Stop banging your head against the wall to complete year end accounting for your small business. Instead, think of it as an opportunity to reflect on your business’s financial health.
Read on to learn more about year end accounting, to get a checklist to get it done right and to see how it can help your small business reach its goals for next year.
Jump ahead to learn:
Year end accounting, also known as closing out the books, is a term for balancing out your fiscal year as a company. It means formally documenting the end of the year’s financial transactions by generating statements and reconciling your business’ financial accounts.
Any consecutive twelve months is considered a fiscal year; it needn’t be January through December. You choose your business’ fiscal year when you register your business. Planning your business year differently than a calendar year may be advantageous if you have busy seasons — if you run a retail store, for example, December is probably too busy for accounting year end. If possible, plan year end accounting at a slow time for your business.
Hiring a certified accountant for your accounting can be a worthwhile investment. They can lead your year end accounting efforts, and you can focus on your business.
We talked with CPA Riley Adams of WealthUP, who wants small business owners to stop procrastinating with their year end accounting. He suggests, “Make routine efforts to minimize the amount of time you spend handling important to-dos that pile up at the end of the year.”
Procrastination is not the only roadblock. Here are some other accounting challenges you could face:
Finally, year end accounting can also be challenging because your finances change as you prepare. Adams explains, “Year end also often involves bonuses or prepayment of large expenses for the coming year to capture a greater tax deduction this year. That means you’ll need to manage cash flow appropriately.”
A lot goes into the end of the year for a business. Here’s how to break down your year end accounting tasks to fit it all in.
Year end accounting has many moving parts; you need to work from a list and a schedule. Here’s how to organize your accounting calendar:
Here are some of the documents you’ll need to collect to complete year end accounting:
Build in time for delays and communicate expectations with employees who need to gather and hand over accounting material. Accounting software can help automate things like invoice reminders for your clients.
Make sure your day-to-day bookkeeping is current before you start year end accounting and reports.
Ideally, you should maintain a bookkeeping process each year. But no business is perfect, and you may need to play catchup.
Learn more about a year end bookkeeping checklist.
Company assets have value you could exchange for cash, and it’s different from your bank account balance. This could include things like tools, vehicles, computers and cash on hand.
Total up the assets for your company by including things such as cash, product inventory, physical stock, materials and anything else of value your company owns.
Reconciliation means comparing your records to what’s listed on official records like bank statements or credit card statements. They’re both different than an official business accounting report, but you can verify your year end accounting against them.
Here are some common statements a small business owner should look at to reconcile business accounts:
Riley Adams, CPA, explains, “This doesn’t necessarily entail a lot of extra work on your part because so many financial tools and apps automate part of this process for you, saving time and attention you can allocate to other important matters.”
Your accounts payable and receivable are likely to be the hardest to close out at the end of the year. That’s because business doesn’t stop; you pay bills and receive customer payments as you go.
Simple reminders and communication can help speed the process. Do this:
This is also the time to check your autodraft payments for things like loan payments from vendors and suppliers to make sure you’re paying the right amount.
If you’re in retail, you must count and record your physical product inventory as part of your year-end accounting and compare it to your inventory balance.
You can write off lost or perishable items you can’t sell; adjust your books accordingly. If you’re dealing with a lot of inventory loss, you may want to consider retail store insurance or e-commerce insurance.
If you have employees, there are payroll expenses that you need to include in your end-of-the-year accounting:
Many companies managing a large team use payroll software to simplify this step. Payroll software can help you expedite the recording of your expenses for your year end financial reports.
There’s a lot of prep that culminates into three major accounting documents. You can prepare your year end accounting reports once your reconciled accounts are accurate.
Your small business balance sheet should balance. That means your assets should equal your liabilities and equity. Or: assets = liabilities + equity.
Let’s break this down with an example. Your lemonade stand needs $1000 to launch. You get a $500 loan (debt) and invest $500 of your own money (equity). You now have a $1000 lemonade stand, which is your asset.
Most businesses are far more complicated, but your balance sheet should reflect all assets, debt and equity.
Also known as an income statement, this document shows a company’s revenue, expenses and costs over a period of time — in this annual report, it would be for the year.
Profit and loss statements help give business owners a view of profitability. You can use it to look closely at how to lower expenses and increase revenue. It’s also vital if you want to measure financial growth over time or qualify for funding.
Companies need cash to pay employees, buy inventory and pay other bills. If a small business struggles with cash flow, its operations may suffer. Differentiating profit from cash gives you a broader view of your business.
A cash flow statement details how cash flows in and out of a company. This is different from the income statement that details all income.
Reconciling the annual books gives a business the tools it needs to plan and set goals for the end of the next financial year.
Look at your profit margin and debt ratio to examine the financial health of your business.
Adams differentiates this from simply reconciling your books. It’s a time when you can examine how your business spends and makes money.
“Software can highlight potential outliers, data problems or other irregularities, leaving you more focused on resolving unusual financial items and handling the nuts and bolts of reconciling your books.”
Your tax return doesn’t always coincide with your financial year, but it does if your financial year ends with the calendar. Your year end financial reports can help to prepare your small business tax return.
Accounting year end can also help your business get strategic about how you influence your tax bill. Adams explains that you can lower your final taxable income or increase expenses for deductions.
He says, “You can do this on the income side by taking simple steps like deferring sending out invoices until later in the month (or even early in the new year) to have cash hit your books after the end of the year, or on the expense side by prepaying certain expenses ahead of time and getting to claim the deduction in the current year.”
Examining your budget from the previous year is helpful because it shows what you got right with your previous financial forecast. When you compare it to the actual financial figures of your accounting year, ask yourself:
With data and analysis, your business can now find areas to reduce costs, where you’re most profitable and growth opportunities. Base your budget on the trends you see.
Make your goals measurable and specific based on your current financial results. Divide your goals into months or quarters so they are more manageable. Consider seasonality in your industry. For example, it’s not reasonable to set equal monthly earnings goals if you’re in landscaping and construction. You’ll need to factor in the slowdown of the winter months.
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Jessica spent over a decade working in education before moving into content marketing. She has worked on content marketing campaigns in the edtech, real estate, and personal finance sectors. She has a passion for working with companies that take the time to educate their customers. When she’s not working, she’s probably outside with her two kids.
