Prepping Your Small Business Finances for the New Year
The year is almost over, which means it time to review the last 11 months to prepare for the next 12. Now’s the time to prepare your small business for everything to come; healthcare, taxes, inventory, risks and strategies.
That’s why we’ve created this in-depth guide to helping you review the last three quarters to better prep for next year. We’ve broken this guide down into three chapters:
Reviewing your finances
Cleaning up your finances
Planning your revenue goals
First and foremost, here are a few tips to help navigate the next few weeks so that your small business stays just as strong as ever.
- Get your financials in order.
Take the time to go over your businesses revenue and expenses to get a good look at what your company should look like in the coming year. Clean up your books and look at your spending reports to see if they can be minimized in the future. Go through and review and break down your financial reports to get a good look at how successful your business was this past year and to make sure you’re your books are up-to-date and accurate.
- Double check your inventory management.
Check out your inventory and business processes to see if anything can be changed to make it run more smoothly, soundly and possibly even run at less of an expense to you. Get rid of any old or damaged inventory – it costs you to keep it, and you could write these up as write-offs.
Make the most out of your deductions by stocking up on office supplies, upgrading equipment and paying off vendors and bills early. However, don’t spend money that you wouldn’t normally spend.
- Plan your strategy.
Work on growth opportunities for your business: think about the steps forward you want to make with your business and come up with plans and ideas (from your employees, you or outside help) to make it happen.
- Think about delaying your income for December.
This could reduce your business income for the upcoming tax year and therefore decrease the tax on your income. At the same time look at your business expenses and maximize any low ones – marketing, inventory, etc.
- Double check your payroll and benefit plans.
Make sure you’re paying your employees on time and with the appropriate amount. Check your benefit plans to see if there are any other plans that better suit your business’s needs and budget.
- Rethink your healthcare policy if you don’t have one.
Although you may not be required to provide insurance (if you have less than 50 employees), it’s still a good idea to offer insurance (if you can afford to do so). This helps improve employee retention and reduce turnover.
Review your finances.
Conduct a Q3 review.
One good way to review how your finances are doing this year is by reviewing your latest quarter! This business review is your chance to see how things are going and evaluate which areas of the business are successful or underperforming. Conducting this review gives you time to strategize for the new year.
After reviewing your business performance, total revenues, expenses and tax estimations, you can take steps to shore up the company’s overall financial condition in preparation for the end of the year.
Here are three areas to look into when you’re reviewing your finances.
The third quarter is a great time to meet with your accountant for an overall “big picture” review of your business performance and tax expectations. This accounting planning meeting could discuss some of the following questions:
- How are your business revenues looking? How much money have you made so far, and how much do you expect to make by the end of the year?
- How much have you paid in estimated tax payments so far for the current year, and are you on track to owe more money to the government or receive a refund?
- How are your sales projections looking? Are you expecting any big sales or new projects on the horizon in the 4th quarter?
- Do you have certain seasons of the year that are busier or less busy than others, and have your financial projections accounted for this?
- Can you make any moves now to minimize your tax liability by the end of the year (i.e. investing more money on business expenses or saving in tax-deferred accounts)?
Profits and opportunities
In addition to taxes, your third quarter business review should take a closer look at the operations and strategy behind your business. For example, this is a good chance to ask:
- Are you making more or less money than last year?
- Which products/services/client accounts are making up the biggest share of your business revenue?
- Which products/services/accounts are underperforming and need to be gotten rid of?
- Where are your business expenses coming from? Do you have any unexpected or excessive business expenses that you can cut?
The third quarter review is also a chance to take a step back and look at the overall direction of your business. This is your time to do some visionary thinking and dreaming. Where do you want your business to go? Consider the following questions:
- What are your top priorities for the 4th quarter – not just in terms of making money and keeping customers happy, but in terms of working “on” the business?
- What has been holding you back this year? Which goals for this current year have you NOT accomplished, and why?
- How can you redirect your energy and resources to spend less time on the things that are holding back your business, and spend more time on growth?
- If you could start with a clean slate next year, what are your top three goals for your business?
It seems like every year in business goes faster than the one before it. Time is precious, but it’s important to take some time at this point of the year to ask these provocative questions and think hard about how to improve your business. The new year lies ahead, but there’s still time to make big changes.
See where you need help.
This section was provided by Janet Attard, an author, small business expert and the founder of BusinessKnowHow.com. The website provides free small business information, tips and hints to millions of small and home businesses each year.
After you’ve conducted your third quarter review, review what ways your small business may be leaking profits. Check out these four ways your business may be losing out on profits.
Your prices are too low.
Small business owners often underprice their goods and services when they are starting out. The reason (right or wrong) that the way to get business away from competitors is to undercut their prices.
While that strategy may work to start a one-person, home-based business, being the lowest-price provider in your category can reduce your profitability and prevent growth. Once you become established, compare your prices to your competitors.
If most of them charge more than you do, raise your prices slightly. For example, if you’re making $200,000 in gross sales a year, a 2.5 percent increase in prices could result in an extra $5000 in profits a year.
Your shipping costs are too high.
If you sell shippable goods, shipping costs and shipping problems are likely to be an ongoing thorn in your side. Your customers want to pay as little as possible (and possibly nothing) for shipping costs; meanwhile, your shipping service always seems to be looking for ways to charge you more. On top of that, the cost of labor and packaging supplies to fulfill your orders may be increasing.
To plug the holes, compare the shipping rates of all the major carriers at least once a year. Look at the figures for the package sizes, weights and destinations you ship most frequently. Some services charge surcharges for shipping to residential addresses, so be sure the U.S. Postal Service is one of the carriers you look at.
If you ship merchandise that fits into flat-rate priority boxes or envelopes, compare the cost of the free box plus priority surcharge to the cost of buying your own box and sending the package via standard shipping.
Make sure that the packaging you use is the smallest possible to assure products arrive undamaged, too. The smaller the total package size, the less you usually pay for shipping – and the less filler you’ll need to use in the box.
You have high costs of goods.
As a new business, you probably won’t be able to negotiate the best prices for the inventory, raw materials and supplies you buy. After all, you are unknown to vendors. But once you are established, you may be able to get vendors to charge you less for what you buy. The way to find out: Ask for a discount.
When asking for a discount, remind vendors of the size and frequency of your orders. If they won’t give you a discount at your current order level, ask at what point you could get a price break. If they have quantity discounts, carefully evaluate how fast you’d be able to sell the inventory, and whether the savings, plus any possible savings on total shopping costs to you, make it worth ordering bigger quantities.
It’s also a good idea to shop around. Get prices from other vendors as well. If they can do better, consider switching.
You’re paying more than necessary for services.
Internet services, telephone and smartphone data services come to mind here, but they aren’t the only ones to look at. If there is more than one service provider for a particular service that is important to your business, get price comparisons.
In your review of service prices, don’t forget to take a hard look at the fees you’re paying for credit card acceptance. If your business has grown steadily, you may be able to negotiate lower fees from your merchant card provider.
These are only a few of the costs you may be able to reduce in your business. To increase your profits, scrutinize your payables and the details of your company credit card bills every few months to spot expenses you can reduce or eliminate.
Clean up your finances
Many business owners find that kicking off the new year with a clean slate helps them focus on their fiscal goals for the year ahead. Whether it’s addressing errors or making sure that client accounts are in good shape, taking an afternoon to clear the financial decks is an investment well worth making.
Yet, many don’t know where to start to make sure they capture the maximum ROI on the time that they spend doing financial housekeeping. Here’s a checklist for business owners to guide you through the process of cleaning up your finances for the year ahead.
Fix accounting mistakes.
Start the year off by closing out the books from last year. Review your accounting and ensure that everything has been accounted for. Have all payments been entered into the ledger? Are outstanding accounts being followed up on? Look for common errors, including:
- Missed invoices
- Missed payments
- Incorrect amounts
- Expenses that haven’t been entered or have been assigned to the wrong category
- Employee and contractor classifications
- Reconciling the books and bank accounts
- Recording small “petty cash transactions”
Writing off bad accounts.
Unfortunately, some customers ultimately don’t pay their invoices and you’re stuck with the bill. The good news is that it’s possible to write off bad accounts. Once an account has been deemed uncollectable, small businesses can reverse credits to Accounts Receivable for the amount unpaid. At the same time, a line item as Bad Debts Expense is then entered into your income statement.
Evaluating customer accounts and terms.
The credit terms that you extend to your customers determine your cash flow. Credit terms refer to the amount of time from a transaction to when payment is due; the more generous your credit terms, the more likely it is to impact your cash flow. Review the past year’s performance through that lens.
Are your current terms working for your business? It’s also helpful to look at each client account in terms of payment. Do you have great customers who always pay on time, or conversely, who are consistently late? These factors may influence your desire to adjust credit terms for the year ahead.
Prepare last year’s taxes.
Tax Day will be here before you know it. Get ready for tax time in advance by taking a three-step approach. Contact your accountant to find out whether you need to issue 1099s or W2s and whether they need more information to make that happen.
Pull together all of your expense receipts and income documents to make it easier to file your returns. Send those to your accountant as early as possible to avoid the rush. Finally, schedule an appointment now with your accountant to make sure resolving tax issues from last year is a priority – for your schedule and theirs.
Plan ahead for next year’s taxes.
Spend time evaluating your tax situation for the year ahead. Do you have a strategy in place to maximize profits and minimize taxes? Is it time to revisit payroll, expenses or contributions to tax-deductible vehicles?
After you’ve reviewed your taxes from last year, talk to your accountant about any steps you can take in the year ahead to plan more proactively. Take steps to simplify bookkeeping by hiring someone to track your expenses, using an expense management system or setting up quarterly appointments to review your finances with an eye toward taxes.
Look at your available credit and upcoming needs.
It’s important to think about your finances through the lens of what your credit needs are. Will you need finances to help bridge cash flow gaps, make an investment in equipment or marketing or hire new staff? If so, determine what kind of credit opportunities are available to you, including alternative lenders. Determine your needs in advance and prepare your financial documents or details so that credit will be available when the time comes.
Cleaning up your finances is time well spent; you’ll have a good grasp on your financial picture and a solid foundation for your goals and objectives in the year ahead.
Decrease business overhead expenses.
This section was provided by Makeda Waterman is an online media journalist with a passion for helping people succeed in life. Outside of writing for The Huffington Post, has writing clips on CNBC Make It., Yahoo Finance News, FastCompany.com, among others.
You determine the success of your small business from the top talent you hire, the technology you implement and the direction of your company culture. One of the top ideas on most entrepreneur’s minds is lowering expenses for the New Year.
Fortunately, you don’t have to figure out this decision on your own. We researched the most efficient ways to help you decrease your overhead to improve your budget.
Invest in the right software.
Your sales team and employees that can deduct work-related expenses to human resources need to keep track of their expenses and receipts tracking. Also, the cost of hiring an accountant to track your annual fees can cost $65 to $420 per hour. Imagine the amount of money your business can save if you depend on internal resources to complete your work.
One way to avoid purchasing a product you don’t like is by requesting a free trial and an account manager to help you throughout the software selection process.
Work with outsourced talent.
It’s said that you can save 20-30 percent by hiring a freelancer versus a full-time employee. At least 50 percent of employees are less likely to quit with work from home options available.
The cost savings are in no furniture, employee benefits, vacation and on-site software. According to the Huffington Post, “The Society for Human Resources Management is more conservative and estimates that the average cost of hiring and training a salaried employee is about 6 to 9 months of salary.” Here are a few sites you can use to find top freelancers in graphic design, writing, graphic design, and consulting:
These sites are a Facebook for business owners and the freelance world with online resumes, a portfolio and an effective form of communication to stay connected for the hiring process.
Move to an inexpensive side of town.
In business, location is about being close to your customers and consumers for easy access to your goods and services. This point can apply to opening a new location or relocating to an area where office/retail space is inexpensive, parking is accessible, and taxes are low. If you own a small business, there are tax advantages to work from home that includes deducting the cost of parking, rent, office space and office supplies.
Depend on your employees.
Your employees are more valuable than you think. The first step is to schedule quarterly brainstorming sessions to hear their ideas on how to use high quality but less expensive materials for products. Your team is customer facing, often sparking different conversations with customers on how to change elements of extended customer service wait times, how to improve around your retail store for easy access to products or insider productivity secrets of your competitors.
We recommend you reward employees for ideas that are implemented that are fiscally responsible to your business. Employees will feel valued and work harder to create cost-saving efficiencies while at work.
Cut phone bills with online communication.
The VoIP telephone was a technology of the past you could save money on telephone bills. Now, your team can take advantage of free services such as Google Voice and Join Me to conduct meetings with clients. Human resources specialists can use these tools to have online pre-screening interviews with candidates or send text messages to contact applicants before inviting them in for an interview.
Hopefully, these ideas help you turn saved money into implementing new technology, investing in your employee engagement programs or recognize employees for hard work. With the new year quickly approaching, you have time to speak with your executive team and management to determine which ideas work best for your small business, implementing these ideas sometime in the first quarter.
Debunking the end-of-year tax myths.
Do you have an end of year tax strategy? If not, it’s time to get to work. Business owners tend to think of taxes as something that matters after the New Year, as April rolls around. But the reality is that with a bit of advanced planning, it’s possible to pay less to Uncle Sam and keep more money on hand to invest back into your business.
Yet business taxes can be complex, and a number of myths and misconceptions leave owners at a potential disadvantage. Here’s a closer look at five of the biggest end of year tax myths – debunked – and what you can do to come out ahead with your tax planning.
Spend to save.
One of the most common end-of-year tax myths is that businesses should spend everything possible to reduce their profits. Expenses reduce your taxable income, so they can help minimize the taxes that you pay.
Yet it’s important to ask whether you’re spending smartly. If there’s equipment, software, services or other items that you’d absolutely invest in, it makes sense to purchase them in the current tax year to get the discount.
But spending just to spend without a business justification or spending over budget that puts you into debt may not be a smart long-term solution. Ask yourself whether your spending is really moving your business forward; if so, it can be a good strategy for reducing your tax bill.
- Tax payments aren’t due until April.
A misconception that can trip up newer business owners is the belief that all taxes are due in April. Businesses often need to make quarterly payments toward their tax debt in order to avoid penalties. There are a couple of ways to approach quarterly taxes.
One is to look at your previous year’s revenue and taxes – and base your estimated payments on those. It’s also wise to consider consulting a professional if you’re newly in business or have experienced a major jump in revenues.
Paying quarterly taxes on time has two benefits. The first is avoiding fees, penalties and troubles with the IRS. The second is simple: You won’t be scrambling for liquid funds in the Spring to pay a large tax debt.
There’s no point to worrying until it’s time to file.
Many businesses don’t think about taxes until they’re due to file. But taking this approach has two distinct downsides. The first is that consulting a tax professional or looking at your financial big picture early may reveal opportunities to save on your bill. Perhaps you want to make strategic purchases or contribute to a retirement plan? By planning ahead, it’s often possible to take steps to reduce your tax bill and advance your other professional or personal priorities.
The second is that by addressing your taxes early, you’re more likely to be organized and control costs. If you do your bookkeeping and tax prep early, you may even save money by taking advantage of better pricing or discounts for avoiding the tax rush. Think ahead to help minimize both your tax bill and preparation fees.
Claiming a home office deduction is an instant audit claiming.
Nobody wants to be audited. In fact, many businesses avoid taking certain deductions in an effort to prevent an audit. But there are so many myths about various deductions or factors that “lead to an instant audit.” These misconceptions can cause conscientious business owners serious money from the bottom line.
Educating yourself about which deductions you are eligible to take and determining what documentation that you need on hand can yield significant results. If you’re confused and need more details, consult a tax professional or visit the IRS website’s Small Business Center. Being informed can help you maximize the legitimate deductions you take and eliminate high fees associated with last-minute tax prep.
You absolutely must file by Tax Day.
Many individuals and businesses don’t realize that it’s possible to file for an extension. The IRS will normally grant individuals and businesses a filing extension under certain circumstances. However, there’s one important note: While the extension buys you time on filing, it doesn’t exempt you from paying on time.
Make sure that everything you owe will be paid by the end of the year – or by Tax Day at the latest. Filing for an extension allows some additional time to get all of your paperwork in order. But paying late – even if you have an approved extension – can result in penalties and interest.
Once you’ve decluttered up your finances, it’s time to plan your revenue goals for the next year. Having these goals in place can help you better stick to your budget and keep your finances clean for the next year.
Plan your revenue goals
Most people wait until January to start thinking about their business revenue goals for the year. At first glance, this seems to make sense. After all, why worry about a new year before it even arrives?
The problem is small business owners who wait until January to plan for the upcoming year often times end up finding themselves already behind. The reality is a successful year in business starts long before the clock strikes midnight on New Year’s Eve.
Additionally, many small businesses find that things slow down toward the end of the year and then pick back up again in January. This makes the end of the year the perfect time to sit down and plan your business goals for the following year.
Besides, wouldn’t you rather already have your plan for the following year squared away so you can start implementing it the first week of January? Here are some of the best ways to make the most of business planning in November.
Focus on the data.
There’s a trend in the business world that isn’t necessarily new but has gotten some attention in recent years for creating the success of companies like Facebook and Twitter. The concept is called data-driven culture, and it’s the act of companies using data to their advantage by using the information they gather to keep improving their business.
To further expand upon the importance of data, CIO.com reported on an important study conducted by the Economist Intelligence Unit where 520 senior executives were surveyed about how they grow their companies. The survey found that the most successful companies were the ones who prioritize data collection and then use that data to improve company operations. Additionally, these companies democratize data and make it easily available to employees.
The good news is you don’t need to be the next Facebook in order to reap the benefits of data. For example, to a small business owner being data-driven may look like conducting a survey at the end of the year to see where their market stands. You can then use that data to create new offerings that meet the needs of their market.
By using data when you plan for a new year, you take the guessing game out of running a successful business. Instead, you prioritize facts and use them to create your business goals for the year.
Crunch the numbers.
Chances are you may be meeting with your accountant at the end of the year to discuss how the business finances are doing. This could include tax planning, determining any purchases that need to be made by the end of the year and going over revenue for the current year.
Since you’ll likely be meeting with your accountant anyway, use the opportunity to discuss some revenue goals for the following year. Your accountant will be able to help you determine what offering brings in the most money, how to improve profits and plan for any potential financial obstacles that may occur.
Assess the risks.
An important part of business planning is risk assessment. This is when businesses take the time to play out any obstacles that could potentially get in the way of achieving their goals for the year.
Unfortunately, business owners may be tempted to skip this part of the planning process. It’s not exactly exciting to detail the many ways something can go wrong.
However, knowing what can potentially go wrong is the only way business owners can create solutions and alternatives ahead of time. Otherwise, you run the risk of having your plans derailed by surprise complications.
According to the Houston Chronicle’s Small Business section, risks may show up in a business in several different ways. Some examples of risks include financial, marketing, operational, a changing economy, natural disasters and new market competitors.
Figure out what worked and what didn’t.
In order to continue expanding your business, it’s important that you review the past year and determine what worked and what didn’t. Here are a few things you can look for:
- What offering brought in the most money? Little money? No money?
- How was customer service?
- Did you have a successful launch? What made it successful?
- Were there any failed projects? Why did they fail?
- Are you investing time and money in things that aren’t working?
These are just a few of the questions you can ask yourself as you plan for the following year. The key is to determine what worked so you can keep doing it while improving (or completely getting rid of) what didn’t.
Taking the time now to review your year can help you create a solid plan for next year. By using data, assessing risks and creating a plan you’ll be able to grow your business more steadily in the new year.