As your first year as a business owner comes to a close, there’s a lot to think about. One of the more important areas to focus on is finances. Even if you started your business because you’re passionate about the work, at the end of the day, if you’re not bringing in money or you get fined with a tax penalty, you may struggle to keep your doors open.
Don’t let poor financial hygiene keep you from running your business. Instead, prep for the new year with this end of year financial checklist.
Review the past year
As the year comes to a close, it’s important to reflect on how you did financially. To do so, Quickbooks recommends looking at a few standard reports, including a profit and loss statement, balance sheet and cash flow statement.
Most important, according to QuickBooks, is your profit loss statement. It explains: “This is the best way to tell where your business stands financially and what your outlook is like for next year.”
As you go through these reporting sheets, don’t forget to ask yourself whether profits were larger than expected. If so, QuickBooks suggests making “some larger purchases for which you can record future depreciation.”
Create your annual financial plan
After looking back on your finances for the past year, it’s time to plan for what’s ahead by creating your Annual Financial Plan. This is critical for all business owners, suggests Rebecca Lake, finance expert with Investopedia.
She says: “An annual financial plan is a guidebook of sorts that tells you where you’re at financially right now, what your goals are looking ahead and what areas or issues need to be addressed so that you can meet those goals.”
This plan should cover finances in every area of your life, including investing, taxes, and your outlook for retirement. It can be as comprehensive or straightforward as you’d like, as long as you can paint a clear picture of what to expect in the new year, along with what that means for your business.
Check out the financial templates from SmartSheet if you’re not sure where to get started.
Get your taxes sorted
Now is the time to meet with your CPA or financial advisor to prep for the 2020 tax season. Going in without an idea of what you can expect can bring on surprises. It also allows you to address questions you may have, especially as a first-time business owner.
For example, if you’re paying full-time employees there are important rules you need to follow when reporting that income during tax season—and if you don’t, the potential consequences can fall onto you personally, even if you have a corporation.
Robert Leonard, Attorney at Law and CPA, explains: “There are situations where having a corporation can shield you from personal liability. Unfortunately, that is not the case with payroll tax debt. The IRS will hold you personally responsible if they determine you are a responsible person. The Internal Revenue Code is notoriously complex, particularly for rules governing business taxes. It is easy for business owners to run afoul of the IRS when trying to calculate and pay its payroll taxes."
Don’t let any area of your taxes become an expensive headache. Instead, make an appointment to see your CPA and get the details sorted now.
Update and categorize your deductions
A benefit of being a business owner is that you can deduct business expenses to lower your total taxable income. The challenge is keeping track of those expenses year round. If you haven’t maintained a record of purchases or tracked spending with a financial tool, you’ll have to sit down now and do it the old fashioned way.
This means opening a spreadsheet, gathering receipts, and looking through your business credit card report to tally and categorize all the purchases you made throughout the year. If you have tracked all of those expenses, this part is easy. Use this time to make sure all your categories are current and that you aren’t missing any potential deductions.
Check out the 10 commonly missed small business tax deductions to make sure you catch everything.
Assess costs and cut back where possible
End of year is the perfect time to look at what you’ve spent and where there are opportunities to cut back. It’s easy to sign up for a tool at a low monthly rate and then forget about it 6 months later, while still paying that monthly fee.
Start here, with monthly subscriptions that you no longer need. Cancel accounts and clear the slate. Next, move onto insurance. A call with an agent will allow you to see if there are any more affordable options that you can switch to. Be thorough and check all insurance plans, including health insurance, business insurance and any other industry-specific insurance you currently pay for.
Finally, check on all vendor costs. Who are you paying and do you still need them? Are they running any end-of-year deals you can take advantage of? If not, you can also consider looking for new vendors or contractors that cost less while providing the same value.
Your EOY financial checklist
Being a new business owner means there’s a lot to think about as you wrap up for the year and this EOY financial checklist is the perfect place to start if you need to get finances in shape. If you can make time to prep for taxes, cut costs, and create a financial plan, your business will be ready to thrive in the upcoming year.