10 Year End Financial and Tax Tips for Your Small Business
As the end of the year approaches, some of us find ourselves overwhelmed by top 10 lists, the hordes of shoppers and endless renditions of Christmas Music. Businesses tend to experience a slowdown, which makes it the perfect time for small business owners to take a closer look at their overall business, financial and tax situation. When you are not buying gifts for your customers, family and friends, a review and analysis of your business will allow you to optimize your current financial situation, implement some beneficial changes that can help avoid last minute tax preparation stress and also prepare for the future.
1. Bank Accounts and Finances
Review your outstanding cheques and write off any cheques that have not been cashed for 6 months, as they are no longer valid (unfortunately banks often tend to screw this up, but chances are that somebody who has not cashed a cheque has likely lost it or worse). Additionally, other items that you or your bookkeeper may have been avoiding like duplicate charges, outstanding deposits etc. should be reviewed and any unidentified charges that you have noticed in your bank account should be discussed with your bank. If you have an accounting software such as QBO, bank reconciliations are fairly straightforward.
If you are self employed and do not have a separate bank account for your business, I highly recommend setting one up in the new year, as this can help organize your finances even if you leave your accounting to the last minute. A separate credit card is also very useful for to maintain the separation between personal and business.
Many business owners have amounts accumlated in their checking account or low interest savings account. It is also a good time to take look at your savings, select business investments with higher investment returns (most banks also have a higher interest savings account) and set up an automatic savings plan or perhaps set a reminder to manually transfer amounts on a periodic basis.
2. Accounts Receivable
This is a good time to thoroughly review customer receivables and write off uncollectible amounts. In addition to cleaning up your list , this will help reduce your taxes payable as the write off is reflected as a bad debt expense. Designated amounts can be submitted to a collection agency and in the event that you ultimately collect the amounts you can show it as a bad debt recovery. This also reduces stress levels as you don't have to see the names of the deadbeats when you are reviewing the list in the new year.
3. Inventory
For self employed people who are unincorporated or have corporate year ends at December 31st, an inventory count should be conducted at the year end. Once the count is complete, all items in inventory should be reviewed and older and/or obsolescent items should either be written off or reduced to the amount that you think they are worth. The writedown of inventory is reflected as an expense in the cost of goods sold and correspondingly reduces your tax liability.
4. Fixed Assets
Take a cold hard look at your business fixed assets i.e. computers, furniture, equipment etc and sell or dispose of anything that is reflected on your books but you are no longer using (do you really need that 5 year old phone?). If you dispose of it for less than the depreciated value , you might be able to claim a . And less clutter can go a long way to improving productivity.
5. Credit Cards/Line of Credit:
Many business owners don’t pay their monthly credit card balances simply because they don’t pay attention to the due date. Cash flow permitting, this is the perfect time to pay down all your credit cards, which will help reduce interest paid on outstanding balances. If you are not able to pay down your credit cards on a monthly basis, it is also a good time to speak to your bank about getting a line of credit. Interest rates on a line of credit are usually significantly lower and can lead to substantial savings. It might also be a good time to set up a process (automatic transfers, a monthly reminder in your calendar) to pay as much of your credit cards as possible in a month to avoid the high expense of credit card interest.
6. Bonuses
The year end is a natural time to decide on bonuses for you and your employees. For those with December 31st year ends, paying bonuses is a great way to reduce your taxable income, rather than deferring them to the New Year. And it makes for happy employees, Also, if the net income of your business exceeds $500,000, you should consider paying yourself or family members (who are employed in the business) a bonus for the excess amount. This will allow you to take advantage of the small business deduction that applies to Canadian Corporations with net income less than $500,000.
7. Computer Hardware/Large Purchases
If you have excess cash and are contemplating a new computer or some furniture for your office or tools or supplies in the near future, it might make sense to purchase it before the new year. This allows you to claim CCA (depreciation) on the computer or furniture or simply expense the purchases in the current year thereby reducing taxes payable (for something you were going to buy anyway).
8. Accounting/Filing:
For many small business owners, the accumulating receipts and filings function is the most tedious. This is however the best time of year to take care of this since there is still a comfortable distance to tax time. Ideally, a separate accounting folder is set up where you can all bills can either be saved or scanned (this fujitsu scanner is excellent and has allowed me to advance towards my goal of a paperless office) Once you have saved your receipts, they can be organized by category eg. telephone, insurance, gas, food etc. or alphabetically or even by month. Also ensure that you have all your business bank statements for the year. Accounting software goes a long way to easing the pain of filing and accounting (while saving hours) by allowing download of bank transactions, creation and email of invoices to customers and saving of receipts etc directly within the software. If software is not used, your accountant will greatly appreciate details of your sales and expenses in excel.
9. Financial Statement Analysis
Your financial statements are your report card for your business and let you know how you have done. Take a look at how much you sold, and how much it costs you to sell it i.e.your gross margins. It is a great time to see if you are charging your clients or customers enough (or possibly too much?) and plan to implement pricing changes, which customers expect at this time of year. Sometimes even a small increase, indexed to inflation, can go a long way in increasing your bottom line. You should also review your other expenses to see if you are spending too much relative to your revenues and potentially take this time to see if another cell phone provider will give you lower rates or if you can get a better deal with your insurance provider or if your bank has a cheaper plan better serves your needs. Service providers will often reduce rates if you imply that you are planning to leave them for a competitor.
10. Budget
Once everything is order, you should start planning for next year by preparing a small business budget which will allow you to assess your cash flow requirements and estimate your profitability.
As we invariably wonder where the year went, and gear up for the holidays, this is a great time to organize your business finances, reflect upon (and pat yourself on the back for) your accomplishments, understand your business mistakes so that you can avoid them in the future and prepare for next year.
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Ronika Khanna is a Montreal based accountant helping small businesses achieve their financial goals. Please sign up to receive articles pertaining to small business, accounting, tax and other topics of interest to business owners. You can also follow her on Facebook or Twitter.
