Why Do Small Businesses Need a Year-end Financial Review?

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Small business owners face many financial decisions that impact growth. The last quarter of the year is the best time to review the hard numbers and discover whether you are on track to meet your goals or might miss the mark. If you aren’t on track to meet your projections, take the time to find out why and make adjustments before the end of the year. Start by calculating your current profit margin, analyzing your expenses, and assessing cash flow to get your answers. 

Doing a Small Business Year-end Financial Review 

An annual review begins by evaluating your company’s financial statements, including:

  • Balance sheet – summarizes what your business owns and owes (assets and liabilities)
  • Income statement (profit and loss) – itemizes expenses and revenue and shows if you are making a profit or losing money
  • Cash flow statement – explains where your money goes, such as operating expenses, loan payments, and investments

Conducting monthly or quarterly financial reviews enables you to identify cash flow problems or operational concerns and make corrections before your profit goals get off track. If you haven’t been reviewing your financial reports regularly, now is the time to run a year-to-date report to make sure you are maintaining a healthy ratio between revenue and expenses. Your success depends on knowing where the majority of your income is coming from, identifying cash flow patterns, and finding ways to reduce operational costs. 

Calculating financial ratios such as Gross Profit Margin, Operating Expense Margin, and Owners Compensation as a percent of gross revenue allow you to quickly identify when your business is going off track.  

  • Gross Profit Margin (Revenue less cost of goods sold) tells you when your contractor or inventory costs are creeping up and may indicate your need to adjust your prices or renegotiate vendor contracts
  • Operating Expense Margin (all expenses except cost of goods) helps you identify when the cost of operating your business is going up. A regular review of credit card statements and vendor payments will help you identify rising costs and potentially unnecessary expenses. Review your recurring expenses at least annually to make sure they are all necessary and determine if there are less expensive options available
  • Owners Compensation as a percent of Revenue allows you to evaluate your own financial value to your company. No matter your passion for running your business, you need to make a reasonable (or hopefully even better) salary and be paid for the risk of running your own business. If your compensation isn’t high enough, your accountant can help you identify ways to move toward better profits.

Gathering Data for Financial Statements

Your financial reports include data from all relevant business-related records organized throughout the year to reference when you need them. If you haven’t done it already, start sorting through the following:

  • Operating Expenses
  • Bank Statements
  • Invoices and Receipts
  • Equipment and Inventory
  • Payroll
  • Vendor Contracts
  • Rent or Mortgage
  • Loan and Credit Card Payments
  • Insurance Premiums
  • Tax Forms and Records

Once information is transferred to spreadsheets or an accounting program, review your financial reports, save the necessary documents, and purge the rest. Your accountant or financial advisor can explain what to keep, for how long, and why. Most records are kept between three and ten years, either in their original form or scanned and saved on your computer. 

Preparing in Advance for Tax Season 

Most business owners outsource tax preparation because it is time-consuming, and it takes some tax code knowledge to be sure you are filing correctly. Your accountant can help reduce your taxes by taking advantage of relevant business deductions that you might not be thinking about. They use the information on your balance sheet, income, and cash flow statements that contain records of:

  • Major purchases used for business purposes that may qualify for immediate expensing or may need to be depreciated over time
  • Identifying hidden expenses such as home office deductions, use of personal vehicles, and other business expenses paid directly by the business owner
  • Identifying the right type of retirement plan for your specific business and maximizing deductible retirement plan contributions 
  • Determining the deductibility of health insurance premiums or Health Savings Account (HSA) payments that may reduce your tax liability

Keeping your financial reports up to date allows you to estimate annual taxes in advance to make quarterly payments or set aside money in a separate account until the tax filing date. 

Evaluating Your Staffing Needs

Fourth quarter is also the time to audit employee and vendor records to make sure you have the correct contact information and tax ID numbers for your required year-end filings. You are responsible for providing W2s to all your employees,1099’s to anyone you paid during the year, and filing this information with the IRS.  

While you have these records handy, it’s a good time to start thinking about your future needs. Will you be adding a new full or part-time employee shortly? Do you have contractors that really should be paid as employees? Looking back on the previous year should offer some insight. Ask your accountant or CFO how to build hiring costs into your budget. You are likely to have a few options.

As you review your current year results, take the time to determine your financial goals for the next 12 months. Small business owners who set aside time to evaluate their business performance and strategize ways to meet financial goals are more likely to see their businesses thrive. Seeing the big picture allows you to discover where your business could improve and identify the additional resources needed to meet your goals.  Now is the time to consider making changes, such as: 

  • Applying for a business loan for working capital
  • Hiring more people
  • Expanding locations, products, or services 
  • Assessing your inventory to adjust capital investments 
  • Evaluating service contracts for potential renegotiation 

As a business owner, you may have initially taken on finance and accounting roles and let bookkeeping and reporting slide to handle other pressing business matters. But if you want to scale or grow your company, rely on a professional accountant, CPA, or CFO to answer financial questions impacting current and future business plans. 

Contact us to learn how we help clarify your business goals with a small business year-end financial review! From setting up your accounting records to preparing financial forecasts, you’ll have the information you need to make significant business decisions that improve your operations and allow you to scale successfully in the new year.