“Year End” can mean a lot of things depending on who you ask. For example, it can refer to the date at which a fiscal year end closes or it can mean the work required in getting a year-end completed for your business. In the below article, we’ll dive into everything you should be concerned about as a small business owner in regard to your business year end. Please keep in mind, that this article focuses on incorporated businesses and not sole proprietors and unincorporated businesses.
Defining Business Year End
A business year-end, sometimes referred to as the fiscal year end, is the date when a company completes its financial year. While a calendar year runs from January 1 to December 31, incorporated businesses are not required to follow the calendar year for their financial records. Instead, many companies choose a fiscal year, which can start on any day of the year and lasts for 12 consecutive months. The end of this period is known as the business year-end.
Choosing your business year end is important. For example, a company might choose to have its fiscal year run from April 1 to March 31, or from October 1 to September 30. The specific year-end chosen often depends on industry practices, seasonal business cycles, or preference.
The Pros and Cons of Picking December 31 as Your Year End
Without a doubt, December 31 is the most common year end selected because it matches the calendar year end. While that is nice and certainly has some advantages, it does come with some drawbacks.
Pros For a December 31 Year End
Things seem a little neater, natural, and convenient when the calendar year closes along with your business year end.
Payroll and T4s are based on the calendar year and it’s nice when these things line up.
T5s for dividends you might declare from profits are due at the end of February which is convenient.
Cons for a December 31 Year End
Time with your accountant will be less because they will be busy with a bunch of December 31 year ends.
There are things that accounting teams and bookkeepers can do ahead of the fiscal year end to help prepare. The holidays may mean that work doesn’t get done.
December 31 might not match the seasonality of your business. For example, say you operate a fishing charter business and fishing ends at the end of September, you might consider just making your fiscal year end September 30, or October 31.
What Needs to Happen at Year End for Your Small Businesses
You need an internal accountant, or bookkeeper to close your financial records. This includes reconciling all accounts such as bank accounts, checking the year end balance sheet accounts to make sure they are all correct, and finalizing any other adjustments to make sure that the accounts are correct and In order.
Choose an external accounting firm to help you file and finalize your year end. You should pick an accountant that suits your work style and is attentive to your needs and questions. Great accountants are proactive and provide excellent, timely service.
Determine what work you need your external accountant to do on your year end financial records. The most basic year end work that your accountant will perform is to prepare and file your corporate tax return based on the financial records that you and your accounting or bookkeeping team have finalized. However, if you have things like loans with banks, lines of credit, or investors in your business, you might be required to do more than just a corporate tax return for your year end. Your bank may require your accountant to perform a compilation engagement, a review engagement, or even an audit engagement on your financial records.
Compilation – Simple financial statements that are professionally prepared and presented by an external accountant based on the financial records that you provide. The accountant focuses mostly on the basis of presentation and looks for clear and obvious errors or misleading items. There isn’t a whole lot of detailed checking of your financial records with a compilation engagement and no opinion on the quality of your financial records is provided.
Review – This engagement type provides limited assurance on the quality and accuracy of a company's financial records. This type of engagement is more involved than a compilation engagement and an opinion, based on the limited nature of work done by the external accountant, is provided on your financial statements.
Audit – This is the most comprehensive type of work that can occur on year end financial records. An audit is usually only performed on larger enterprises with large loans, public companies, certain not for profits that get government funding, etc. An external accountant performing an audit will offer an opinion on the quality and accuracy of the company's financial statements.
Other Things Small Business Owners Need to Consider as their Year End Closes
Along with what was discussed above, here are a few other items that small business owners should consider as their year end closes.
Inventory Valuation – If you carry inventory in your small business, you should count it at year end. Knowing exactly what you have in stock will make sure that your accounting is correct and will also let you effectively plan for the coming year.
Check Customer Pipeline – If you take deposits in advance for future projects, make sure you know exactly what deposits you have on hand to ensure those projects get completed. In addition, year end is the perfect time to reflect on new ways to attract new customers. A review of your advertising, marketing, and customer acquisition strategies at a minimum should be done once a year around your year end.
Year End Review – Too many small business owners get caught up in just compliance. I have to get my records accurate, I have to get my tax prepared and filed, etc. Do not forget to actually review how your business did and consider what can be done better in the future.
Create a New Budget – As your year end closes and your financial records are finalized, this is the time to start thinking about your next years fiscal budget. Do I want to grow my business? What’s possible? If I’m growing, what will my costs look like etc? Far too many business owners just fly by the seat of their pants and just see what happens. Planning will help you realize your goals and make you more successful.
Conclusion
A business year-end is much more than just a point in time; it is a critical time for companies to assess their financial standing, take care of compliance, and plan for the future.