Year-end is an important checkpoint for any small business. It’s a chance to clean up your books, understand how the business performed, prepare for tax season, and make better financial decisions going into the new year.
The goal isn’t simply to “close the books.” Good year-end preparation should leave you with accurate financial records and a much clearer picture of what worked, what didn’t, and what needs your attention next.
Here are eight areas worth reviewing before you turn the calendar.
1. Make Sure Your Books Are Actually Up to Date
Before you start making year-end decisions, you need reliable numbers.
Review your bank and credit card accounts and make sure they have been reconciled. Look for duplicate transactions, uncategorized expenses, old balances, or transactions that may have been entered incorrectly.
Then review your three primary financial statements:
- Profit and Loss Statement: How much did the business earn, and where did the money go?
- Balance Sheet: What does the business own and owe at year-end?
- Cash Flow Statement: How did cash actually move through the business?
If those reports don’t make sense, that’s worth investigating before handing everything over for tax preparation.
Our guide to Cash Flow vs. Profit explains why your P&L alone doesn’t always tell the whole story.
2. Review Your Business With Tax Season in Mind
Once the books are accurate, you and your tax professional can have a much more productive conversation about year-end tax planning.
Depending on your business and tax situation, that conversation might include the timing of deductible expenses, equipment purchases, retirement contributions, estimated tax payments, or other planning opportunities.
The important part is not waiting until the return is being prepared to start asking those questions.
Bookkeeping and tax planning also serve different purposes. Your bookkeeper’s job is to make sure the underlying financial information is accurate and complete. Your tax professional can then use those records to evaluate tax strategies that apply to your particular situation.
3. Review Inventory and Cost of Goods Sold
If your business carries inventory, year-end is a good time to verify that your records reflect what you actually have.
Inventory affects your cost of goods sold (COGS) and ultimately the profitability shown on your financial statements. Incorrect inventory balances can distort your reports and create problems when it’s time to prepare your tax return.
Construction businesses should pay particular attention to materials, job costs, and other items that may cross from one reporting period into another.
Accurate bookkeeping throughout the year makes this process considerably easier than trying to reconstruct everything after December 31.
4. Clean Up Accounts Receivable and Accounts Payable
How much money do customers still owe you?
And how much does your business still owe everyone else?
Review your accounts receivable aging report and identify invoices that are overdue. An invoice sitting unpaid for 30, 60, or 90 days deserves attention before it turns into a collection problem.
Then do the same with accounts payable. Look for old bills, duplicate entries, unapplied payments, and balances that don’t look right.
This isn’t merely year-end housekeeping. Strong AR and AP processes can have a major effect on cash flow throughout the year.
If cash seems tight even when your P&L says you’re profitable, our Cash Flow Management 101 article is a good place to start.
5. Verify Payroll and Contractor Records
Businesses with employees or independent contractors have additional year-end work to consider.
Review employee information, payroll records, and contractor information before year-end forms are prepared. Missing addresses, incorrect Social Security numbers or EINs, and incomplete W-9 information are much easier to address before filing deadlines arrive.
This is also a good time to make sure workers have been classified appropriately and that payments have been recorded consistently.
If you use payroll software or a payroll provider, don’t assume that automation eliminates the need for review. The system can only work with the information it has been given.
6. Look at What Your Numbers Are Telling You
Once the bookkeeping is clean, don’t stop there.
Compare this year’s results with the previous year and ask:
- Did revenue increase?
- Did profit increase along with it?
- Which expenses grew the fastest?
- Which products, services, or jobs were most profitable?
- Are customers paying you quickly enough?
- Did you experience predictable cash shortages?
- Where did the business outperform your expectations?
This is where bookkeeping becomes more than recordkeeping.
Your financial reports should help you understand the business well enough to make decisions about pricing, staffing, spending, debt, and growth.
Our Financial Health Check-Up for Small Business Owners walks through several of the numbers worth reviewing regularly.
7. Set Financial Goals for the Coming Year
“Make more money” isn’t much of a financial plan.
Use your actual results to establish measurable goals for the coming year. You might decide to increase gross margin, build a cash reserve, reduce debt, shorten your average collection time, increase revenue, or keep a particular expense below a certain percentage of sales.
Then determine how you’ll measure progress.
For example, if cash flow was a recurring problem this year, your goal might be to build a reserve equal to one month of operating expenses. If receivables were the problem, the goal might be reducing the number of invoices that reach 60 days past due.
Specific goals give you something to manage toward.
8. Decide Whether Your Financial Systems Still Fit Your Business
The systems that worked when your business was smaller may not work anymore.
Growth can create a need for better invoicing procedures, job costing, payroll processes, accounts payable controls, financial reporting, or more frequent bookkeeping.
Year-end is a good time to ask a simple question:
Do I have the financial information I need to run this business confidently?
If the answer is no—or if you’re spending hours trying to produce that information yourself—the underlying system may need attention.
You can use our Business Health Scorecard to identify some of the areas where your current financial processes may be falling short.
Start the New Year With Better Numbers
Year-end preparation isn’t just about getting ready to file a tax return. It’s an opportunity to make sure your financial records accurately reflect what happened during the year—and then use that information to make the next year better.
Clean books make tax preparation easier. More importantly, accurate and timely financial information helps you recognize problems sooner, plan for cash needs, evaluate profitability, and make decisions based on facts instead of guesswork.
Serenity Solutions provides bookkeeping services designed to give small business owners consistent, useful financial information throughout the year—not just at tax time.
If your books need cleanup or your current bookkeeping system isn’t giving you the visibility you need, contact Serenity Solutions to talk about what better financial systems could look like for your business.