Five Financial Planning Tips for Small Business Owners

by Scott K. Schmidt, Chief Financial Officer, U.S. Money Reserve

As we approach the end of the year, it’s time to start thinking about what you need to do to get your books in order. Here are five things to consider.

For many small businesses, it’s been a whirlwind year, with plenty of ups and downs. This year-end will likely be a bit of a financial tangle for most companies, thanks in large part to the ongoing COVID-19 pandemic. In fact, the pandemic has most likely caused many ups and downs in your reporting, and it’s time to address those in order to prepare for taxes.

Beside taxes, however, most small business owners are also likely starting to think about how to wrap up their books for the year and begin to prepare for 2022. As we approach December 31, businesses have numerous financial issues to consider. Here are a few of my favorite year-end financial planning tips for small business owners.

Plan for Taxes.

Admittedly, most business owners dread this time of year. It can be really stressful among year-end sales, the holidays, and any last-minute tax accounting that needs to take place before the year wraps up. The good news is that if you have been relatively organized throughout the year, your tax-time shuffle shouldn’t be too onerous. The first and most crucial step most small business owners should consider as the year winds to a close is to prepare and plan for taxes. Here’s how.

Pull together your critical financial documents.

To make tax time easier, be sure to start pulling together any financial documents you need to file or get to your accountant to file on time. This includes documents like your balance sheet, profit and loss statement, cash flow, and income reports. Look these over and make sure they accurately record what you think they should and reflect what your year actually looked like.

Gather any W-2s, 1099s, or pay stubs you may need to submit with your taxes. If you applied for any small business loans or got any of the Small Business Administration relief funds, you’ll also need to include records of these with your year-end documents to send to your accountant.

Documents to consider include:

• Form 1099-NEC and Form 1096
• W-2 and W-3 forms
• State and federal annual (Form 940) or quarterly (Form 941) payroll returns

I discuss the 1099 and W-2 forms further below because there have been some updates to the tax code for 2021 that small businesses should consider as they close out their books for the year.

Prepare to Send out W-2s and 1099s.

Managing the W-2 and 1099 workflow can be a real headache for most small businesses, which is why many outsource their payroll once they have reached a certain number of employees. Many of the companies that handle things like payroll are well equipped to deal with the tax forms that come along with managing staff paperwork at the end of the year.

Most small businesses will need to pay attention to a few updates to the tax code that carried over from 2020. They include the following:

• 1099-NEC. Companies will now file Form 1099-NEC for each person to whom they paid at least $600 during the year in the course of the payer’s business. This payment would have been for services performed by a person or company who IS NOT the payer’s employee, such as freelance or contract workers. (Instructions for Form 1099-NEC)
• 1099-MISC. Other payments over $600 that a payer makes in the course of the payer’s business — for things such as rent, prizes, awards, or “other income payments” — are reported on Form 1099-MISC.

The general rule is that you must issue Form 1099-NEC or 1099-MISC to each person you have paid at least $600 to in rent, services (including parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099s for payments made for personal purposes. You are required to issue Form 1099-NEC or Form 1099-MISC reports only for payments you made in the course of your trade or business.

Most of these forms will be due to arrive in your employees’/1099 workers’ hands no later than January 31, 2022. They’ll also need to be filed with the IRS no later than February 28, 2022, if you’re filing by mail. If you’re filing electronically, you have until March 31 to file the paperwork with the IRS. If you’re working with an accountant, they’ll keep you abreast of other updates that may apply to your specific line of business. It’s a good idea to touch base with your accountant before the end of the year to double-check anything that you might need to provide to them in addition to the forms above.

Take Stock of Your Progress This Year and Plan Your Goals for Next Year.

Once you’ve gotten all the tax and accounting paperwork somewhat tamed, it’s time to start the less nitty-gritty parts of managing your financials at the end of the year. You should evaluate where you excelled in 2021 and perhaps where you might be able to improve on your financial goals for your business in 2022. While I like to recommend that small business owners do this at least once a quarter so you know exactly where you are with your larger goals for the year, if that is too often, then I recommend doing this at least once a year to ensure that you’re on track.

Looking back and analyzing how the year has gone not only helps you prepare to pay your taxes and deal with any outstanding invoices and debts you may have, but it will also help you prepare and plan for 2022. Some great questions to ask yourself are:

• What goals were we able to achieve or excel at this year?
• What goals might we want to set for 2022?
• Where might we improve our business?
• Do we need to hire more people to reach our 2022 goals?
• What kind of technology investments did we make this year, and did they pay off?
• What kind of technology investments might we need to make for 2022 to continue to maintain or grow our business?
• What would we like to achieve financially in 2022?

These are just a few of the key questions small business owners should ask themselves at the end of the year as they look back on 2021. Consider these jumping-off points for your 2022 planning and feel free to customize these questions to your own specific business and needs so that you can narrow down your goals for the coming year.

Consider Thanking Your Customers and Staff.

Since it is the holidays, it’s time to consider thanking both your customers and staff, especially because we’re all entering the third year of the worldwide pandemic. It’s important to acknowledge both where you’ve come from and where you are, and doing so means acknowledging the people who helped get your business where it is today. Thanking your customers and staff doesn’t have to be a giant affair either. You can offer customers a considerable discount and give staff gift cards or nice bottles of wine for the year, for example. Since COVID is still raging in most of the country, it’s probably a good idea to forgo in-person gatherings, or — if you do plan to have an end-of-year event to celebrate staff and customers — ensure that it meets all the restrictions your location has for in-person gatherings. Some states are now requiring proof of vaccination to have any event indoors.

Think About Where You Want to Invest in Growth in 2022.

Finally and most importantly, you should consider where you want to invest in the future of your company as you move into 2022. As the world continues to figure out how best to handle remote work situations and a more flexible workforce, it may be time for your small business to adopt some new technology, hire more workers in a specific area, expand your operations into another location, or even move into a new business vertical. This is the time of year to both dream and take a good hard look at where you invested your cash, then think about where you might be able to make better investments next year. If you’re planning to expand or aim higher on specific targets, you need to consider where you’ll spend to make that expansion or growth possible. Now is the time to take a preliminary look at what your budget might be for expansion and investment plans. It’s also the right time to start thinking about the hires you might need or like to make in the coming years and put aside the cash to make that happen.

The Bottom Line on the Best Financial Planning Tips for Small Business Owners

Planning for taxes, getting ready to send out 1099s and W-2s, looking back at where you have come from this year, thanking your customers and staff, and thinking about where you want to invest in growth are a few of the critical steps you should consider taking as you approach the end of the year. While this can seem like an overwhelming period for most small businesses, if you plan ahead and tackle each of these tasks one at a time this December, you’re sure to be ready for whatever 2022 throws your way.