How to Prepare Year-End Financial Statements as a Small Business Owner

Preparing these statements requires diligent record keeping on a day-to-day basis, so we’ve put together some tips to help business owners stay ahead of the busy year-end season.

While there are many forms of financial statements, four of the most common statements will help you complete your year-end financials.

The balance sheet

The balance sheet outlines your business’s assets, liabilities, and shareholder equity for a specific period. This shows what you own in comparison to the debts of your business, and also reflects investments in the business.

Lenders will often ask to see a balance sheet to evaluate your business, especially if you are looking for financing. The balance sheet allows lenders to look at your debt-to-equity ratio (among other calculations) to determine how reliant your business is on debt financing and your ability to repay debt in the short term.

Having year-end balance sheets to compare year-over-year can help you understand how your finances have changed over time. The balance sheet also provides a snapshot of the financial health of your business and can help you determine the book value of your business if you are considering selling it.

Income statement

The income statement (also known as the profit and loss, or P&L, statement) outlines the revenues and expenses of your business, and shows what your net earnings were at the end of a fiscal quarter or year.

The income statement is a good indicator of the financial wellbeing well-being of a company.

You can use the income statement to help with strategic planning while optimizing and optimizing your business operations by gaining a better sense of where you can cut expenses. or invest. Additionally, it can indicate what you can invest further into growing the most profitable areas of your business. Comparing income statements over several reporting periods can help with informed decision-making and planning for the future.

Cash flow statement

The cash flow statement, or statement of changes in financial position, outlines the net cash flow for a businessesa business during a certain time period. As the name suggests, the cash flow statement helps to demonstrate the liquidity of the business by showing money coming in and money going out from operating, investing, and financing activities.

In order to put together a cash flow statement, the balance sheet and income statement are used to evaluate where the cash came from, and where it went. Cash flows can be positive or negative, although it’s important to remember that profitability is not always indicated, regardless of which direction your flow points.positive or negative cashflow doesn’t always indicate profitability, or lack thereof.

Statement of retained earnings

The statement of retained earnings, or statement of changes in equity, shows how much profit is kept within the business to reinvest during a specific period. The statement of retained earnings provides insight into where the business is funding growth or paying down debt.

Business owners can also choose payout earnings (fully or partially) to themselves and other shareholders instead of retaining them in the business as dividends. Evaluating the statement of retained earnings can provide insight into business priorities and operations.

The way you prepare your financial statements and taxes for your business likely depends on the scale of your operations.

A business in its early stages is often unincorporated, with the owner being a sole proprietor.

The finances of small businesses are synonymous with the personal finances of the business owner.

The business’s income and taxes are included on the owner’s personal tax returns, and there are likely no employees or shareholders asking to see the financial statements. However, even the smallest businesses should get in the habit of keeping diligent financial records to demonstrate how they’ve grown year-over-year.

No matter the size of the business, keeping financial records starts with staying organized.

For sole proprietors, you can keep track of your expenses through bookkeeping apps, or by collecting and sorting receipts and printing bank and credit card statements. Sort these items by date throughout each month and organize them using folders or envelopes with a proper filing system.

Set aside time throughout the week dedicated to bookkeeping. Staying on top of your accounting may seem tedious, but having financial statements prepared will help with taxes and acquiring loans or investments. As your business grows, you can consider hiring a bookkeeper to manage these regular bookkeeping tasks.

Knowing how to complete your own financial records will make you a well-rounded entrepreneur equipped with a deep understanding of the financial health of your business. This knowledge can aid you in making better business decisions, now, and in the future.

Once incorporated, your business will have an official fiscal year that may not align with the calendar year. The Canada Revenue Agency allows business owners to choose their fiscal, or tax year-end date, so long as it is within 53 weeks of their incorporation date. Business owners should be strategic when choosing a date, as and it may be wise to delay your year-end date instead of choosing December 31st because it matches the calendar year.

If your business is seasonal, choose a year-end date that falls during your off-season.

Year-end is a busy and more costly time of year.

The main reason costs increase during this time is because you will need to hire an accountant to review and verify the records you or your bookkeeper have prepared. The accountant will analyze these records and offer financial advice for your business. Accountants are aware of the government support and incentives available to business owners that could provide you with a tax break or financial assistance. Additionally, many investors, lenders, and the government often request year-end financial statements to be prepared by a certified accountant.

Keeping financial records and preparing year-end statements will help you as an entrepreneur to understand how you can improve your business. Being well-informed of the financial aspects of your operations will lead to strategic decision making that positively impacts your ongoing success.