As the year comes to an end, you naturally begin to reflect on all that it brought. You may think about your successes, as well as what can be done differently moving forward. While reflecting, the end of the year may bring a sense of relief for some business owners. However, for others, it may feel extremely overwhelming. No matter what the fourth quarter looks like for your business, there are several key components that every business owner should address as they prepare for year-end.
Accounting Book Review
As January approaches, it’s essential to ensure that all your accounting books are accurate and up-to-date. As a business owner, you may cringe at the thought of these administrative and accounting tasks. Ideally, you should be checking your books monthly. If you have not done so, your financial reports may be inaccurate, and you may be missing an opportunity to proactively spot trends in your data. Reviewing your books throughout the year makes for a much easier end-of-year close.
When reviewing your books, the first step is to check your balance sheet. Many business owners ignore this financial report, but it holds the key to making sure your books are accurate. You are looking for things that stick out, like assets or liabilities that show a negative balance, large accounts receivable that don’t match up to what you know about what customers owe you, loan or credit card balances that have not changed through the year even though you have made payments. Each of these items is an indication of incorrectly recorded transactions.
Now you can move on to looking at your detailed transactions. Ensure all proper documentation is saved and transactions are recorded with the payee, account, amount, and business purpose. If you find yourself unsure about a transaction, now is the time to reach out to your accountant to discuss how to record the transaction and how it will affect your tax return.
Once your transactions have been recorded and reviewed, double-check that all money is where it should be. Are you up to date on paying your vendors? Do any of your clients have unpaid invoices? Are all your accounts reconciled? It’s essential to have all accounts in good standing prior to year-end.
Vendor Review
As you prepare for year-end, you want to ensure that all your vendor information is accurate. Now is the time to update addresses and check that you have a W-9 on file for every vendor. You also want to identify which vendors will require a 1099. Generally speaking, you must issue a 1099 form to anyone you have paid $600 or more. This applies to your contractors, attorneys, accountants, consultants, website developers, coaches, and anyone else you paid for services rendered.
Employee Review
Just as you do with vendors, your employee information should be reviewed and updated so that all your W2s are delivered correctly. At this time, it is also beneficial to complete a compensation review. Employee satisfaction is an essential part of any company, so giving hard-working employees a raise is an integral part of your business. As you evaluate giving compensation reviews, consider market-based comparisons and cost of living adjustments. Year-end incentives are also a fun way to engage and reward your hard-working employees.
It’s equally important to reassess the staffing needs of your business each year. First, look at your employees. Are they fulfilling their roles? Do you have the right people in the right positions? Next, look at your business. What were your staffing needs like this year? Were they fulfilled? What do you need to plan for in the upcoming year?
Prepare for Tax Season
Even with proper planning, the inconvenience of tax season remains. Preparing the paperwork is often a significant pain point for business owners during this time. Paperwork preparations include gathering receipts, this year’s W-2s and 1099s, your tax return from the previous year, deductions, and more. Ask your tax preparer for a copy of their tax checklist to help you organize and collect all the records you’ll need to file your tax return. If you prepare your own return, QuickBooks offers a printable tax checklist here.
In addition to gathering all necessary documentation, there are four other necessary considerations when preparing for tax season.
- Estimated tax payments – Have you made your estimated tax payments and adjusted payments for increased revenue/expenses? While “safe harbor” tax estimates keep you from incurring penalties, it does not lessen the shock of unexpected taxes due at filing time – use your up-to-date financials to determine if you need to set aside additional funds to pay taxes.
- Year-end purchases – It’s never a good idea to spend money just to save on taxes. However, if it is something you need regardless, purchasing before the end of the year can help minimize your tax situation.
- Retirement plan funding – Retirement plan options can be an excellent way to manage taxes and put aside funds for your and your employee’s retirement. As a small business owner, planning for your retirement is entirely up to you, but the good news is there are a variety of low costs, easy-to-administer plans available to small business owners outside the standard 401k or IRA. If you need help deciding what type of plan is right for your business, consult your investment advisor or, for a do-it-yourself option, check your Vanguard’s small business retirement plan guide. Generally, you have until you file your taxes to fund your retirement accounts but now is a great time to ensure you have the cash to do so.
- Client invoicing – Review your current projects and your income expectations. Do you need to catch up with your client invoicing or perhaps wait until early next year to bill some accounts? Keep in mind most businesses pay taxes on a cash basis, so managing the timing of billing and collecting accounts can be a tax planning tool.
Reviewing 2022 Goals
As the fourth quarter is in full swing, you may start to reflect on this business year. Setting and reassessing annual goals are crucial for the success of a business. Ideally, you set measurable goals at the start of the year. Are you on track to meet these goals? If you feel you will be cutting it close, devise a strategy to still achieve these goals. If your key performance indicators(KPI) predict that you will fall short or exceed your 2022 goals, utilize this information to help set realistic targets for 2023. Additionally, use this time to re-evaluate your KPIs to ensure that you are tracking the most valuable data.
Set New Goals for 2023
Once you have gathered your tax documents, reviewed your books, updated necessary records, and analyzed your business, you may feel lighter. The tedious year-end work is almost complete. At this time, you can switch your focus to the future of your business.
Setting goals each year should be a non-negotiable task. Determine what overarching goals you would like to develop, create a budget and set your KPIs. To make your goals more digestible, divide them into manageable and measurable parts. Having a big goal might seem intimidating. However, if you approach things incrementally, even the biggest ones seem possible.
Minimize the Stress
By planning ahead, staying organized, and utilizing the various resources available to you can significantly lessen stress as the year comes to an end. At ClariFI Business Solutions, we can help you manage even those most complicated end-of-year prep and tedious tasks seamlessly.
As we move into 2023, make sure to plan ahead for success and ease, identify all new opportunities, and stay focused!
Sources:
https://quickbooks.intuit.com/r/taxes/small-business-tax-prep-checklist/ess
https://investor.vanguard.com/accounts-plans/small-business-retirement-plans