will, of course, affect your tax bill, but it may not make a huge difference to your employees.
6. Double check your payroll and benefits
If you’re a sole proprietor or don’t have any employees, you can skip this step. But if you do pay people and provide them with salary and benefits, make sure everyone has been paid what they are owed, and that you’ve included any and all fringe benefits, such as a company car or transportation subsidies, into your calculations for how they’ve been compensated this year.
7. Backup your data
Any and all important documentation, customer information, emails, creative briefs, etc. should be backed up and secured. Even if you use cloud-based software such as Dropbox for storing your important files, consider downloading those files and store them locally on your own hard drives. You can also go old-school and print out and file away paper copies of what you want to keep in case of emergency or system failure.
8. Audit your inventory and fixed assets
If you don’t use automated software to track the location and status of either your inventory or fixed assets (about half of small businesses don’t), you might find that what you have on the books doesn’t match what you actually have. If you say you have more inventory on hand than you actually do, you will pay more than you should in taxes on it. The same goes for fixed assets on your balance sheet.
If you still use a manual process to keep track of your assets, audit everything and make sure your ledgers are accurate—then consider switching over to a system that automatically tracks your investments for next year.
9. Create your plan for next year
Speaking of next year, it’s time to start laying out your goals and expectations for the following fiscal year.
Now that you know how your business performed over the last 12 months, what should you expect out of the next 12? Create an action plan for any investments you hope to make in your business, such as rolling out a new marketing campaign, applying for a business loan, engaging in new product development, or upgrading your store or office space.
As you can see, each of these steps helps your business become more profitable, more prepared, and ready for next year’s challenges—and they require you to take action before this year is up. Don’t wait until the last minute to cram important end-of-year chores into the waning hours of December. If you start today, you might even have a minute to enjoy the holidays this time around.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business financial solutions such as business banking accounts and business loans. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
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