I’m always surprised at how many small business owners don’t prepare for their business’s year-end. Sadly, it’s more of a case that “they don’t know what they don’t know!” But spending some time on this annual event can potentially save you a lot of money.
As to why so many entrepreneurs are oblivious to the importance of preparing for year-end has a couple of parents.
To begin, most of the responsibility lies squarely on the shoulders of the business owner. For some unknown reason, far too many owners don’t take the time to understand the financials of their business.
Being an entrepreneur requires you to have an understanding of all aspects of your business if you hope to succeed. So many owners can recite chapter and verse on the merits of social media or other online promotions but can’t read an income statement. This makes absolutely no sense to me.
The root cause for this appears to be that many owners are afraid or don’t want to look foolish by asking questions of their accountants, yet in the next breath complain that it’s bewildering and too complicated. Therefore, like ostriches, they just stick their head in the sand and leave it to their accountants.
This brings me to the second group that can share part of the responsibility – accountants . Now, as a caveat, I personally know a half dozen accountants that take the time to help their clients get a working knowledge of financials statements. These individuals also provide insight to entrepreneurs on how to manage their corporate finances in areas such as cashflow, receivables, etc. Unfortunately, they are in the minority.
Far too often I come across individuals that leave their accountants office feeling they that they are no wiser and everything they heard was in Latin. Sadly, most just sat through the meeting nodding their head pretending they understood. Now in defence of accountants, most will gladly explain anything on the financial statements, if they are asked. Unfortunately, they rarely ask their clients if they truly understand what is being presented. So, a word of advice to owners, start asking questions and don’t stop until you understand.
So, in order to help you prepare for your companies year-end the following areas need to be addressed to ensure you get the clearest idea of where you and your company stand at the closing of each and every year. This process should begin during the final month of your company’s year-end.
Get your invoicing done! Simply invoicing every client for work completed during the current year could make the difference between a good year and a bad year or a good year and a great year! By doing so, you attribute all the income you have generated to the actual year that the work was done. Failing to do so, distorts the actual revenue and expenses you generated during the year.
Often, I see companies showing a loss at year-end and after a little digging, I find they should have shown a profit had they just invoiced their clients.
Get all your payables in whatever accounting system or spread sheet you use. Again, these are for work completed during the current year-end period. Much like invoicing, failure to get your arms around all the expenses you incurred, distort your final financial results.
For example, failing to get all your expenses in could increase your profits for the year. Those profits are subject to taxes. Inadvertently overlooking some expenses mean that you’ll have a higher tax bill, and nobody want to pay more taxes than they need to. So, get a hold of any laggard suppliers you have and get them to send their bills to you.
Does your business carry any inventory? If so, this is the time of year to do a physical count to determine its value. Inventory is an asset and can impact the value of your company. Although a company’s valuation is always important, it is even more so, if you are planning on selling it.
Have you got any bad debts? You know, those clients that are never going to pay you. So, if you’ve exhausted every means to collect and have decided that spending any more time, effort or money in trying to collect is useless , then it might be time to write off the receivable. This also applies to customers who have declared bankruptcy.
The same thing applies to inventory. If you have dead inventory sitting around collecting dust, now might be the year to blow it out at clearance prices and turn it into cash or donate it somewhere, but get rid of it and take the write-off.
Writing off bad debts and blowing out dead inventory, both serve to reduce your net income and when we reduce our net income, we also reduce our, you guessed it, taxes.
In need of a new piece of equipment for the business? This might be the best time to make the purchase or purchases, especially if you’ve generated a profit.
You see most jurisdiction allow businesses to deduct a percentage of the value of their equipment every year. This deduction is an expense and serves to reduce your taxes.
However, the real intent for depreciation allowance is that the government knows that you will need to replace that equipment as it ages. In theory therefore, that allowance should be kept aside for future replacement purchases. But in reality, no one does.
So, the point of that explanation was to bring to your attention to that by buying that new piece of equipment before year-end, you may get the benefit of a whole year’s worth of depreciation expense even though you have only owned it for a couple of weeks. Depending on the item, some countries even allow for a 100% write off in the first year. You’ll need to do your own homework on this one to get the specifics for your country.
As I said earlier, the responsibility for getting your house in order lies with you, the owner. Entrepreneurs need to look at this whole year-end process as getting a report card. Some years you pass and some years you fail, but having accurate information lets you know where you truly stand.
I’m providing this information to get you thinking, but it is by no means an exhaustive list of things you need to do to get ready for year-end. Furthermore, don’t take this as fact until you check your own tax guidelines. As a matter of fact, the easiest way to get that information would be to call your accountant and ask.
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Even a cursory understanding of P/L statement is valuable.Working at this with my accountant.
Absolutely agree. Basic understanding of P&L and Balance Sheet is mandatory. Thanks for commenting.