By Jennifer Barnes, CEO of Optima Office, a firm that provides Fractional CFOs, COOs, Controllers and HR professionals for businesses.
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Now that you’ve held your year-end company holiday party, there are additional preparations you should be making if you haven’t already in terms of year-end accounting. It is important to make sure 2022’s documents are accurate, review them for insights on the year, and set yourself up for success in 2023. If you’ve already done that for this year, keep reading for tips on improving the process for 2023.
Ensuring your financial records are correct and organized is essential to the success of your business. Preparing your business for the upcoming year by creating a budget and cash flow forecast is near the top of that list. Next is making sure that you have everything up to date and in the correct general ledger accounts so that your CPA can file taxes.
Here are some helpful tips to make sure you are prepared for a new fiscal year. First, set a timeline for upcoming deadlines like sending out W2s and 1099s, and make sure all stakeholders are aware of the timing. It is also important to ensure that you have all the correct addresses for your active, and especially non-active, employees when you mail out W2s. If your company provides yearly bonuses for anyone on the team, plan on when you’ll be able to calculate those bonuses as well.
Reviewing the current (or previous) year’s profit and loss statements will help you create or modify a budget for the new year along with realistic financial goals, which should be completed and approved early. The creation of the budget should be a company-wide exercise that the accounting team drives. Make sure you look for trends that may continue into the next year and be sure to think carefully about upcoming events or items you will need to increase your budget for. On the flip side, look for things that you spent money on this year that you won’t need next year.
Next, look at your last two quarters and break them down by weeks to help you prepare a 90-day cash flow forecast for the first quarter of the new year. You always want to stay a quarter ahead so you can plan for how much cash you will have in the future. Think about things you will be spending money on that won’t necessarily hit your profit and loss statement. These could include items like principal payments on loans, credit card payments, prepaying for future events, etc. Build these items into your cash flow forecast so you know exactly how much cash is going out and when. Data is essential for creating good business strategies.
The objective of the year-end financial close is to list all the action items that need to be completed, with associated dates, and which members of the accounting team (or others in the company) are responsible for them. If your company has an external audit, the external auditors will typically request a copy of the year-end close checklist, as this will show the auditors that the company is organized and prepared. Detailed below are the categories of the year-end close (in balance sheet order, assets in descending order of liquidity, then all liabilities and comments associated with each):
• Bank accounts: All bank accounts need to be reconciled to the official bank statement for that financial institution. It is a good practice to post the transactions that go through the main operating accounts on a daily basis so that at month-end or year-end, you should be able to complete this task by day one of the new month.
• Accounts receivable: In addition to following up on outstanding accounts receivable (AR) during the month, it is a good practice to have your AR department reach out to your customers to make sure your payment will be included as part of their next payment cycle. Sending invoices out on pink paper can help speed things up.
• Inventory: You should plan a detailed physical count as close as possible to the actual year-end date. In preparation for the count, a plan should be developed, inventory cleaned up and segregated, and staff assigned who are familiar with the inventory to assist with the count. Pay attention to slow-moving or obsolete inventory and note those items on the count sheets.
• Prepaids: I recommend that you list all prepaid assets, such as insurance, dues and subscriptions, future events or vendor retainers, in a spreadsheet that ties to the balance of all prepaids on the balance sheet. This helps ensure the appropriate amount of expense is charged to the P&L.
• Fixed assets: As part of the year-end close, it is important to identify assets acquired, assets disposed of and assets that have reached the end of their useful life and are fully depreciated. You should prepare a copy of a fixed asset register or spreadsheet that includes pertinent information about asset details.
• Current liabilities: Current liabilities, such as accounts payable or credit cards payable, need to be reconciled to statements from AP vendors or credit card companies, such as Amex, Visa and so on.
• Accruals: A review of expenses in the first few days of a new month ensures that accruals that are required for payroll or other expenses are applied to the correct period. Pay attention to the PTO accruals for your employees and ensure they tie in with the payroll registers. If you have a use-it-or-lose-it policy, make sure your accruals reflect what you’ll owe a person in the new year.
• Lines of credit and loans payable: These balances should agree with statements from the applicable financial institutions.
Don’t settle for mediocrity in your accounting department. By following the steps above, you can ensure a much smoother year-end close.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
