As a new year begins, many contractors want to look forward to the future of their business. However, it is important to first look backward to understand how the previous year financially impacted the company.
For many, this can be an ominous proposition, but it can easily be an opportunity to learn and make the company more efficient. The key is to keep things as simple as possible.
Maintain Correct and Up-To-Date Books
Every month, someone should manage the bookkeeping to ensure entries are up-to-date and accurate. This allows the owner to know how much they owe, what is outstanding and what the business is worth. It also keeps the business organized and prevents being blindsided by a forgotten debt.
To help ensure the financial success of the business, it’s important to review your company’s transactions and reconcile all accounts. Print out an income statement and balance sheet. Run reports (i.e.: accounts receivable aging report, accounts payable aging report and bank account statements) to show each month’s totals.
Determine what stands out and whether there are any amounts that don’t seem to trend with other months. If so, research the transactions. In addition, determine whether any transactions were mistakenly recorded to the wrong account/category.
Determine whether any adjusting entries need to be made for activities not recorded during the month, including items that did not make it on the books but should have been recorded.
Making sure these items balance can help companies close their year-end books. The best way to prevent becoming overwhelmed by the seemingly endless amount of commas and figures is to consider the end of the year as simply another month of the year.
Let’s put the monthly steps into year-end context. The balance sheet is just a snapshot in time that depicts where the company is at the end of the year. The income statement is the best view into the company’s bottom line and how it is doing as a company. It also determines how much is owed in taxes. Understanding the prior year’s income statement allows for more effective planning for taxes and growth for the new year.
Tax season does not have to be a tedious and stressful ordeal. The key is to keep records up to date and to reconcile each month to prevent scrambling at the end of the year like a college student with a term paper due at 9 am.
One solution is to outsource the monthly and year-end bookkeeping duties to a separate partner. This solution keeps business owners from going through the time-consuming hiring process and paying taxes and benefits on another employee.
The bottom line is if a business owner spends a little time each month with its bookkeeper or bookkeeping company, it will have a better idea of the financial health of the company, as well as a much less time consuming and stressful tax deadline.