Your end is upon us, and it comes every year. You need to care about having your books updated before year-end. It's not for tax reasons, but so that you can clearly see how your business is doing and make strategic decisions for you and your business along the way.
The two scenarios for people
- Scenario 1 – They never do their books all year, and then they wait until right before the tax deadline happens to start dealing with it and try not to freak out that they owe a ton of money.
- Scenario 2 – The people who really had great intentions then just kind of fell off the rails towards the end of the year, and they're kind of scrambling, stressed, worried, and overwhelmed.
There is very rarely someone who's just right on time with this, unless they've enlisted help or they have a really well defined process and pretty efficient systems. That person is not an overnight success. They've worked hard to make that happen, so I want to honor those people who are always ready for year-end. Their books are clean and straight, and they have the data together because the rest of us are just trying to figure out life and what to do and how to get on track and stay on track.
Getting your books in order
Here’s why people should care about having their books updated before year-end. It's not for tax reasons; it’s so that you can clearly see how your business is doing and make strategic decisions for you and your business along the way.
The fruit is that you could have an idea about how your taxes are shaping up or what your tax opportunities are, but we always say the best work is done when the books are done, and it's for a lot of reasons.
Reporting your income and debt service payments properly
One of the things you need to have in order before year-end is income. I know this seems very basic and very simple, but I have to tell you it's not. I can't tell you how many times we've started working with clients who treated their deposits as income and then had this huge amount of 1099-Ks come through or got an IRS letter saying they underreported income.
So getting your income right is really important. It’s not just to understand how your business is doing but to make sure your taxes are filed correctly and you don't have some massive disaster for underreported income come your way. The underpayment penalties are really expensive, especially if it's over $5,000.
The important questions
- Is all of your income reported, and is it reported properly?
- Are you making sure that anything that will be reported to the government as income is reported?
Understanding your cost of goods and expenses
Most sellers kind of know what their basic costs are, but you have to look at it from that 30,000-foot view on your income statement.
Then you have all your expenses because you have to know the difference between what are tax-deductible expenses and what are expenses that have a partial deductibility attached or a limit attached to them. Also, properly categorizing your expenses so those decisions can be made to evaluate your business and file your taxes is really important.
Co-mingling
Those items that are really personal expenses, not business expenses, you have to identify and get them out of there. No co-mingling finances between your personal and business accounts. You need to make a plan for the co-mingling and make sure nothing personal hits that expense ledger.
I would also say that if you're a sole proprietor, a freelancer, or a single member LLC on a Schedule C tax return, you have to make sure the money you paid yourself isn't hitting your expense ledger. Your owner's draws are not expenses, and the debt that you pay is not an expense.
The beauty of a balance sheet
When you have a balance sheet and your balance sheet is correct, you can have faith and trust that your income statement is probably correct. The balance sheet has a lot of beauty attached to it. It's just a ledger of assets, meaning your bank account, inventory, liabilities, the people you owe, and the kind of equity you’re building in your business and what you have taken out of it or whatever.
You need to understand what your debt balances are, if you have debt, and what your inventory balances are, if you have inventory. So you just have to tie those things down on your balance sheet. That might seem overwhelming to the small business owner, but I encourage you to kind of get your head around it. You can't just put together an income statement. Typically, you need that balance sheet.
Finding the process that works for you
I always say that after 9/30, it's pregame season. Nail down a process and keep it going. Your accountant and tax preparer will love you.
Depending on your business, you are going to have things that need to be reported that you potentially need to do by January 31st. It is more difficult and stressful to do if your books are not completed.
We know how hard it is for our small business owners and entrepreneurs. Just decide on one thing you can do and do that thing. Then do the next thing. Don't just keep accepting being in the dark, stressed, overwhelmed, and worried if that's where you are and where you live. We haven't said it in a while, but just take the step of scheduling time to do this every week if you're behind.
Resources to help
We have some great resources at TBL that can help you on your journey.
If you want to learn more about our financial closing checklist to put your year behind you, check out Episode 112: Year-End Books 2022: Financial Closing Checklist to Put Your Year Behind You.
