By Jane Gilpin, CPA

With the fourth quarter well under way, it’s time to start thinking about the end of the year. This is a busy time for everyone, especially for you as a solopreneur or small business owner. A new tax filing season looms, so this is the perfect time to focus on the following tasks to help you get your taxes in order and your business planning off to a good start.

Get Your Financial Books in Order
Review Your Business Position
Gather Tax Documents and Consult with Your Tax Preparer
Plan for the Coming Year.

Get Your Financial Books in Order

Year-end financial statements are used to prepare taxes and are the foundation for all other current and future reporting. If you have been faithful utilizing your accounting software, generating these statements should be a breeze. But whether or not this is the case, you have to get this step done before you can move forward.

Steps to perform prior to preparing your year-end statements should include:

Reconciling bank accounts and credit cards to ensure balances are equal to the year-end statements provided by your financial institution.
Ensuring fixed assets purchased during the year have been recorded properly. Recording, maintaining and reconciling the fixed asset account is vital because errors can lead to inaccurate valuation of a business or incorrect tax reporting.
Performing a thorough review of the sales, cost and expense accounts. Compare balances to prior years. Are any increases or decreases in these accounts reasonable and within expectations?
Reconciling all of the accounts with the general ledger to ensure all entries are legitimate and accurate.

Your business’s year-end closing procedures are vital to the success and organization of your company. You need to start out each year with a clean slate that is organized and correct.

Review Your Financial Position

You should now be ready to generate the three main financial statements to figure out where your business is now.

Balance Sheet – How is your business doing financially?
Income Statement – Is your business profitable?
Cash Flow Statement – What was the net increase or decrease in your business’s cash flow?

Dig a litter deeper by checking a few business ratios. Some basic ratio analysis will allow you to check your business’s current position, identify potential problems and determine if your business is doing better or worse. This won’t take long with your balance sheet and income statement in front of you.

First let’s look at the current ratio, a liquidity ratio that measures your business’s ability to pay its bills over the next 12 months. The formula is:

Current Ratio = Current Assets/Current Liabilities

These numbers can be pulled directly from your balance sheet. A current ratio of 1 or more is generally good news; however, if you are comparing your current ratio from year to year and it seems abnormally high, you may have problems with collecting accounts receivable or carrying too much inventory.

Next is the debt ratio, representing the portion of a company’s assets that are financed by debt. It is an excellent way to check your business’s long-term solvency and is a favorite of lenders. The formula is

Debt Ratio = Total Debt/Total Assets

These numbers can also be pulled directly from your balance sheet. For good health, the total debt ratio should be lower than 1. The lower the debt ratio, the less total debt the business has in comparison to its asset base.

Finally, the profit margin, a profitability ratio that measures the amount of net income earned with each dollar of sales. In other words, what percentage of sales are left over after all expenses are paid by the business. The formula is:

Profit Margin = Net Income/Sales

These numbers are pulled directly from the income statement. Obviously, the higher the profit margin the better. The profit margin is an extremely useful measure of how your business is performing over time. At a glance, you can see whether your business’s net profit margin has increased, decreased or stayed the same over the last year. If it has decreased, you will know to take steps to cure the problem, such as controlling your expenses.

Gather Tax Documents and Consult with Your Tax Preparer

For many business’s, having a professional prepare their income tax returns is the most sensible option. But even if you are a do-it-yourselfer, there is a list of all the right tax records that you or your preparer will need at hand to do the job right. This list varies depending on your business, but will likely include:

Year-end balance sheet and income statement
Revenue and business expenses for the year
Business use of automobile
Vehicle driving log
Asset additions and deletions
Prior year income tax filing.

Discussing your business’s current financial situation with your tax preparer before the busy seasons starts will prepare you for documentation gathering, allow you to take better advantage of available deductions, and hopefully lower their costs or your fees.

Plan for the Coming Year

Now that you’ve done the groundwork, you’re ready to do some business planning. That means you are going to:

Set next year’s goals – Where do you want to be?
Prepare an action plan – How are you going to get there?
Start implementing your action plan.

Another essential element of planning for the coming year is the preparation of a budget. Developing and managing an annual budget, helps manage costs, determines whether your profit goals are within reach and keeps you on the right road from month-to-month.

This may seem like a daunting challenge at year-end. But if you remember to utilize your accounting software faithfully and keep your files organized, closing out year-end and planning for the next can be a relatively painless process. Remember Benjamin Franklin’s quote, “If you fail to plan, you are planning to fail!”

Jane Gilpin, CPA and owner of Supporting Strategies franchise for San Diego. Her spirit of adventure led her to a commission in the United States Navy. She discovered her passion for accounting while working for the Department of Defense at the Naval Hospital at Camp Pendleton where she worked in the purchasing, accounting and finance departments. For Jane, combining her love of accounting with Supporting Strategies platform that includes secure, best-of-breed technology and a proven process to deliver a full suite of services is a dream come true. http://www.supportingstrategies.com/services/

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