Accounting year end: How to analyze profit and loss for small business

Accounting year end: How to analyze profit and loss for small business

Jessica Crosby
By Jessica Crosby
Dec 15, 2023
1 min read

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:

What does year end accounting mean?

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.

4 end of year accounting challenges

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:

  1. Your business does not have a bookkeeping process. Ideally, your accounting should be consistent in finalizing reports and bottom lines by the time you get to the end of the year. If you don’t maintain your books now, plan to start doing it next year.
  2. Human error. Not everything can be automated, and human error could mean accounts that don’t reconcile. Try to minimize manual entry and automate as much as possible.
  3. Missing documents. Compiling necessary documents can be a huge timesuck. Have a filing and organizational system in place to prevent lost paperwork.
  4. Poor communication between departments. Sharing documentation between employees and departments can be a struggle. Put a system into place that makes critical data such as invoices and contracts accessible.

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.”

Small business year end accounting checklist 

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. 

1. Create a schedule

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:

  • Create a timeline with dates. Break down all significant tasks and map them onto a calendar. 
  • Add reminders to your calendar. Build in time to remind customers and employees that you need materials and money. 
  • Get a headstart: If it’s possible to get something done early, do it! The end of the year is busy and it’s best to lighten your load.

2. Gather documents, outstanding invoices and receipts

Here are some of the documents you’ll need to collect to complete year end accounting:

  • Bank statements
  • Credit card bills
  • Last year’s tax returns
  • Invoices
  • Loan and bank documents
  • Expense reports
  • Budgets
  • Inventory
  • Payroll documents

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. 

3. Organize bookkeeping and accounting books

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.

4. Review your business asset account

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.

5. Reconcile your business accounts

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:

  • Bank statements
  • Petty cash holdings
  • Credit card statements
  • Income (from invoices) and expenses (from bills and receipts)
  • Loans (and be sure to separate your principal and interest on your balance sheet)

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.”

6. Close out accounts payable and accounts receivable

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:

  • Make sure you’ve paid all your bills. 
  • Remind customers that they should pay their invoices. 
  • Contact suppliers and vendors to ask them to cash checks so you can reconcile.

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. 

7. Take inventory

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.

8. Complete end-of-year payroll

If you have employees, there are payroll expenses that you need to include in your end-of-the-year accounting:

  • Insurance
  • Transportation and gas expenses
  • Bonuses 
  • Outstanding contractor invoices

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.

How to prepare 3 year end accounting documents

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. 

1. Balance sheet

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. 

2. Profit and loss statement (P&L)

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

3. Cash flow statement

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. 

How to plan for the future with year end accounting 

Reconciling the annual books gives a business the tools it needs to plan and set goals for the end of the next financial year. 

1. Analyze your business’s financial state

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.”

2. Start preparing for taxes

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.”

3. Compare your budget to reality

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:

  • Do they match up?
  • Were your goals realistic? Did you achieve them?
  • What are reasonable business goals based on your current rate of financial growth?
  • Where can you improve your small business financial situation? Were your costs and expenses predictable in your previous financial goals? 

4. Come up with new goals and a budget

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.

How NEXT helps small businesses grow

NEXT helps small businesses get just the right insurance coverage they need. We make business insurance easy with 24/7 access to your policy via web and app to help you manage your coverage.

Start a quote, customize your options and access your certificate of insurance online — all in about 10 minutes.

Start an instant quote with NEXT today.

banner get business insurance in 10
Jessica Crosby
About the author

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.

What we cover
Chat with Us

Mon – Fri | 8 a.m. – 5 p.m. CT

© 2024 Next Insurance, Inc. 975 California Ave, Palo Alto, CA 94304, United States
Better Business Bureau
Issuance of coverage is subject to underwriting. Not available in all states. Please see the policy for full terms, conditions and exclusions. Coverage examples are for illustrative purposes only. Your policy documents govern, terms and exclusions apply. Coverage is dependent on actual facts and circumstances giving rise to a claim. Next Insurance, Inc. and/or its affiliates is an insurance agency licensed to sell certain insurance products and may receive compensation from insurance companies for such sales. Policy obligations are the sole responsibility of the issuing insurance company. Refer to Legal Notices section for additional information.

Any starting prices or premiums represented before an actual customer quote are not guaranteed and are representations of existing premiums of active policies as of December 6, 2023. To the extent permitted by law, applicants are individually underwritten, not all applicants may qualify. Individual rates and savings vary and are subject to change. Discounts and savings are available where state laws and regulations allow, and may vary by state. Certain discounts apply to specific coverages only.