A lot of people find the end of the calendar year a good moment to take stock and set New Year’s resolutions. On the business front, the end of your financial year is also a good moment to review. Whilst most business year-ends are March/April, now is the perfect time to start getting organised. And, of course, if you have a December year-end, you still have a few weeks but action can’t be delayed any longer.
Why year-end accounts matter
Your year-end accounts are more important than your normal monthly accounts because it is the year-end accounts that will provide the information going to the tax authorities, and they may also go to the bank and investors.
Also, if you come to want to sell the business, buyers will ask for the past 3-5 years of accounts. Year-end accounts can help you work better with your accountant and, crucially, you can use the information to improve your business performance.
How to prepare year-end accounts the right way
The best way to prepare for the year-end is of course to prepare regular management accounts and keep on top of any issues during the year. The year-end is essentially no different in as much as you need a profit & loss report (which sets out income and expenses) and a balance sheet (which sets out what the business owns and owes at the year-end.
If you are trading as a limited company then your accounts will need to be in a “statutory format” – this doesn’t have to be done by an accountant but it’s worth noting that there is lots of fiddly detail which might not be the best use of your time.
The key thing with year-end is to make sure the ‘cut off’ is correct. Accounts are prepared on the basis of what is known as ‘accruals accounting’ – this can be extremely confusing for entrepreneurs who think in terms of cash. Essentially with accruals, you are matching income and expenses in the same period based on activity. If you have provided a service before the year-end it, needs to be included and similarly, if you have received a service before the year- end which hasn’t been invoiced, it needs to be ‘accrued’ for.
Year-end – areas for attention
Here are my top areas to look at when preparing your year-end accounts:
Stock – If you hold a lot of stock, plan carefully to ensure that it is counted properly and that you have received invoices for all items in stock.
Reconciliations – Debtors, creditors, bank, VAT and payroll accounts all need to be agreed to the external reports or account balances. The aged receivables report needs to tie in to the figure in the accounts. Similarly, the balance on the bank needs to be reconciled/agreed to the year-end bank statement.
Year-end accruals – Has the business received goods or services which it hasn’t been invoiced for? If so, you need to make a provision or accrual. Similarly, the business may have been invoiced in advance (e.g. for insurance) which would give rise to a pre-payment.
Fixed assets – Fixed assets (equipment) are not treated as day-to-day expenses, so check that they have been entered into equipment. Their cost is then spread over their useful life with an accounting entry called depreciation – ask your accountant about this.
Keep a separate file of copies of these invoices during the year – your accountant will love you.
Director’s loan account – Don’t bury your head in the sand on this – if you have let it get out of control, the longer you leave it, the worse it will become. Talking it through with someone will help enormously – I promise!
Profit & Loss report – Review it carefully to see if any items look as though they may have been entered incorrectly – e.g. do your office costs look high?
Using your year-end accounts
If you prepare your year-end accounts in the right way, they will be a great tool for improving your business. Here are a few reasons why.
80:20 rule – Often, 80% of your profit will come from 20% of your customers or products, so it pays to know which are your best. Run and review the detailed reports which will give you this information.
Ansoff Matrix – Thissounds like a movie but it’s actually a useful table with your products along the top and customers down the side – it helps you identify which customers don’t take all your products and perhaps some opportunities to market better or up-sell.
Overheads – Have a good trawl through your overheads – what could you cut out or renegotiate?
Tax – Definitely start doing your tax planning before the next year-end. Think about capital allowances, R&D tax credits, dividend payments, the “loan account” mentioned above and pension contributions.