16 Dec Year-End Planning: A Checklist for Small Business Owners
Pop quiz time. It’s December, have you reviewed your company’s finances yet?
(A) No, what’s the point?
(B) Definitely not – I don’t have time!
(C) Yes, and I’m already making plans for next year.
If you answered anything other than C, this article is for you.
As a small business owner, it is sometimes easiest to simply go through the motions of running a business. Maybe you’re dealing with the holidays or you’re handling all the extra work that a year-end rush brings with it. Regardless of how life is keeping you busy, if there is any downtime, you probably want to spend it catching-up with family and friends, not planning for next year.
However, when you consider that 50% of small businesses fail within the first five years, and only one-third continue on for longer than 10 years, it becomes apparent that taking the time to plan is important.
If you’ve been meaning to do this, but have no idea where to start. No problem, we’ve got you covered.
1. Make a Plan for Next Year
Planning is an extremely important part of running a business. Here at SimpleKeep, we initially struggled with planning —so we get it. There are often so many things that need to get done, that it can be easy to get tunnel vision by creating a to-do list and working on each task until it’s completed, but what’s the end goal? What’s the most important thing to you? What do you need to get done for your business to survive?
For us it was simple: obtain more clients.
As a company, this became our number one goal. We decided that everything we did needed to be related to this goal in some way, and, if it wasn’t, it would have to take a back-seat until a more appropriate time.
As a planning technique, we use 13-week races (basically a quarter). We start each of these 13-week periods by breaking down our main goal into two or three supporting goals, with measurable numbers. Our goal to obtain more clients could be broken down into, say, driving more traffic to our site and doubling our sales efforts.
Your main and supporting goals for your 13-week race could look something like this:
Main Goal: Sign-up 15% more clients
Secondary Goal #1: Drive 20% more traffic to your site
Secondary Goal #2: Increase sales outreach by 35%
Instead of a main goal to sign-up 15% more clients, you could decide to focus on reducing customer church by 10% or even reducing overhead costs by 8%. You decide what is more important to you and your business.
2. Establish Your New Entity Now
January 1st is a great time to start anew. We all make resolutions for exactly this reason, and this concept can easily be applied to your business as well.
Maybe you started out freelancing, just to test the waters, or you just didn’t know how to go about legitimizing your business.
Whatever the reason, follow these four steps to get organized, today:
1. Set-up an entity with your state’s Secretary of State. You can register using your state’s Secretary of State website, use a company such as BizFilings, or, although more costly, work with an attorney directly.
2. Consider applying for an EIN.
3.Set-up a company bank account, and keep your business and personal finances separate.
4. Sign-up (and use!) accounting software. Consider Xero; setting it up now will be beneficial in the long run.
The entity type you choose will depend on a lot of factors, so this is one that you will definitely want to talk to your tax advisor about.
1. Review Your Financial Statements
When it comes to financial planning, reviewing your financial statements is the best place to start because it helps to give you an overview of what happened throughout the year.
Here are some questions to ask yourself:
Did revenue increase from the year before?
Which period did you make the most sales?
What’s your profit margin (net profit / net sales)?
Which products or services are the most profitable, where should you be focusing your efforts?
2. Set-Up A Budget:
After determining your business goals for next year, you should have an idea of how this translates to your business’ financials. If obtaining more clients means that your revenue will increase by 50%, but expenses will also increase by 25% because you’ll need to bring on a new marketing associate, then budget this out. What does this look like on the financial statement at the end of the year?
Budgets are great because they can help translate your non-monetary goals into financial ones.
Like goals, we recommend having an annual budget, then breaking those out into quarters. This way, at the end of each 13-week race, you can see how close you came to achieving your financial goals.
Maybe obtaining more customers means your customer service inquiries will also increase, and you, therefore, need to hire a dedicated support staff. Having an updated budget will help you determine whether you can afford to make changes, such as bringing on additional team members.
3. Set-Up a Business Retirement Plan:
Business owners often don’t plan for retirement until much later. Contributing to an SEP IRA, 401K or profit sharing plan can not only help you save for retirement, but can be an essential tax planning step.
From our experience, some business owners shy away from setting-up retirement plans because they think it’s expensive; however, some retirement plans, like the SEP IRA, can be inexpensive to set-up and administer.
Depending on the retirement plan you choose, and your business income, you may be able to contribute up to $53,000 in 2015. Since contributions aren’t taxed until you retire, when, presumably, your tax rates will be lower than they are now, it’s a great tax planning strategy.
The due dates for setting-up and contributing may differ depending on your retirement plan (some plan rules will allow you to make a 2015 contribution as late as April 2016). So, if you haven’t contributed yet, you’ll want to look into this immediately.
1. Adjust Business Tax Structure From a Sole Proprietorship to an S Corporation
You’ve probably heard S Corporations being touted as a good entity to use when setting up your company, but to understand why they’re great you should first understand the self-employment tax.
Self-employment tax is an additional 15.3% tax that some business owners pay in addition to their regular income tax. Even though making an S corporation election can help reduce their self-employment tax burden, lots of businesses get hit with this tax each year and do nothing about it.
This is one of the easiest things to fix, and one of the first places we look whenever we start working with a new client that is still reporting their business profits on a Schedule C with their personal return.
While this strategy is great, it does come with increased compliance requirements, so it won’t work for everyone. For example, if you make the election to file as an S corporation, you are required to put yourself on payroll and pay yourself a reasonable salary; however, despite this, there is still an opportunity to eliminate a significant portion of your self-employment tax.
This can sometimes translate to at least $5,000 in tax savings.
How will you know if this election is right for you?
There are a lot of factors, but we typically start asking questions and keeping an eye on this when annual net profits are close to $50,000. Why $50,000? With a $50,000 net profit, the self-employment tax alone is approximately $7,650. And that is in additional to normal income tax.
2. Spend Money on Capital Investments
Depending on your cash flow, it may be a good time to think about investing in new hardware or upgrading your computer software.
Businesses usually have to deduct the cost of any equipment or computer software purchased that cost more than $500 over a few years. However, for 2015, you can fully expense up to $25,000 of business assets purchased, so long as the total purchased was under $200,000 for the year.
3. Prepay Invoices, Buy Supplies, or Defer Income
Some businesses that use the cash-basis of accounting often overlook simple things such as paying invoices early, buying additional supplies, or simply deferring income by waiting until the beginning of the year to invoice clients.
If you have vendor invoices due the beginning of January, I bet some of these vendors would probably appreciate you paying a bit early. And now could be a the perfect time to switch from monthly to annual plans for some of your favorite online software. Some vendors even use it as a selling point; here’s an email example from Zapier.
From making goals, to adjusting your entity type, there are a number of steps you can take and strategies you can implement that can help you plan for the future and also save money on taxes.
As is often the case with tax planning, some of these suggestions may not work for everyone. We strongly suggest that once you have a handle on your business’ financial situation, you give your tax advisor a call to help you design a tax strategy that is appropriate for your particular situation.