As the end of the calendar year approaches, small business owners know that their financial year is almost up as well. For most small businesses, the financial year is up on 12/31—which means a fresh, new start is ahead.
Although good businesses will have a handle on the state of their finances throughout the year, the end of the year is typically when companies double down on their efforts to clean up their books, to present an organized state of affairs to the IRS, banks, lenders, and investors—as well as for their own peace of mind.
If you run a new or very small business, you might be the one in charge of making sure you follow generally accepted accounting practices and keeping your company on the right financial track. Hiring an accountant can take a lot of the difficult bookkeeping and financial planning responsibilities off your plate, but it may not be feasible for you at this point.
If that’s the case, here’s a rundown of seven ways to clean up your financials before the new year:
Create a checklist of important documents to have on hand
The first step in getting cleaned up is ensuring that you have every important financial document regarding your business dealings from the past year (and all past years) close at hand.
A good baseline checklist to use is what the IRS asks for when auditing a business. The IRS can audit you at any time by random selection, so it’s helpful to prepare for this scenario anyway.
Among other documents, here are some things the IRS typically requests:
Receipts, bills, and cancelled checks
Any legal papers relating to your business
Loan agreements, including a copy of the original loan
Logs or diaries that may recount your travel plans or job-hunting activities
Tickets, such as travel tickets or even lottery tickets
Theft or loss documents
Schedule K-1, if you’ve got an S Corporation
Ensure your inventory and asset records align with reality
Over the course of a year, your stated inventory and fixed asset levels on the books may deviate from what you really have on hand. This is especially likely if you use a manual process to track your assets, rather than an automated system.
Fixed assets, which are large investments that you plan to keep on your balance sheet for years, can be particularly troublesome. Fixed assets that you have on your books but don’t appear in real life (due to loss, theft, or breakdowns) are called “ghost assets.” These ghosts mess with workflow and can trigger an audit from the IRS since your reported worth is higher than it should be.
Take the time to audit and account for all of your assets at the end of the year, so your filings are truthful. This will help you both logistically and legally.
Reconcile your bank and credit card statements
Do the balances on your statements match up to what you have listed on your own balance sheet? The only way to find out is to compare them. Review the ending balance on your bank statement, subtracting any outstanding checks but adding deposits on their way to you. This amount should match the cash account balance on your balance sheet.
Also, check to see that everything on your credit card statements is present and accounted for on your books as well as in your office. Any incorrect or fraudulent charges should be addressed immediately.
Collect on accounts receivable, deliver on accounts payable
Generally accepted accounting principles (GAAP) dictate that if you charge someone for your product or service, you should collect payment for that work the same year. Some businesses fudge the numbers and fail to collect until January, so they won’t have to pay taxes on the payment until the following year. This is generally frowned upon, especially by institutions that want a clear picture of your business, such as lenders for most business loans.
Instead, be diligent and collect on your invoices before the year is up. Void and reissue checks that you’ve sent out to those that have invoiced you to ensure they’re cashed. Make sure to get your cash flow in line and up-to-date in order to present a truthful snapshot of how business is going.
Button up all your accounts, transactions, and expenses
The end of the year is a great time to close out old or inactive accounts for customers, vendors, and employees from whom you’ve moved on. Ensure your transactions line up on both your tax returns and on your internal books. And check that all your gross sales, sales taxes, and merchant fees are either accounted for or paid up.
Review your profit-and-loss statement
Your P&L statement provides you with the net income of your business by summarizing your revenues, costs, and expenses. It should also categorize your expenses to help keep them organized.
Generate a profit-and-loss statement and review both month-by-month levels to spot major fluctuations, and individual transactions—names, dates, and amounts—to see if you can identify why some months may be markedly lower than others. A transaction may have been miscategorized, duplicated, or not posted altogether, and now is the time to fix that.
Prepare for your payroll responsibilities
If you had salaried employees this year, you’re required by law to send them their W-2 no later than January 31 of the following year. Doing so will keep you federally compliant, and will keep your employees happy.
If you used vendors or freelancers this year and paid them more than $600 apiece, you’re going to need to send out a 1099 form. It’s crucial that you ask for and receive W-9s so you can prepare to generate and complete 1099s by the first month of next year as well.
Even if you prepare and execute all of these steps yourself, it may still pay to get in touch with a CPA and let them review your work to ensure compliance. There’s a thin line between window dressing and legally or ethically dubious practices, and your clean up efforts may end up making your books dirtier if you’re not careful.