Happy New Year! As we turn away from 2020, we take many lessons into 2021.
I’m going into the new year with confidence that we will see life improve, in part because of the intense growth many of us had to go through while navigating uncharted territory in 2020.
Hopefully, we’ve all become stronger and more resilient and can apply these freshened skills and attitudes to our business and lives this year. Here are three important things to do in this new year.
For the business owners, controllers, and finance staff, it’s year-end. It is vital to get your year-end books closed quickly and accurately. And get your CPA audit started as soon as possible. This will position you to make more informed decisions this year. Speed is essential because the longer you procrastinate, the less value this report card has.
I have a current client where we are having trouble getting the CPA audit completed – we are 12 months later than expected. This delay was initially due to sloppy bookkeeping, but now it’s a delay due to CPA scheduling and some subsequent event issues (COVID, PPP, etc.) that now need to be disclosed in the footnotes. If we would have gotten these completed on time, we would have avoided major headaches, extended time – and more professional fees.
Don’t let that happen to you. Banks generally give you 90 days to submit your financial statements, but earlier is best (and if you happen to need a covenant waiver due to ratio misses, the sooner you address it with your lender, the better.) It all starts with a disciplined approach. Get your year-end checklist out and assign expected dates and who is responsible. Push to get your year-end reconciliations done and the books finalized. Do your planning with your CPA and if appropriate schedule the review/audit now. Get it on the calendar. Do the following to have a quicker, more accurate year-end close:
- Use a month-end checklist – see my resource page for a downloadable sample.
- Delegate as appropriate and assign expected completion dates and deadlines – don’t leave this to chance.
- Meet with your finance staff now and review progress often.
- Make sure all reconciliations are done early. Some could have been completed prior to year-end.
- Prepare the roll-forward schedules with fixed assets and debt now.
- Review your leases and know lease accounting (ASC 842) is changing for all companies after this year. This change needs to be considered with bank covenants. Consult your CPA in your year-end planning.
For us smaller LLC companies, update your QuickBooks. It’s a discipline of successful companies. It’s a pain for us smaller businesses, but you need to update and look at your QuickBooks.
Your final tax estimate for 2020 is due January 15th.
I hope you have an income tax problem. That means you’ve had a profitable year. Yes, we want to keep our tax liability as low as possible, but having an income tax “problem” is a good thing because it means you’ve had a steady income. The “problem” surfaces because we’re inclined not to think about taxes until it’s time to pay them. I’ve seen clients scratching on April 15th to come up with the $40,000 in taxes that they owe, (plus the Q1 estimated taxes for the following year.) Ouch. So let me give you a word of important advice for 2021 – if you don’t already have a plan in place to handle estimated income tax, make that a priority this year. Here’s a practical way I do this for my business. It’s a model you could follow, too.
Based on the “profit first” concept, have a separate bank account for owner’s compensation, operating expenses, income taxes and profit.
I take a percentage of each of my revenue sources and physically fund my income tax account. My income tax account is fully funded which works for me.
Those employed by others are already familiar with taxes being taken out of each of their paychecks. Those in business for themselves need to do the same thing. I have colleagues that do essentially the same thing with their small businesses. And every time estimated taxes come due, guess what? None of us lose any sleep over taxes. We simply draw from the set-aside money, pay the taxes, and move on with our business lives. No panic, no frustration, no stress.
Many of us thankfully received PPP loans in 2020. These were essential for all the companies I’m dealing with, helping them through a period of emergency. My clients have applied for loan forgiveness, but unless and until this is approved by the SBA, these loans are reflected in the books as a liability and will be recorded as revenue when the forgiveness is approved. I was glad (and relieved) to see that PPP is going to be deemed tax free. That was the initial intent, and I feel Congress made the right decision to stick with that. Also, PPP Round 2 is here. If you qualify, contact your bank, and apply! Here are some details on my resource page.
Bonus: A Professional Development Tip
If you’re looking to start 2021 off on the right foot, I suggest all business owners read the book Profit First by Mike Michalowicz. This is an extremely helpful book for getting into the proper mindset as a business owner. There is nothing wrong with making a profit—a priority.
Contact me if I can help you in any way. Here’s to starting strong and seeing 2021 be one of your best business years, ever! Cheers!