Give 2020 the sendoff that YOU deserve
As we head into the end of the calendar year, it’s a time for reflection and preparation for myself, my clients and for all those around us. Reflection on a challenging year that stretched us thin, forced us to adapt, rewarded patience (and creativity!) and put things into perspective.
Armed with that perspective and the experience that comes with it, here’s some additional advice to consider as we close the books (and the door) on 2020 and look ahead towards 2021. The first bit of advice is one that I give to all my clients, every year, but it’s especially important this year, so pay close attention.
four things you need to do right now to tie up fiscal year 2020 and get off on the right foot in 2021
Showing 2020 the door will feel a lot better if you set yourself up for success in 2021.
Make an appointment to see your CPA. Don’t wait until the end of December or (gasp) the middle of January, when you’ve already made critical year-end financial decisions and have likely laid the groundwork for 2021.
Goal-setting. The driving force behind your decision-making should be meeting your business and personal financial goals. Knowing what those goals are is the key to effectively plan for the future.
Know what to ask. Knowing what questions to ask your CPA will go a long way towards making your meeting (and the next year) productive:
How much can/should I be saving and investing to reach my goals?
How much emergency cash reserves should I have for my business and for myself personally?
Am I being efficient with my usage of resources (cash, employees, equipment, etc.)?
Are my assets sufficiently protected within the business legal entity and/or in a family
trust?
Is my financial reporting accomplishing what it needs to do and do I have a good understanding of the “pulse” of my operations?
4. Prepare. In the interest of avoiding cliché, I’ll spare you the bit about perspiration and preparation (because really, taxes require and induce both) and get right to it—Here’s what you need to prepare in order to get the most out of your year-end planning meeting with your CPA:
Written business and personal goals. Whether it’s because you tend to draw a blank when put on the spot or simply because writing things down helps us to focus and refine our thinking, write those goals down, and bring them along.
Good financial statements. Accurate financial statements that display relevant, timely and useful information about the business are essential. Statements can include your Profit & Loss/Income Statement and Balance Sheet (both cash basis and accrual basis) as well as any projected income and expenses for the next few months.
Projections. Projected sales, costs and any anticipated changes related to your operations in the coming year. Are you hiring? Buying equipment? Renewing a lease? Leasing out space? Adding an income stream? Consolidating sales channels? Income projections can also include stock sales, investment income, trust/estate income, and sales of assets.
Itemized deduction estimates. i.e., charitable contributions, mortgage interest, medical costs, etc.)
Now that you’re ready for your meeting with your CPA, why do you still have a nagging feeling?? Well, first, it’s because you still need to make that appointment, and second, it’s because 2020 has been a year full of (mostly) unpleasant surprises. So, in the interest of playing it safe, you might also want to:
Anticipate the need for greater cash reserves into next year (6 months of operating expenses is a great goal)
Familiarize yourself with the President-elect’s tax plan as well as local propositions that might affect your business
Consult with a financial adviser to make sure that your investment planning and asset allocation is where it should be
We’re all full up on surprises.
Should I make extra payments at the end of this year to reduce my taxes?
Every year, I also get questions about whether extra payments should be made at the end of the year (paying bills early, prepaying rent, advance payments to subcontractors, etc.) in order to reduce taxes. Well, the answer to this question, like so many others, is: it depends.
For some businesses, making extra year end payments could be a bad decision because cash is tight and using the terms on accounts payable can help stretch those funds farther. For other businesses that are less cash-strapped, making advance payments could indeed be the key to lowering taxes.
Not sure which category you’re in? Talk to (you guessed it) your CPA.
Big thanks to Michael Klein, CPA, CMA, who is a wealth of knowledge and was an invaluable resource for this article.