It's Time for Year-End Planning

and Not Just Tax Planning…

Every Fall CPA’s receive calls to talk about year-end tax planning. Should we try to move income items to next year? Can we make some expenditure this year to reduce our taxable income? Have we funded our retirement accounts? Many questions should be considered to help better plan for the inevitable end of the year.

But this is also a time to consider the impact of the end of the year on your company’s financial position, above and beyond the necessary tax planning.

In many cases, companies must issue and distribute annual financial statements to various outside parties:  banks, lenders, partners, and other stakeholders. But the annual statements are important for management of the company as well. As such, this is the perfect time to do some planning regarding how the company’s annual financial statements will look.

The annual review should really begin now . . . using the latest interim set of financial statements as a starting point.

The Company’s Annual Financial Statements

Every company needs to prepare a complete set of annual financial statements. Some companies prepare them quarterly or monthly-all successful companies do the latter. But it is critical that these statements be completed on an annual basis.

The most effective and complete set of financial statements will, of course, include comparative balance sheets, statements of income, and statements of cash flow. If your company will be audited, you’ll also need footnotes. But even if the company is not required to do so, I highly recommend that footnotes also be prepared. The notes need not be as complete as those required for an audit, but they should include information that outlines commitments, management estimates, contingencies, fixed assets, benefit and health care obligations, and so on.

Why Prepare This Detail?

The purpose of these notes is to focus management’s attention on the details that may not show up when simply looking at the balance sheet.

  • What are the company’s long-term obligations for leases?
  • Is the defined contribution or defined benefit plan fully-funded, and are the assumptions still appropriate?
  • Does the company have a commitment for unused vacation pay?
  • When is the company’s debt due to be paid?
  • Are there contingencies (legal or otherwise) that the company has that may not be recorded?

The goal of focusing on these kinds of areas is to enable the company to ensure that it is aware of matters that will affect the company in the future.

At the same time, a close look should be given to the company’s assets and liabilities. Every balance sheet account, for instance, should be analyzed to see that it is reasonably correct and accurate. For example, when is the last time management analyzed its allowance for doubtful accounts?  Has the company needed to write-off more receivables this year than last?  Are more receivables past due than last year?  What has caused this to happen?

For companies with inventory, the reserve for slow-moving and obsolete inventory is an important part of the review. Are there finished goods that just won’t sell any longer? Can such slow-moving items be sold-or should they be discarded? Don’t forget raw materials and work-in-process-does it make sense to hold on to what won’t be used? (A detailed look at inventory should lead management to think about the future-will we sell this in the future? Is it time to make a change in our product line? What are the carrying costs of holding on to this slow-moving inventory-how much is the company paying in terms of cash and in the amount of time it takes to keep track of and manage the inventory?

And don’t forget the liabilities. Are there contingent liabilities that are not recorded? For example, it’s important to have a good estimate of expected sales returns or allowances. Is the company’s experience regarding workers compensation or unemployment insurance claims properly quantified and reflected on the balance sheet?

Bank or other debt often comes with restrictive covenants that must be monitored, especially at year-end. There are generally debt-to-equity and current ratio requirements, and most likely a number of other restrictions. Looking at these before year-end is important so that the company can either react and take action so that it is in compliance at year-end, or be in a position to speak with the lender to discuss the current status.

Comparing account balances to a prior period’s balances is also important. Plotting expenses as a percentage of sales over a number of years, for example, may highlight important trends in the business. Comparing gross margins from period to period also can identify issues that management must address. And, while most small to mid-sized businesses need not report the results of operations by the various segments of the business, as public companies must, it is critical that companies understand the source of sales and profits-by customer, product line, and geographic area.

When Should This Review Be Done?

So, here’s the question:  When should this be done? And here’s the answer: Now.

Prepare monthly and year-to-date financial statements as of the end of September, if you haven’t done them already, and dig into the balance sheet and income statement. Identify the information you would need for year-end footnotes, and ensure that the financials reflect what should be included. You will most likely find that you need to make certain adjustments now, rather than at year-end. By performing these analyses at this time of year, you may even find that the cost of your annual audit or review, if one is required, can be reduced.

So, begin this process now. Identify what you can do before the end of the year. Remember, it is the year-end set of financial statements that are generally considered most important to outsiders-banks, lenders, and other stakeholders. These are the statements that will be used to show to investors, partners, and other parties-and will be requested all next year, as well-and will be used for the preparation of the company’s tax return.

So take a tip from those who urge you to do some tax planning . . . and do some serious financial planning as well.

Share This: