7 Steps to a Financially Healthy Year End
There’s more to preparing for the end of the year financially than determining whether it’s time to hire a CPA. Getting the books ready is not enough. To prepare your business and yourself for the tax season and the coming year, there are seven steps every creative entrepreneur should take.
Gather all the documentation
The best first step to prepare for the coming year is to get your financial books in order. This is the time to locate all the receipts for your business, the revenues for invoices paid or royalties received, compile your bank statements, and determine what your mileage is for the year. You should also consider any major purchases you made that might not be included in your bank statements.
Find your gaps
After you gather your documents, the odds are you will uncover expenses that don’t have receipts, or remember trips you didn’t include in your original calculations. Identifying these oversights opens the door for future improvements. For example, if you learn that you are not keeping track of meals while traveling, this is the perfect time to make a plan to improve in the coming year.
Now you can arrive at an estimate for your profits. It’s not necessary to have an exact number at this point, but an estimate will provide you with the information you need. It is vital to find this estimate before the end of the calendar year, in order to have time to make any decisions for the current tax year before it ends.
Make reasonable purchases
If you find that you are carrying a large estimated profit, and this estimate is completed before the end of the calendar year, then you have time to make some purchases to reduce your profit. The key here is to make sure that the purchases make sense for your business, and of course to only spend money that you definitely have available for spending.
Business gifts are an option
One specific avenue to consider is to purchase gifts for your business partners, favorite vendors, employees, or contractors. This will allow you to garner favor for your business and enhance your existing relationships, all while reducing taxable income. Sounds like a win-win proposition.
Forecast next year
Again, the forecast I am speaking of here isn’t a detailed spreadsheet with hundreds of lines. Rather, this is a simple comparison of the current year against expectations for the coming year. Think about the number of events, the number of books sold, and the number of products moved in the current year, and estimate how the coming year will compare. Do the same with expenses.
Consider tax planning
Armed with a basic understanding of what the next year could bring for you, this sets the stage for some tax planning. For example, if you anticipate growth in profits of $10,000, then you can proactively plan to set aside 15% or more of those additional earnings to prevent a tax bill. Or perhaps you can plan to make some larger business purchases to reduce your income. Similarly, if your business will take a hit in the coming year, then you can plan accordingly by setting aside less in taxes.
If you act on these seven steps before the end of the calendar year, then you will be in great shape to have a financially healthy business in the coming year.