The Ultimate Year-End Financial Checklist for Busy Small Business Owners
Can you believe 2021 is almost over? I know I can’t. Whether we’re ready for it or not, the end of the year is quickly approaching. That means it’s time to take stock of your business performance in 2021, get your finances in order, and prepare for what’s to come in 2022.
Why Is It Important to Focus on Year-End Finances?
Analyzing your annual finances at the end of the year is critical for any successful business, and measuring this year’s performance allows you to better plan for next year.
You may discover procedures and practices that were not efficient – or even wasteful – that you’ll want to adjust for next year. Your year-end financial review may also reveal how to realign your goals with your resources to improve performance for next year.
Additionally, completing the following year-end financial checklist might expose planning opportunities to save money and increase profits in ways you otherwise would not have realized.
As you’ll see below, getting your money in order at the end of the year can help you stay organized, gain clarity, get back on track financially if necessary, and even allow you to proactively reduce your tax liability.
The Ultimate Year-End Financial Checklist for Business Owners in 2021
Remember the old adage; businesses who fail to plan, plan to fail. By completing the steps in this year-end financial checklist, you can rest easy knowing that you’re creating a plan for success. You can’t improve what you haven’t measured, and this checklist will help you measure all the right things for year-end planning and improved forecasting.
1. Run Your Financial Reports
Numbers don’t lie, and gathering year-end financial reports can give you much more clarity about your business’s financial health than a gut feeling. Your year-end financial statements will reveal how profitable your business has been (not just how much revenue you’ve produced). They’ll also indicate where you need to make adjustments if necessary.
The three most important financial reports you need to generate include:
A profit and loss statement
A balance sheet
A cash flow statement
Profit and Loss Statement
The profit and loss statement, also known as an income statement, itemizes all your revenue (business income) and expenses for a given period. It reveals how profitable your business has been over the past year. If your profits fall short, the profit and loss statement shows what expenses most significantly reduced your profit.
Balance Sheet
The balance sheet reveals your business’s financial position by listing your current assets, liabilities, and equity. You can think of the balance sheet as the net worth statement for the business. The balance sheet shows the financial health of your business and indicates whether your business is in the green or in the red.
Cash Flow Statement
A cash flow statement summarizes the cash flow your business has experienced over a period of time. The cash flow statement outlines your business’s opening cash balance at the beginning of the year and ends with your final cash balance. It should itemize cash flow transactions (inflows and outflows) throughout the year.
2. Review Your 2021 Financial Goals
Once you have the numbers in black and white, review the goals you set for 2021 to see how your actual business performance met, exceeded, or fell short of those goals. Spending some time reflecting on what went well and what didn’t is an important component of business planning. This step allows you to set more informed goals for the following year.
3. Prepare for This Year’s Taxes
As we near the end of the year, you’ll have a better idea of how much you’ll owe in tax for the year of 2021. There’s one final estimated tax payment due on January 15th. Then you’ll have about three months to prepare for your final tax bill, which will likely be due on April 15th.
Instead of waiting until next year, which poses the risk that you’ll have to scramble to save enough money to pay your tax bill, start planning now.
Additionally, it’s time to start prepping your 1099’s. A 1099 form is required to be sent to each person to whom you have paid at least $600 in rents, services or other income payments for the year.
Now is an excellent time to schedule a meeting with your accountant or CPA, as planning earlier rather than later gives you more time to strategize how to lower your tax bill.
4. Maximize Your Deductions (if Appropriate): Business Expenses
As a business owner, taking advantage of business expense strategies can help you maximize your deductions to lower your tax bill when appropriate. If your business has been profitable, you may want to use some of your profits to invest in upgraded equipment or continued education for you or your employees. Strategically increasing your business expenses at the end of the year can reduce your taxable income.
With that being said, increasing business expenses simply to maximize your deductions isn’t always the right choice. In some cases, it may be in your best interest to use profits to pay yourself more in a given year, to plan for low cash flow months ahead, or retain those earnings for business stability. A financial business coach can help you determine the best strategy each year.
5. Reduce Your Taxable Income: Tax-Advantaged Contributions
Another way to reduce your taxable income is to maximize tax-advantaged contributions to a retirement account or health savings account (HSA). If you haven’t met the contribution limits for this year and your business has been profitable, consider increasing your contributions to a tax-advantaged account to reduce this year’s taxable income. This tax reduction strategy comes with the added bonus that you’re paying yourself and investing in your future.
6. Set Goals for 2022
Finally, it’s time to take what you’ve learned from year-end financial planning to set your goals and expectations for 2022. Although your 2021 goal reflections may influence your goals for 2022, they shouldn’t be the only thing you take into consideration. You should also take into account what you learned from budgeting in 2021 to set informed goals for 2022.
You can make realistic goals by using your budget and end-of-year reports to forecast predictions for sales, revenue, and expenses in 2022. Start with your expenses, as those are sometimes more predictable than revenue. From there, you can create two forecasts for your business: a conservative forecast and an optimistic forecast, and keep in mind how your variable expenses might change for each scenario.
As you’re developing informed goals from forecasting, remember to consider external factors that occurred in 2021 such as low interest loan rates, rising inflation, or Covid-19-related business disruptions. Although these external factors may be outside your control, they’ll likely reveal new opportunities or the need for new strategies in the coming year.
Need Help Completing the Year-End Financial Checklist? Partner with Financial Fitness Coaching
Year-end financial planning is a necessary part of running your business, but it can feel overwhelming to busy small business owners who aren’t financial experts themselves. If you need help completing this year-end financial checklist, consider partnering with a financial business coach.
At Financial Fitness Coaching, we’ll help you get organized and walk you through the process of year-end financial planning to set you up for success in the New Year. To see how we can help you and your business, email me at kristen@financialfitnesscoaching.com or simply schedule a free 20-minute Discovery Call on my calendar.