The end of the year is a time of transitions. It’s a chance to reflect on the past year and to set your sights on what’s to come. For business owners, the first thing that comes to mind is probably taxes. The end of the year often means being busy with the books and financial planning for the coming year.
While the calendar has December 31 as the end of the year, that’s not always how businesses see it. It’s time to look at the advantages of defining your own fiscal year and how to manage your end-of-year financials.
What’s A Fiscal Year?
A fiscal year is similar to a calendar year in that it is a consecutive 12-month period. What makes it different is that this period doesn’t have to end on December 31. A fiscal year-end typically coincides with the end of a quarter of the calendar year. This could be March 31, June 30, September 30, or December 31.
A fiscal year is determined for accounting purposes. For seasonal businesses in particular, it can be useful to do accounting for a time period other than a calendar year. If peak business happens over the summer, a business may want to do their annual financial reporting on September 30, for example. In another example, a business that does the majority of its business during the holidays may have difficulty preparing their end-of-year financial reports at the end of December.
Is A Fiscal Year The Same As A Tax Year?
Not quite. A tax year is what the IRS uses to calculate the taxes a business owes. In most cases, your tax year must be the calendar year. This means your fiscal year can differ from your tax year. In this case, even if your fiscal year ends on June 30, the tax year still ends December 31 and your taxes are due April 15. This is one reason that having a fiscal year that matches your tax year can make your business accounting easier.
In summary, a fiscal year is what your business uses internally to produce financial reports on a period of time, and a tax year is what’s used externally by the IRS to calculate the taxes you owe.
Choosing A Fiscal Year
Businesses that are taxed as sole proprietorships don’t have this option. Sole proprietors must use December 31 as their fiscal year-end. Businesses that don’t fall into this category can choose a fiscal year-end based on what works best for their accounting purposes. This usually means having a fiscal year-end based on the business cycle of the company. It’s also sometimes more beneficial to have a fiscal year-end that coincides with the end of the tax year.
Business Year-End Financial Planning
As the end of the financial year approaches, there’s a list of things that a business needs to accomplish. Organization is key at this time of year. Letting these tasks pile up can quickly become overwhelming and can make planning for the year ahead a headache.
Before your business can do anything else, it needs to have its finances from the previous year in order. Organized and accurate financial statements that are produced on time are a necessary part of preparing for the coming year. Staying on top of your finances is a year-long effort, and sometimes the best move is to get expert guidance from professionals.
Evaluating Your Financial Health
Once you have your financial records in order, it’s time to evaluate your business’s financial standing. This is done using the financial statements for the past year. As a reminder, the three main financial statements are the balance sheet, income statement, and the cash flow statement.
The balance sheet is useful for end-of-year financial planning because it will give you a snapshot of your business’s current financial situation. This can be used in planning how you will approach the new year.
Perhaps the most common financial statement, the income statement is important for at this time of year because it offers a look at how your business performed over the last year. By looking back at the last year you’ll be able to compare how well your business performed in comparison to years prior.
Is your business growing at a desirable rate?
Do you need to make any sweeping changes in your company?
The income statement gives good feedback on the overall financial health of your business.
The cash flow statement provides detailed data regarding the inflows and outflows of cash related to the operating activities, financing activities, and investing activities of your business over a period of time. This document will give you a clear picture of where your cash went throughout the year. It’s important because managing cash flow is a big part of making sure your business is healthy and able to handle any unforeseen expenses.
In addition to having a clear understanding of your business’s financial health, it’s also beneficial to look to your competitors. By analyzing available financial data, you should be able to see how you compare to other businesses in your industry. This can serve as a useful benchmark in evaluating performance and planning for the future.
Last Year’s Goals
In the words of Confucius, “Study the past if you would divine the future.” What he’s getting at here applies to your business. The past performance of your business can offer valuable insights in planning for the future.
Now that you’ve looked at your financial statements and have a good understanding of the current financial health of your business compared to previous years, you can take another look at the goals you made last year. How did you measure up? If you performed well or even out-performed your business plan for the past year, what worked so well? Maybe you should aim even higher next year. If your business wasn’t able to meet its goals, understanding why not will prove valuable in drafting a plan for the future.
This is a great opportunity to look at your business tax strategy. If you’ve got one, consult your finance or tax advisor to make sure your business is saving as much as possible on taxes. Are you making the most out of the deductions and write-offs available to you? Is your business classification ideal for tax purposes?
If it’s time to get a tax advisor on board, make sure you know what to look for. Looking back at how well your tax strategy worked for you over the past year will help you know if you should consider different options next year.
While tax filing season may feel like a natural time to take a closer look at your tax strategy, it’s something that is really best when managed year-round. A good accountant, tax advisor, or CFO consultant will be able to keep your business’s tax situation in optimal shape all year, preparing you for the end of the year. The earlier you start planning the better. Instead of waiting until the last possible moment, consult your tax planner earlier in the year to get a jump on all possible savings.
Planning For the Future
Once you’ve got all the looking backward out of the way, it’s time to look to the future. Taking in all of the information above, you should be well-prepared to make and implement the best plan for your business. What do you want to accomplish? How are you going to accomplish it? Now’s the time to answer these questions.
A tried-and-true method for making effective and actionable goals is to use the SMART technique. This means making sure your goals have the following qualities:
Specific – Be as clear as possible about what you want to accomplish.
Measurable – A goal is only useful if you can measure your progress—use a concrete metric.
Achievable – Goals that don’t have a finish line are demotivating and hard to measure.
Realistic – Make sure your goals aren’t impossible to realize but maintain a level of challenge.
Time-based – Part of measuring goals well is using a timeline. Set a date.
The End of the Year Is An Opportunity
As the end of the year approaches, it’s best to look at it as an opportunity rather than a burden. The end of one year means the beginning of a new one, and a chance for your business to outperform last year’s accomplishments. It requires organization and planning, but if you make it a priority all year long you shouldn’t be overwhelmed. If you didn’t plan well enough last year, there’s always the chance to do better the next.
Whether your fiscal year ends with the tax year or at a more favorable time for your business, the same process applies to approaching business year-end finances. Preparing well-organized and accurate financial statements will help you evaluate your business’s performance and aid you in adjusting your tax strategy and business plan accordingly. Use the business year-end to set positive goals for your company and make a financial plan to put your business ahead this year.
At Saddock Advisory, we can help determine if your business is financially healthy.
Get in touch with us here to find out more.