How are you preparing for 2021? Planning may feel pointless as we face another lockdown and increasing COVID-19 cases, but as business owners, it’s important that we control what we can within our business. Start prepare your financials for a new year with this checklist of actions to take before December 31, 2020.
The chaos of 2020 showed the importance of having your financials ready in order to take advantage of funding opportunities, like the PPP and EIDL loans, as well as local stimulus grants and loans.
In order to have reliable financial reports, it’s essential to have your financial records accurate, complete and up to date in an accounting system like Quickbooks, Xero or Freshbooks.
First, speak with an accounting or financial expert to set up the right categories (chart of accounts) that each transaction will fall into in the accounting system.
Next hire a bookkeeper, on a contract or permanent basis, that has accounting knowledge to do the financial record-keeping on a regular basis. Whether bookkeeping happens on a weekly or quarterly basis is your choice, the important part is to stay consistent.
TIP: Remember to maintain checks and balances. For example, if your bookkeeper is handling the books, they should not be able to access monies in the business bank account, sign checks nor make decisions on what to pay and when.
If you received a PPP or EIDL loan, be sure to track how you spent that money in your accounting system. If your current accounting system isn’t working for you, work with a financial expert to find the right option for you. The beginning of the year is the best time to switch to a new accounting system.
Review health insurance options. The 2021 Open Enrollment Period for healthcare insurance runs from November 1, 2020 to December 15, 2020. If you don’t act by December 15, you can’t get 2021 coverage unless you qualify for a Special Enrollment Period.
Before distributing W-2 and 1099s January next year, make sure your employees and independent contractors review their personal information for accuracy.
If you don’t have the money to add or increase employee benefits in the coming year, get creative and find alternatives to keep valued people. For example, offer a fixed dollar reimbursement for their internet/cell phone work expenses, health & wellness perks or career development classes and conferences.
TIP: If you are ready to switch payroll companies, start looking for a new one because you likely have to give your current payroll company a 30-day notice before termination. The top of the year or the start of a new quarter are the best times to switch payroll companies. It would be a much cleaner process.
If you received a PPP loan and plan to apply for forgiveness, make sure you restore employee salaries and wages as well as FTE (full time equivalent employee) numbers to where they were when you applied for the PPP loan, by December 31st 2020. For more on that refer to the Salary/Hourly Wage Reduction Safe Harbor and the FTE Reduction Safe Harbors in the SBA’s FAQs.
Given your business performance this year, what your CPA suggested paying in estimated quarterly taxes at the beginning of the year, may have changed. Consult your CPA on the estimated amount you need to pay in local, state and federal taxes by January 15, 2021, then start setting that money aside.
Share your 3-5-year goals with the CPA so they can create a tax plan for you today, to benefit from the tax laws that have changed this year. You may want to add more to your retirement account this year than in prior years or less. If you want to access capital or buy property next year, you may or may not want to report relatively low profits as compared to 2019.
The CARES Act, set by the government this year, included a number of tax law changes beneficial to business owners. For example, qualified individuals may withdraw coronavirus related distributions up to $100K from eligible retirement accounts without incurring the 10% additional penalty tax.
In addition to tax strategy, assess your relationship with your CPA. If they met with you once this year, didn’t really have time for you, or you simply don’t like them, the end of year is the perfect time to find a new CPA before next year’s tax season.
If you are a product-based business, do a physical count or implement an inventory control system.
If you have machinery, vehicles, equipment (computers, audio/visual, forklifts and woodworking machines, delivery truck etc.) add or update a record of each piece of equipment specifically, the date of purchase, the total price you paid for the asset, each item’s expected useful life and the amount you can sell it for once it’s past its useful life (e.g., how much a scrapyard would pay for an old work truck).
Analyze your financial performance versus 2019 and 2018. Evaluate what choices you could have made to buffer the impact of the pandemic and economic recession on your business.
For example, how would you have benefited from having 6 months of savings instead of 2 months? How can you make payment terms tighter or create multiple channels through which you can deliver products and services? Implement these new processes into your day-to-day operations.
Determine your cash needs for the next 3-6 months especially if you are pivoting your business and need to invest in technology, tools and people to execute it. We use a cashflow planning tool to help our clients with this. If you deferred payment of business expenses and have outstanding bills, make a plan to start slowly repaying it even if the payment is nominal. If you have some extra cash, consider contributing more to your and your employee’s 401K, donate to charities or boost the emergency reserves.
Performing an annual review is an important exercise to identify areas where you are financially strong, uncover weaknesses and strategize on how to improve your financial position and protect against future emergencies.
Annual reviews are a part of the Art of Money Matters year-end wrap up and close out process with clients. It reminds them how far their business has come with the partnership, knowledge and consultation of an outsourced CFO. Here are the results of working with one client this year.
Action Taken → Result Achieved
Cleaned up financials in accounting system → clarity on business performance
Collected on outstanding customer balances → brought in $30,000 in cash
Integrated invoicing system into accounting system → improved sales tracking
Projected cash shortfall three months in advance → helped secure a line of credit at one-third the rate of their credit card APR further improving cash flow.
After this annual review, the client renewed the contract! You pay for value and results and it’s my responsibility as a financial consultant to communicate and show that regularly.
If you would like to brainstorm solutions to a current financial challenge, uncover areas where you are susceptible to be impacted further by the recession or plan a path to financial success in 2021, let’s set up some time to connect. Book a FREE 30 minute consultation below.